Feature Stories | Sep 27 2021
Download related file: FNArena-Reporting-Season-Monitor-August-2021
A compilation of stories relating to the August 2021 corporate reporting season in Australia, including FNArena’s final balance for the season.
Content (in chronological order of publication):
-August Results: Anticipation & Trepidation
-Conviction Calls
-August Bonanza, But What's Next?
-Conviction Calls
-Early Days, But Plenty Of Signs
–Not To Be Forgotten: The Bond Market
-Conviction Calls
-August: It's A Joke
-BHP, Dividends, And Breville Group
-It's The End Of The Trend
-Post-August: Five Themes For The Year Ahead
-August: The Final Numbers
-All-Weathers In August
-Conviction Calls
By Rudi Filapek-Vandyck, Editor FNArena
August Results: Anticipation & Trepidation
Prima facie, Australian shareholders have plenty of reasons to feel excited ahead of the upcoming August results season.
Most companies have recovered more quickly than forecast from last year's lockdowns and pandemic, and profits and dividends are in a strong uptrend with Macquarie analysts observing consensus forecasts in Australia are now in their 11th consecutive month of upgrades, and expectations are building there's more of the same on the horizon.
February was on most market analysts' assessment one of the best local results seasons ever. Corporate Australia not only delivered strong recoveries in profits and dividends, but -uncharacteristically for Australia- it also handsomely beat analysts' forecasts, even though they had been lifting for multiple months already.
On FNArena data, the percentages of earnings "beats" over the past three reporting seasons (before, during and after February) have been at 49%, 47% and 55%, respectively; well above the circa 33% average we measured over the twenty seasons prior.
According to stockbroker Morgans, corporate Australia is currently experiencing one of its strongest upgrade cycles since late 2004. Over the past three months, upgrades have outnumbered downgrades by two-to-one with both miners and energy companies enjoying the strongest momentum.
Recent corporate market updates have equally contributed further, as did Cimic Group's ((CIM)) interim results release last week. It wasn't exactly a shoot-the-lights-out performance from the former Leighton Holdings, but it was good enough for slightly increased forecasts, a small bump up to analysts' valuations (already well above the share price) and the share price has risen slightly too.
For a company that hasn't exactly been kind to its shareholders over the past two years, it most have felt like a welcome relief for many, and a possible early indicator of the turnaround stories that August might present.
One minor disappointment, ironically, would have come from numerous mining companies not meeting production forecasts or failing to contain costs, including BHP Group and Rio Tinto, but the sector continues to enjoy stronger-than-expected prices for its products, which offers plenty of compensation, plus some.
When resources analysts put today's spot prices into their modeling, they see share prices trading on double digit percentages in free cash flow, which then feeds into questions such as: how high exactly might dividends be next year?, but also: how long before those share prices start pricing it in?
It is for this exact reason, I believe, that share prices have remained remarkably resilient over the weeks past, even as governments globally encountered set-backs in their quest to quell the pandemic, including 60% of Australians back in lockdown, and with the climate causing chaos and havoc in parts of Europe and Asia.
Corporate profits are recovering rapidly. Forecasts keep rising, while expectations for the years ahead remain positive. Dividends are coming back, and growing. There's potential for bonus payouts, for buybacks, and for M&A.
Only a few weeks out from August, it would take a lot of negative news to convince investors they'll be better off selling shares in, say, Fortescue Metals ((FMG)) and Mineral Resources ((MIN)), but equally in REA Group ((REA)), Telstra ((TLS)) and Charter Hall ((CHC)).
Clearly, it hasn't happened, and I'd wager this is because the same positive prospects are currently supporting optimism in Europe and the US, where corporate performances are equally surprising to the upside.
That said, there is always the possibility this positive undercurrent might turn or exhaust itself and investors will thus be on the lookout for clues both here and overseas: are business leaders confident enough? What are the effects of transitory inflation on profit margins? Is the consumer prepared to spend more from savings? Are governments able to navigate their way out of this? Did anyone mention central banks and less stimulus?
There is always the dreaded elephant behind the curtains: what will bond yields do in the months ahead?
Not to be dismissed: investors are reminded corporate performances are always judged against forecasts and expectations. While multiple signals point towards ongoing potential for positive surprises, it remains yet to be seen whether corporate Australia can maintain the exceptionally high percentages of "beats" we all have experienced post August last year.
I am inclined to think the numbers of "Beats" and "Misses" will look a lot more "normal" by the beginning of September and this by default means there is potential for a lot more portfolio damage even without macro-influences and left field occurrences.
Analysts are starting to preview and re-assess their forecasts and assumptions, and I expect a lot more to be released over the two weeks ahead (early August is quiet in the season). Next week will thus dig deeper into anticipated beats and misses.
This week we preview with three themes that seem poised to feature prominently in reporting season, and beyond.
Theme 1: Cost Inflation And Margin Pressure
It has the potential to become one of the defining features of the August results season: how much does transitory inflation impact on companies' profit margins, including through rising wages?
Sectors that have investors' attention: retailers and mining services providers.
Stockbroker Morgans has selected a number of companies with a question mark about their margins: Super Retail ((SUL)), JB Hi-Fi ((JBH)), Jumbo Interactive ((JIN)), Reliance Worldwide ((RWC)), GUD Holdings ((GUD)), and Accent Group ((AX1)).
On the other hand, the broker also believes investors might currently be underestimating the potential for margin expansion at: Afterpay ((APT)), Orora ((ORA)), Link Administration ((LNK)), Ramsay Health Care ((RHC)), Chorus ((CNU)), Tabcorp Holdings ((TAH)), Domain Holdings ((DHG)), Amcor ((AMC)), and IDP Education ((IEL)).
Theme 2: M&A Is Back!
With Sydney Airport and Oil Search firmly in play, both investors and analysts are starting to look for who could be next?
JP Morgan has identified the most likely candidates among the large REITs in GPT (GPT)), Dexus ((DXS)), and Lendlease ((LLC)). There is, as per always, seemingly more potential among the smaller cap players in the sector: National Storage REIT ((NSR)), Abacus Property ((ABP)), Irongate Group ((IAP)), Hotel Property Investments ((HPI)), and Waypoint REIT ((WPR)).
Morgans has identified no fewer than 35 potential M&A opportunities for investors:
-Acrow Formwork and Construction Services ((ACF))
-Aerometrex ((AMX))
-Earlypay ((EPY))
-Cooper Energy ((COE))
-Karoon Energy ((KAR))
-a2 Milk ((A2M))
-GrainCorp ((GNC))
-Treasury Wine Estates ((TWE))
-United Malt Group ((UMG))
-Tabcorp Holdings
-Japara Healthcare ((JHC))
-Mach7 Technologies ((M7T))
-Regis Healthcare ((REG))
-Volpara Health Technologies ((VHT))
-Blackmores ((BKL))
-Dalrymple Bay Infrastructure ((DBI))
-Silk Logistics Holdings ((SLH))
-Nufarm ((NUF))
-iCar Asia ((ICQ))
-Iress ((IRE))
-Praemium ((PPS))
-National Storage REIT
-Bapcor ((BAP))
-Baby Bunting ((BBN))
-MyDeal.com.au ((MYD))
-Redbubble ((RBL))
-The Reject Shop ((TRS))
-Data#3 ((DTL))
-LiveHire ((LVH))
-NextDC ((NXT))
-Over The Wire Holdings ((OTW))
-Superloop ((SLC)
-Qube Holdings ((QUB))
-APA Group ((APA))
-Spark Infrastructure ((SKI))
Theme 3: Dividend Super Cycle
On Morgans' data, the percentage of ASX-listed companies who paid out a dividend in February rose to 57%, from 53% in August. Market forecasts for earnings and dividends have risen by approximately 14% since then, which pulls back total dividends domestically to equal the total payout from 2019.
What has improved is the average payout ratio: circa 70.5% now versus 75% two years ago, leaving businesses with more to invest for the future.
No surprises here when all and sundry are once again looking at the banking sector to reinstate dividends and add additional payouts and share buybacks on top due to excess liquidity. ANZ Bank ((ANZ)) already surprised early this month, will CommBank ((CBA)) follow suit next month?
No surprise, also, many eyes are staring at BHP Group, Rio Tinto, Fortescue Metals and other iron ore producers for positive surprise potential on excess cash and little appetite to spend it on operations and/or M&A.
Insurers could surprise too. And Ampol ((ALD)) is everybody's favourite this year to splash out on extra shareholder benefits.
As per standard practice, FNArena will be paying close attention over the coming six weeks. Our dedicated year-around Corporate Results Monitor is empty, but won't be for long:
https://www.fnarena.com/index.php/reporting_season/
(There is an archive to research past reporting seasons for paying subscribers)
Predicting The Next Index Changes
Better early than late seems to be the motto at Wilsons as quant analyst Angus Stains has already published his predictions for the next update on Australian share indices. Index manager Standard & Poor's is expected to update on the composition of Australia's leading indices on September 3, with any changes only taking place on September 17th, after the market close.
Starting from the top, Wilsons is not expecting any change to the current ASX20, but since the ASX50 now has 51 constituents (Woolworths ((WOW)) and Endeavour Group ((EDV)), at least one change is to be announced. Wilsons sees potential for multiple changes.
Most likely to be dropped are a2 Milk ((A2M)) and AGL Energy ((AGL)), with Ampol ((ALD)) seen as a possible drop-out too. In their place, Seek ((SEK)) and BlueScope Steel ((BSL)) are seen as likely candidates to join. Were S&P to also remove Aurizon Holdings ((AZJ)) and Origin Energy ((ORG)), then ResMed ((RMD)) and Mineral Resources ((MIN)) seem best placed.
The ASX100 is expected to see fewer changes with only Beach Energy ((BPT)) identified as a likely drop-out, and no one to be added (because of Woolworths-Endeavour). Wilsons thinks it is possible Link Administration ((LNK)) might be dropped too. In that case, Steadfast Group ((SDF)) seems most likely for inclusion.
Traditionally, changes in the ASX200 tend to have more noticeable impact on share prices, as funds managers literally jump off and on board in case of exclusions and additions. Here, Wilsons sees Nuix ((NXL)), NRW Holdings ((NWH)), G8 Education ((GEM)) and Westgold Resources ((WGX)) all losing their membership in September. S&P could also decide to drop Spark New Zealand ((SPK)).
Most likely candidates to fill in the newly vacant spots have been identified as Pinnacle Investment Management ((PNI)), SeaLink Travel Group ((SLK)), De Grey Mining ((DEG)), Event Hospitality & Entertainment ((EVT)) and, at a lesser chance, Piedmont Lithium ((PLL)).
As is traditionally the case, there might be more changes coming up for the ASX300, but because of tie-ups such as between Orocobre and Galaxy Resources, the September reshuffling should see noticeably more inclusions than removals.
Have been identified as most likely to be added in September are: Paladin Energy ((PDN)), Imugene ((IMU)), Liontown Resources ((LTR)), Betmakers Technology ((BET)), Novonix ((NVX)), Johns Lyng Group ((JLG)), Strike Energy ((STX)), Australian Strategic Materials ((ASM)), Dubber Corp ((DUB)), and HomeCo Daily Needs REIT ((HDN)).
The six candidates who might find themselves friendless, at least immediately after the announcement, are Bubs Australia ((BUB)), Synlait Milk ((SM1)), Integrated Research ((IRI)), Maca Ltd ((MLD)), Medical Developments ((MVP)), and Humm Group ((HUM)).
Wilsons sees an outside change that SSR Mining ((SSR)) too might be dropped from the ASX300, in which case Syrah Resources ((SYR)) is expected to make a come-back.
Conviction Calls
Morgan Stanley's Australia Macro+ Focus List (read: stocks most positively viewed with extra conviction at this particular point in time) currently consists of the following ten inclusions:
-Ansell ((ANN))
-APA Group ((APA))
-BlueScope Steel ((BSL))
-Downer EDI ((DOW))
-Qantas Airways ((QAN))
-QBE Insurance ((QBE))
-REA Group ((REA))
-Scentre Group ((SCG))
-Telstra Corp ((TLS))
-Westpac ((WBC))
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A collective effort among Macquarie analysts has identified 16 investment ideas ahead of the August reporting season; 14 positive ideas with Domino's Pizza ((DMP)) and Suncorp ((SUN)) as the two negative outliers.
Returning to the positive "Best Analyst Ideas"; Amcor ((AMC)), Brambles ((BXB)), Coles ((COL)), Transurban ((TCL)) among defensives, Afterpay ((APT)), Charter Hall ((CHC)), ResMed ((RMD)) and Seek ((SEK)) among the local growth stocks. Favourite ideas for capital return: Ampol ((ALD)), BHP Group ((BHP)), Deterra Royalties ((DRR)) and Fortescue Metals ((FMG)).
Plus two cyclical ideas to round up the list: Eagers Automotive ((APE)) and BlueScope Steel.
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Last week's update on stockbroker Morgans Model Portfolio certainly provided some eye brow-raising suggestions such as that the Core Model Portfolio is holding on to its shares in Sydney Airport ((SYD)) in anticipation of a higher offer to shareholders.
Portfolio managers also decided to top up their ownership in Woolworths-spinoff Endeavour Group, while switching into Santos ((STO)) and out of Woodside Petroleum ((WPL)) and slightly trimming the position in Brickworks ((BKW)).
Morgans' Growth Model Portfolio waved good bye to outperformer Collins Foods ((CKF)) and initiated a new position in TechnologyOne ((TNE)) instead, welcoming the latest addition as "a great steady earnings compounder well suited to the Growth portfolio".
August Bonanza, But What's Next?
The upcoming August corporate reporting season should offer plenty of positives for Australian shareholders.
With both banks and large cap mining companies swimming in cash, there should be plenty of additional rewards on top of a strong recovery in post-2020 dividends. Both ANZ Bank and National Australia Bank have already indicated as much and Rio Tinto's larger-than-usual payout, including a bonus dividend, is equally but the first sign of what is likely to follow over the coming four weeks.
But the benefits that await from August stretch much wider; the quicker than anticipated economic recovery has fueled a much quicker than forecast recovery in corporate profits and balance sheets, and thus Australia awaits an even greater recovery in dividends across the board.
But wait, there is more, a lot more. Asset sales are providing the proverbial cherry on the cake with REITs and companies including Waypoint REIT, Telstra and Insurance Australia Group selling off parts of the business with the intention of (at least partially) passing on the proceeds to shareholders.
And, would you believe it, there is more, still. Increased confidence in that the world will overcome the challenges provided by covid, has interest in pursuing mergers & acquisitions spiking noticeably on the ASX. The latest such announcement came from Afterpay on Monday morning, informing investors its board had agreed to a full take-over by US-listed Square.
We already knew about suitors for Sydney Airport, Oil Search, Japara Healthcare, Spark Infrastructure, iCar Asia, and Iress among mid and larger cap names, but chances for the next suitor to announce itself for an ASX-listed target are improving by the day, or so it seems.
Can Treasury Wine Estates be next? Or Challenger or Praemium, maybe? How about Aerometrex, Bapcor or NextDC? Is Altium now fully off the hook? (See also last week's Weekly Insights for a list of potential targets).
Corporate Profits
In terms of corporate profits, the general expectation is that profits in aggregate are back to where they were pre-pandemic, though this won't be the case for every company individually, of course. Strong underlying support is provided by continuous upgrades to market forecasts which have now been rising for eleven months uninterrupted.
On average, earnings per share for the financial year that ended on June 30 are expected to have risen by circa 26%; this percentage is projected to rise to 45% for the year to December 31st, but for FY22 ending in June next year projected growth sits around 10% and by December 2022 it is close to zero.
One year ago, the average EPS in Australia fell by -19.3%. At the start of 2021, the forecast was for 8% EPS growth in FY21 (showing just how strong those upgrades have been since, carried by resources and financials).
What Comes Next?
The numbers above show the challenge for the Australian share market beyond August: how much growth is left beyond the initial V-shaped recovery?
The answer to that question might prove all-important because share markets are not cheaply priced. The local market's average Price Earnings (PE) ratio is still around 20x if current forecasts for the year to June 30 prove correct. But share markets are forward looking and that PE ratio falls to 17x-something by year-end and will shrink further by June next year if/when current growth forecasts improve further.
But can they?
The question will remain on investors' mind as countries struggle to vaccine populations and contain the virus, central bankers are looking for signs to start reducing liquidity and monetary stimulus, and bond yields might not stay at current depressed levels forever and always.
It would be a big ask for domestic companies to provide all the necessary answers in August, quite unrealistic to be frank about it, but share buybacks, bonus dividends and an explosion in M&A announcements at the very least show there is a lot of (quiet) confidence on display.
And confidence, as every economist and central banker will assure us, is extremely important for financial markets and economies alike. Investors will be hoping inflation will prove transitory and governments will figure out how to deal with the virus, as with climate change.
Bottom line: the outlook for equities won't be solely determined by profits and dividends, but for the four weeks ahead they are nearly all that matters, with the general framework set for a genuine cash splash bonanza on the ASX. Incidentally, data accumulator FactSet reports the second quarter in the US is generating the best outcomes on multiple metrics since FactSet started its US corporate data series in 2008.
US share markets are in a similar position as the ASX: not cheap, but with strong underlying support, and with multiple serious question marks ahead, though few will question the resilience of the mega-trends in the background.
Dividends In Strong Up-Trend
When it comes to specific sectors and individual companies, the key difference between Australia and the US cannot possibly be more accurately illustrated as through Rio Tinto's ((RIO)) super-dividend announcement last week.
As the shares are essentially trading on a double digit yield percentage, because the market doubts iron ore priced above US$200/tonne is sustainable, Rio Tinto's half-yearly payout amounts to a 5%-plus cash distribution; or what shareholders pre-pandemic came to expect from their beloved banks is now being paid out over six months only, with more to follow.
The yield on Fortescue Metals' ((FMG)) dividend in August should be even higher, while a more diversified BHP Group ((BHP)) should still pay out more than each of the banks this year.
Sure, there is every chance this year marks the peak in payouts for these companies, but it remains an open question how long iron ore prices keep feeding into excess capital and exactly how quickly the transformation to a more normal payout will ensue for the sector.
Other candidates to surprise with their dividends in August include Deterra Royalties ((DRR)), Iluka Resources ((ILU)), OZ Minerals ((OZL)), QBE Insurance ((QBE)) and Santos ((STO)).
As the likes of JP Morgan will remind their clients over the weeks ahead: Australia is only at the start of a Super Cycle in Dividends that goes well beyond this year's extraordinary payouts from iron ore producers.
As per usual, Australian investors should not allow themselves to be blinded by high yields only, as history shows superior investment returns are achieved through combining yield with growth.
In Focus: Margins
History also shows the better investment returns come from owning companies whose profit margins are on the rise. It is for this reason that investors remain uncertain about what the year(s) ahead might look like, even if the economic recovery continues unabated. Rising costs, already showing up in "transitory inflation", can play havoc and become a major impediment for companies unable to pass on or contain costs.
A recent analysis by Wilsons suggests an extra complicating matter might present itself as covid might lift or lower margins for certain sectors, with potential consequences for how investors value companies in these sectors.
Wilsons' analysis suggests margins might now be lower-for-longer for industrials and consumer staples, while there appears to be a bias for higher margins in sectors information technology and materials.
An interesting role in this context might be reserved for the Australian dollar. Earlier forecasts had AUD/USD at 0.80c if not 0.85c but instead the cross seems to have settled below 74c and more iron ore weakness and a dovish RBA could well push it closer to 70c.
Morgan Stanley pointed out recently some 27% of the ASX ex-resources is made up of foreign growers who should all benefit from a weaker domestic currency. Think Amcor, ResMed, Cochlear and Aristocrat Leisure, but also Ansell, Pro Medicus and QBE Insurance.
Nominations: Winners & Losers
As happens for every season, analysts pick their potential winners and losers ahead of the real event. This year, those lists are more extensive than usual. The overall bias is unmistakably for more upside surprises relative to negative disappointments. Apart from all of the above, maybe the big hint lays with the so-called confession season that precedes each February and August in Australia; it has virtually gone quiet.
When was the last time a big profit warning shocked the market? Not so long ago the likes of Canaccord Genuity kept an overview of profit warnings and that list would swell to above 100 companies. But that was pre-pandemic. Post-pandemic we have a different dynamic, as also illustrated by the statistics that coloured the past three reporting seasons: before, during and after February. (see archive for the FNArena Corporate Results Monitor on the website).
On my observations, not backed up by any firm statistical analysis, most incorrect predictions usually involve analysts fearing the worst. Companies tend to find a way to smooth things out, or to combine disaster with a positive twist (extra dividend, restructuring, asset sales, lay offs, etc).
Hence, for what it's worth, companies that tend to get mentioned in a negative sense ahead of their August reports ("downside risks") include:
-AMA Group ((AMA))
-Boral ((BLD))
-Domain Holdings ((DHG))
-Elmo Software ((ELO))
-Flight Centre ((FLT))
-InvoCare ((IVC))
-PolyNovo ((PNV))
-REA Group ((REA))
Companies perceived to have a predilection for upside surprise in August:
-Adore Beauty ((ABY))
-Audinate Group ((AD8))
-ARB Corp ((ARB))
-Breville Group ((BRG))
-Computershare ((CPU))
-Downer EDI ((DOW))
-IDP Education ((IEL))
-Integral Diagnostics ((IDX))
-NextDC ((NXT))
-NRW Holdings ((NWH))
-Ridley Corp ((RIC))
-Resimac Group ((RMC))
-Seven Group ((SVW))
-South32 ((S32))
-Universal Store Holdings ((UNI))
-Whitehaven Coal ((WHC))
There is always a list that attracts both cons and pros. It would not be fair to mention them in either of the above lists:
-CSL ((CSL)
-EML Payments ((EML))
-Lendlease ((LLC))
-ResMed ((RMD))
-Super Retail Group ((SUL))
-Seek ((SEK))
Candidates for fresh capital management announcements:
-Ampol ((ALD))
-BHP Group
-CommBank ((CBA))
-Fortescue Metals
-South32
-Telstra ((TLS))
-Woolworths ((WOW))
Lastly, a company that happens to disappoint in results season is not by definition not worth buying or holding on to, just like not every winner in the season is an excellent longer term investment. Every reporting season builds a narrative and there will always be fresh insights and conclusions that can prove vital later on.
Conviction Calls
Stockbroker Morgans has updated its Best Ideas pre-August reporting season.
This has led to the inclusion of five new names: Treasury Wine Estates ((TWE)), Transurban ((TCL)), AusNet Services ((AST)), Tabcorp Holdings ((TAH)), and Hotel Property Investments ((HPI)).
In the stockbroker's own words, Best Ideas are those that come with the highest risk-adjusted returns over a 12-month horizon, supported by above-average confidence.
Early Days, But Plenty Of Signs
The August reporting season in Australia is still very young. The FNArena Corporate Results Monitor only contains 19 updates on Monday, August 9th (see further below), but already the main themes of the season are there for all to see:
-A humongous dividend from Rio Tinto, including a bonus payout
-A special dividend from Suncorp (plus share buyback)
-The promise of a share buyback from News Corp
-Asset sales are in full swing, as is M&A
-Industrial bricks and mortar assets continue enjoying revaluations
-Just under half (9 out of 19) of companies performed better-than-expected
-Covid-losers are achieving the strongest bounce-backs (unsurprisingly), but covid-winners are not by default turning into losers
-Those who miss market expectations (only a few to date) are likely to do so because of higher costs
-Covid and lockdowns continue having an impact, as expected
-Overall, companies remain reluctant to provide quantitative guidance
-Analysts remain conservative in their forecast upgrades given lockdowns and other uncertainties
Take a short stroll through the aforementioned Corporate Results Monitor and all of these themes will be found. It's early days still, but it is well possible the rest of August will simply provide investors with more of the same.
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When it comes to share price action, however, August might be a lot trickier to navigate than usual. Witness: shares in Rio Tinto ((RIO)) are down more than -4% since the announcement of that Grand Dividend; REA Group ((REA)) lost -8% in a heartbeat and ResMed ((RMD)) shares too opened some -3% lower on Friday but have subsequently recovered to a small gain.
And macro factors haven't genuinely commanded a primary role over that brief period.
The share price weakness in Rio Tinto shares is closely correlated with movements and market sentiment concerning the price of iron ore. One would assume most investors are well aware virtually nobody, including the producers themselves, believes this year's elevated prices are sustainable. Hence, those market beating dividends might well include some compensation in the form of share price erosion.
The investment case for Friday's three reporting companies looks equally tricky as all of News Corp ((NWS)), REA Group and ResMed were trading at or near an all-time record high, similar to Rio Tinto. Does it matter? Well, News Corp shares, despite the promise of share buybacks coming under consideration and potentially a better year ahead, has equally seen selling pressure emerge after the market update.
Clearly, there are limits to investor optimism, at least in the short term. Note also: News Corp shares remain well below most broker price targets, so there's no natural safety in a share price that isn't maxed out when the financial result doesn't fully satisfy.
The difficult task ahead for investors is to assess the real importance of these short term moves in share prices, and whether they tell us anything about the way forward. Within this context it is good to keep in mind that companies that manage to beat expectations, and force analysts to lift forecasts and valuations, usually see their share price outperform for up to four months after the market update.
The future profile for those that miss is a lot less straightforward, history suggests, and punishments can be immediately, savagely, or through persistent underperformance over a prolonged period of time.
The best way to handle the information that is updated during results season is thus by forming a view about the longer-term future of the company behind the share price. And here, dare I say it, the fundamentals for ResMed and REA Group continue to look a lot more solid than for most other companies that have reported thus far.
It is no coincidence, both are proud members of my selection of All-Weather Performers on the ASX, and they have been since the inception of my research.
The Strong Are Getting Stronger
Whenever investors ask me: what makes a true All-Weather Stock? My knee-jerk response is usually: a company that consistently invests in its business.
The longer I observe the share market and its multitude in business models, the more I come to this very simple conclusion: from the moment a business starts cutting corners and stops investing in itself, it is gambling on the possibility that nothing unforeseen happens to its customers, its markets, its products and its competitive strengths.
This does not mean nothing untoward can happen. What it does mean is that if something negative occurs, this type of business can handle it, or it knows how to respond relatively quickly. In most other cases, the damage might well be terminal.
Which brings me to one theme that was not mentioned in the list above: recessions and pandemics cause the strong to become stronger. There is, of course, a strong correlation between being a market leader that does all the right things, like investing substantially in the business, and witnessing one's prospects improve on the back of global misery.
The share market may not necessarily always like it, not in the immediate term, but eventually the benefits reaped from those investments will translate into healthy and sustainable rewards for shareholders.
The best example that comes to mind in this regard is that of Seek ((SEK)), whose market leadership for job advertisements in Australia has come under threat from multiple corners on multiple occasions over the past decade, and every time management at the helm responded with: we need to crank up the level of investment.
On each occasion the share price has come under pressure in the immediate aftermath of yet another "disappointing" market update, but look where it ultimately has taken the share price.
Seek shares set an all-time high in July; they are a little lower now. The former is what counts in a long-term oriented portfolio; the latter is only important in the here and now.
Seek, too, has been on my list of All-Weather Performers since inception.
Other companies that come to mind include Aristocrat Leisure ((ALL)), Breville Group ((BRG)), Cochlear ((COH)), CommBank ((CBA)), IDP Education ((IEL)), and Woolworths ((WOW)), though there is a valid argument to be made I should mention all companies listed as All-Weather, potential All-Weather and All-Weather with question marks in the dedicated section on the website.
Not all report in August, and CommBank is not on my lists, but investors' portfolios would be well-served through exposure to any of these high quality businesses that know the secret sauce for staying on top of the corporate ladder.
Short Term Versus Long Term
Of course, we still want management to harbour a positive culture, to stay aligned with shareholders, to invest in the right places and at a favourable return, and we prefer markets that are non-cyclical with a less volatile structure, but all these characteristics still need to be complemented with substantial investments that are not one-offs and do not simply patch up various weak spots in the corporate armour.
Where things get a little trickier, once again, is that most companies I selected have been enjoying favourable long term trends, such as an ageing population, comfort food and the eternal popularity of automobiles. Some of these trends are ripe for disruption, some of the trends are arguably already under threat.
Here the most obvious victim is probably Ramsay Health Care ((RHC)). Up until 4-5 years ago, this leading operator of private hospitals provided better growth and better financial metrics than CSL ((CSL)), would you believe it? But dynamics for that industry have changed, and quite profoundly so, and this is why the share price has essentially trended side-ways, after the plunge from $80-plus.
Make no mistake, last year's pandemic and lockdowns have plausibly created a runway for growth that may well last two-three years because of the freeze in low priority surgeries, but there are also higher costs to be dealt with and it remains still to be seen how governments respond to the prospect of ever higher costs for general healthcare services.
Ramsay Health Care is still held in the All-Weather Portfolio, but I have to admit the thought has crossed my mind, on multiple occasions, that its name should probably be removed from my list. For now, the prospects for next year and beyond have kept this stock in the portfolio. Management has a major challenge at hand. I am not sure whether they can pull it off, beyond the immediate horizon.
And herein lays the true challenge for investors: at face value, Ramsay Health Care shares look a lot cheaper than the likes of Seek, ResMed and REA Group on very basic measurements such as the one-year forward looking Price-Earnings ratio, though I wouldn't call Ramsay particularly "cheap".
It is possible this gap in relative valuation helps Ramsay shares perform better if the FY21 financials beat forecasts, but I remain more confident in keeping ResMed and REA Group in portfolio and if/when their share prices weaken significantly, I'll be ready to increase portfolio exposure.
This is, ultimately, how you play the share market to your own advantage. Know what you are interested in, and why. Give confidence to the companies that deserve it. Keep a firm eye on the longer term.
Understand that quantifiable quality is rare and extremely valuable, and that 'valuation' is the one and only consideration for unproven, lower quality and cyclical companies (which is: most of them), but merely a short-term item for those exceptional businesses that are also listed on the ASX.
Not To Be Forgotten: The Bond Market
Results seasons are supposed to direct investors' attention to what really matters on the share market, and that is how business leaders at the helm of ASX listed companies create durable shareholder benefits and rewards, usually through growing the company's revenues, profits, cash flows and dividends.
But results seasons are seldom only about individual companies. Anno 2021 we can count the global pandemic and bond markets as two potential forces that can have a profound impact, either on individual companies or on markets in general. In particular the bond market can cause some serious tribulations, if/when global bond yields start rising once again.
Nobody really knows what has driven bond yields down since mid-March. All explanations I have come across seem partial influences, at best. What we do know is that bond yields are a lot lower than where they seemed to be trending towards up until March, and this has allowed Quality and Growth and Defensive stocks to once again show their most favourable colours.
Investors should, however, not underestimate the potential impact from bond market yields rising, as we all witnessed during the opening weeks of this calendar year. We don't know when or why exactly, but it seems but a fair assumption this will happen again, possibly before year-end.
What this means is that diversification in portfolios remains of paramount importance. Don't stare yourself blind on the strength of profits and dividends and capital returns this season; equally consider what a quick run up in bond yields might do to the share price.
This might be an opportune time to secure profits on the winning side and start looking at adding some laggards that might come to life on the back of bonds selling off (yields rising).
Whatever the strategy: don't make it a one-way bet on the direction of bond yields.
Also, keep in mind: companies that are capable of achieving sustainable strong growth will come out positively on the other end of bond market headwinds, though probably not immediately.
Conviction Calls
Last week's surprise takeover agreement between US fintech Square and local BNPL market leader Afterpay ((APT)) has triggered a genuine "Who Could Be Next?" research drive inside the local stockbroker community.
Whereas Morgan Stanley doesn't think investors should get too excited post-Afterpay, RBC Capital has weighed in with a three-tiered assessment, dividing potential ASX-listed technology targets over three baskets: Highly attractive targets, medium attractive names, and lowly attractive peers.
In the highly attractive basket we find: NextDC ((NXT)), Infomedia ((IFM)), Pushpay Holdings ((PPH)), Altium ((ALU)), and Hansen Technologies ((HSN)). The latter already is providing due diligence to a potential suitor.
Medium attractive targets include: Appen ((APX)), EML Payments ((EML)), Megaport ((MP1)), Macquarie Telecom ((MAQ)), and Fineos Corp ((FCL)).
Not so attractive, apparently, are: Xero ((XRO)), Pro Medicus ((PME)), Nearmap ((NEA)), and Elmo Software ((ELO)). Not all for the same reasons though. The first two are trading on elevated valuations, which acts as a natural deterrent, while for the latter two the future looks a lot less predictable with RBC Capital anticipating ongoing negative cash flows.
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Not a big fan of picking high dividend yielders whose shares look attractive because of operational headwinds and serious question marks that depress the share price, but it is one of the selections that always has investors' interest in Australia.
Morningstar has come up with the following "10 Franked Income Ideas for Australian Investors". Stocks selected are:
-Aurizon Holdings ((AZJ))
-Perpetual ((PPT))
-Link Administration ((LNK))
-GWA Group ((GWA))
-Westpac Banking ((WBC))
-APA Group ((APA))
-Telstra ((TLS))
-Magellan Financial Group ((MFG))
-Dexus ((DXS))
-Medibank Private ((MPL))
Morningstar seems confident there are no dividend traps included in that list.
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Morningstar also updated its selection of Best Stock Ideas, involving a switch out of Spark Infrastructure ((SKI)) and into Aurizon Holdings.
The 15 Best Stock Ideas are:
-a2 Milk ((A2M))
-AGL Energy ((AGL))
-Aurizon Holdings
-Brambles ((BXB))
-Challenger ((CGF))
-Cimic Group ((CIM))
-G8 Education ((GEM))
-InvoCare ((IVC))
-Lendlease Group ((LLC))
-Link Administration ((LLC))
-Southern Cross Media ((SXL))
-TPG Telecom ((TPG))
-Viva Energy Group ((VEA))
-Whitehaven Coal ((WHC))
-Woodside Petroleum ((WPL))
August: It's A Joke
Corporate reporting season in Australia; in most investors' mind that is only February and August, every year.
In practice, however, the bulk of companies tends to release its market update in the second half of each month, so we might as well call it the second-half-of-August reporting season.
I am not even exaggerating, not by the slightest. When the team at FNArena started updating the Corporate Results Monitor, some eight years ago now, we had to account for a lopsided schedule from day one, but -for reasons unknown- things have only grown even more lopsided since.
From memory, eight years ago we'd end up with some 100 companies having reported by mid-month, which meant there were a further 150-plus left for the closing two weeks of the season. The numbers have since gradually become slimmer and slimmer for the first two weeks, and thus larger and larger for the second half. Also because the stockbrokers we monitor have broadened their coverage over time.
Four years ago, we'd have 80-plus companies in the Monitor by mid-month. Last year that number had shrunk to a little over 50. This time around we ended up with 44. At this pace -dropping -50% in four years- we might as well shorten the whole season to two weeks only from next year onwards. Nobody's going to notice the difference!
Post-2018, my suspicion had been this shift to reporting later in the season was due to more and more local companies having to report bad news for shareholders. If it wasn't a big miss on forecasts, it'd probably involve a capital raising, or a dividend reduction, or a large write-down (non-cash, thus not-so-bad).
But if this were the case over the past three years, businesses clearly do not feel optimistic or confident enough to pull forward the timing for their financial results release. See the numbers this year. Or maybe this is simply a case of: it'll never revert back to a more spread-out scheduling worthy of its common label.
Once we've created a new habit, maybe there is no turning back from it.
Is two weeks long enough to talk about a results "season"?
What this lopsided scheduling does prevent is the ability to draw in-depth, far-reaching conclusions at the half-way point. By early September we expect to have covered off on circa 350 companies. So far, we have hardly scratched the surface in terms of numbers.
Hence, it's getting busy from here onwards. I do not precisely know what the coming two weeks might bring, nor what the exact impact will be on writing Weekly Insights on the coming two Mondays.
I'll do my best.
BHP, Dividends, And Breville Group
So far, so good. Eight days from the end of the domestic corporate results season (six trading sessions plus one weekend) and genuine 'beats' are outnumbering disappointing 'misses' by almost a factor of two-to-one.
More companies feel comfortable enough to provide some kind of guidance, though that is to be read as 'more than feared' beforehand, not a reference to the majority. Many companies are swimming in cash, and they have not hesitated to reward shareholders through increased payouts, special dividends, share buybacks, and M&A.
The share market as a whole is up for the month and local indices would have performed a lot better if not for the global growth scare that is unfolding in the background, which is partially why specific price charts for the likes of Fortescue Metals look like a fall-off-the-cliff experience -suddenly, quickly and savagely- but this also explains why AUDUSD has been below 72c instead of nearer to 80c.
Also, typically for Australia, the FNArena Corporate Results Monitor still only comprises of 140 reports, or an estimated 40% of the total number of individual companies. This goes a long way in explaining why most stockbrokerages are no longer publishing intermediate running updates on the season.
We still await more than 50% of financial results from the companies scheduled to report in August. Apparently, it's the bottleneck in accountants domestically we should blame for this out-of-kilter, heavy skew.
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Some of the early indications have solidified and gained more traction as the numbers to date have accumulated to 140 corporate updates. Many a company in Australia can report its sales, if not profits and dividend, have recovered to pre-pandemic level, or it anticipates to achieve full recovery over the year ahead.
This observation is incredibly important for a share market that has continued to trend upwards, setting new all-time record highs along the way. Most surprises, however, have come through cash dividends for shareholders with company boards lifting payout ratios much sooner than anticipated, despite ongoing challenges posed by the global pandemic.
In hindsight, it can be concluded both ANZ Bank ((ANZ)) and National Australia Bank ((NAB)) gave local investors the earliest indications that corporate Australia was gripped by quite an optimistic mindset in June.
August is not solely providing bliss and happiness, of course. While June-half financial numbers have been better-than-forecast on balance, the outlook for the December-half for many companies is a lot more circumspect as lockdowns across Australia remain in place.
Estimates are thus falling for retailers, travel agents, leisure companies, et cetera. The market is drawing confidence from the past in that once lockdowns end, a strong recovery should follow. This is why, so far, reduced forecasts because of renewed impact from lockdowns has not been met with savage punishment this month.
The market looks forward. One observation is that share prices remain supported by confidence that temporary lockdowns, even when extended, shall be followed up by a swift recovery in sales. This confidence is fueled by numerous companies reporting they were performing better-than-expected up until new lockdowns were announced in NSW, then Victoria and elsewhere.
Unsurprisingly, companies announcing a share buyback usually are rewarded through additional outperformance, though not in every case. Note, for example, the differences in share price performances for Janus Henderson ((JHG)), Suncorp ((SUN)) and Telstra ((TLS)) -all very strong- with the negative outcomes for Fletcher Building ((FBU)) and Emeco Holdings ((EHL)).
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The Big Surprise this season has come from dividends and here, Janus Henderson reports, we are witnessing a global phenomenon. Global dividends experienced a sharp fall in 2020, but Janus Henderson forecasts total payout will rise above the pre-pandemic high in the year ahead.
Global dividends rose by 26% in the second quarter ending June 30th, so this month's sharp increases announced in Australia are not even included yet. On the fund manager's calculations, global dividends have now recovered to $628.3bn (US$471.7bn) for the quarter, which is only -6.8% below the level paid out in Q2 last year.
A few key observations to consider:
-Companies restarting cancelled payouts contributed three quarters of the underlying surge;
-84% of companies increased their dividends or held them steady compared to Q2 2020;
-In Asia Pacific ex Japan, three quarters of companies increased or held their dividends with Australia boosted by banking dividends (pre-August);
-In a seasonally quiet quarter for Australia, payouts more than doubled (+103.6%) on an underlying basis;
-Janus Henderson has upgraded its 2021 forecast to $1.85trn (US$1.39trn) from $1.81trn (US$1.36trn); this new forecast is just -3% below the pre-pandemic peak, implying next year global dividends are set to rise to a new all-time record.
The dividend numbers are receiving an extra-boost from companies paying out a special dividend, as also witnessed in Australia this month, while an offset comes from companies cutting dividends in emerging markets. Underlying, estimates Janus Henderson, dividends globally are set for 8.5% growth in 2021.
One interesting observation was made by analysts at JPMorgan who observed that 33% of Australian companies reporting thus far have subsequently seen forecasts being downgraded with all sectors, except Staples, experiencing negative revisions this month.
A sign of growing wariness or a realisation company boards have pulled forward their reward for shareholders in order to sugarcoat for the headwinds and uncertainties that lay ahead? Worst hit sectors have been Utilities and Materials and the reasons for both seem pretty straightforward: energy markets and the price of iron ore.
All of AGL Energy ((AGL)), BHP Group ((BHP)), BlueScope Steel ((BSL)) and Mineral Resources ((MIN)) have suffered a decline in dividend forecasts this month, as have several of the more troubled names including AMP ((AMP)), Lendlease ((LLC)), and Vicinity Centres ((VCX)).
Macquarie, quite casually, observes prospects for growth in profits remain superior in the USA compared to Australia.
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In terms of individual companies, irrespective of what happens between now and early September, August 2021 will be marked down as the season when the Big Australian made that Big Dividend announcement; US$15bn, the largest in its corporate history, but BHP Group also made a seminal deal with Woodside Petroleum ((WPL)) and pulled its share market listing back home to the Big Southerly homeland.
In terms of truly historic announcements, it'll be plain impossible to beat BHP this season. There has been plenty of coverage by FNArena and media elsewhere, so I'll simply point out what I haven't seen mentioned elsewhere as yet.
Confronted with several opposing challenges and options, the current C-suite team at BHP has found solution in a narrative that should be on every long-term thinking investor's mind. Instead of milking its world-class assets in oil and gas during a time when the price of iron ore is likely heading down quite sharply from lofty US$200-plus per tonne levels, BHP has chosen for a hundred-year long journey into a sector it believes is primed for natural growth in the century ahead, fertiliser, with the ambition of becoming a powerful, low-cost disruptor.
On the other side of the deal we find a super-enthusiastic Woodside Petroleum, and for obvious reasons. Today's share price is a long way off from the highs seen in Q2 2008 and while Woodside stands to lose the mantle of Australia's largest oil and gas company because of the merger between Santos ((STO)) and Oil Search ((OSH)), the company has spent post-GFC in vain to find growth and to develop new projects at a satisfactory return.
Time to reel out my most favourite market observation: the energy sector, in Australia and elsewhere, has been by far the worst performer post-GFC. Santos once was seemingly destined for that elusive $20. Origin Energy ((ORG)) shares equally used to trade in the mid-teens. Woodside used to be revered for its stable and attractive dividend.
Remove the movements in the price of oil and gas from the picture and what is left at Woodside Petroleum? A company ex-growth, struggling to find the capital without a large, shareholder-dilutive capital raising; a position it has been in for years. The deal with BHP will inject new momentum into the business that can possibly reverberate for many years.
But it won't last forever, of course, and most certainly not as long as BHP's entrance into Canadian potash. Deep down, below the surface, there is a real message in there for every investor. Short-term versus long-term. Instant reward against investing for longevity.
We all make those choices, or at least: we should.
Incidentally, the energy sector stands out so far this month with the weakest updates and the largest disappointments, as also illustrated through share price falls for Beach Energy ((BPT)) and Cooper Energy ((COE)). Woodside's half-yearly update was labelled as "weak" by all and sundry too.
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One company that caught my attention is Breville Group ((BRG)), proud manufacturer of iconic Australian household brands Breville, Kambrook and Sage. Less known, probably, is that Breville considers itself an innovator; it is Australia's first and foremost bridge into the Internet of Things (IoT), a future era when household goods start communicating with each other through the ether.
Management at the company decided to cut the dividend for shareholders, traditionally seen as 'blasphemy' among Australian investors, in order to ramp up investments into the company's future. On the day of the FY21 report release the share market responded with a good old shellacking, to which the All-Weather Model Portfolio responded with: I'll have some, thank you.
Breville Group has been on my radar for a long while. Those who are familiar with my research know it ranks as a 'Prime Growth Story' alongside the likes of Macquarie Group ((MQG)), Aristocrat Leisure ((ALL)) and Pro Medicus ((PME)). One cannot own them all at the same time and while the Breville share price has been cheaper, the All-Weather Portfolio was previously happily filled with plenty of durable, quality performers.
One of the names currently no longer held by the Portfolio is Pro Medicus, whose shares put on another big rally following the release of FY21 financials. This remains one of the highest quality growth stocks on the ASX, but it's also valued to the max.
Which simply means Pro Medicus remains on the radar for when a similar opportunity at the right time presents itself.
Next week we shall look into more companies that stood out or caught my attention this reporting season. Plus we will finally be able to draw conclusions by then that stand the test of time.
It's The End Of The Trend
Investing revolves around numbers. Investors like to focus on numbers, though sometimes, dare I say it, with too much emphasis. Successful investing goes beyond the temporary, static analysis of data, but we'll leave this topic for further discussion another time.
As per always, the August corporate reporting season in Australia has generated series of fresh statistics and numbers. Now the end of the month is beckoning, we might as well start off with the numbers that provide us with fresh new trends and updated, deeper insights.
Observation number one is that corporate Australia remains a bifurcated, multi-speed organism and many of the generalised statistics hide the fact that, underlying, the gap between Winners and Laggards remains large. Whether this swings the pendulum in favour of the positives or the not-so-positives -your typical glass-half-full or half-empty proposition- is very much dependent on the angle one starts off from.
The overall positive impetus from corporate results mostly meeting or slightly beating expectations, showing sharp recoveries and a clear bias towards rewarding shareholders, has ostensibly faded as the month matured.
On the FNArena Results Monitor assessment, as the number of corporate reports increased significantly throughout week 4 of the season, the percentage of 'beats' gradually moved away from the 39.1% it had risen to over the three weeks prior (128 companies in total).
On Monday, with the total number of companies having accumulated to 293, the percentage of 'beats' has fallen below 35%. This still indicates a positive reporting season, still above the pre-2020 average of 33%, though no longer as exceptional as the reports that had been delivered over the 11 months post August last year.
Of course, we must also take into account that analysts' forecasts had been rising for 11 months uninterrupted and so it was always a bigger challenge to keep beating those forecasts, in particular when growth in China, momentum in the US and lockdowns in Australia have started presenting fresh headwinds and challenges.
Irrespectively, the negative news that is hiding underneath the numbers from August is that earnings momentum in Australia is now probably past its peak. When all modeling and forecasts have been freshly updated over the coming days, it is likely that August will mark the first month of net negative earnings revisions, in aggregate, ending the strongest and longest positive trend the ASX has experienced over multiple decades.
Investors will be on the look-out for further signs that a new trend might be in the making; one that can have negative implications for the next six or twelve months ahead.
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According to CommSec, whose data analysis runs until last Friday, 84% of Australian companies are back in profit, which marks a significant improvement from last year, but the long term average is higher, at 88%. Moreover, and best not forgotten, for many ASX-listed companies government support and central bank stimulus have been key contributors to the sharp recovery in profits and cash flows.
This fact remains somewhat masked by the never dissipating desire among Australian boards to pamper and reward shareholders, and August witnessed a fierce recovery in dividends, accompanied by share buybacks and special/bonus payouts. Nevertheless, CommSec reports 18% of all reporters in August are not paying out anything to shareholders. This compares with a long-term average of 15%.
A year ago 31% did not pay out a dividend; by February that percentage had dropped to 21%. So, 82% of companies are now paying a dividend pushing up the aggregate cash pay out by 70%. Almost 60% of companies increased their dividend, only 13% had to cut it.
Capital returns through special payouts and share buybacks have become one of the stand-outs this month, and both banks and bulk commodity producers in particular featured prominently. When it comes to lifting dividends in general, all of financial institutions, food retailers, mining companies and telcos have contributed.
The total in dividends paid out to shareholders from this August reporting season might end up nearly double the total amount of last year (up 98% thus far).
Aggregate revenues lifted by 5% over the year to June, with 77% of companies on average increasing their top line by 18.1%. The aggregate net profit rose by 32% on the year prior. Cash holdings improved by $154bn to a record $210.7bn, but only 58% of companies are responsible for that increase.
On FNArena's assessment, thus far only 21.5% of companies delivered a 'miss' on market expectations, which is at the lower end of historical statistics, but the percentage has been climbing throughout the week past.
Rising costs, if not because of difficulties in finding skilled labour, have been held responsible for most disappointing performances, but covid and renewed lockdowns had a significant impact too, in particular when companies were asked to quantify guidance for the year ahead.
Unsurprisingly, those companies that came out with a quantified FY22 guidance, in particular if that guidance carried a positive undertone, have been rewarded this season, including the likes of WiseTech Global ((WTC)), James Hardie ((JHX)), Charter Hall ((CHC)), Goodman Group ((GMG)), Amcor ((AMC)), Mirvac Group ((MGR)), Telstra ((TLS)), and Stockland ((SGP)).
Forward guidances that were not so well received, at least not initially, included CSL ((CSL)), AGL Energy ((AGL)), Seek ((SEK)), Ansell ((ANN)), Origin Energy ((ORG)), Aurizon Holdings ((AZJ)), and Link Administration ((LNK)).
On Macquarie's analysis, some 16% of all companies to date did not issue guidance because of covid.
It is Macquarie's view that when it comes to highlighting some of the best corporate results that have been released thus far, investors should direct their attention towards WiseTech Global, Reliance Worldwide ((RWC)) and Medibank Private ((MPL)), but also Perenti Global ((PRN)), City Chic Collective ((CCX)), ReadyTech ((RDY)), Uniti Group ((UWL)), Macmahon Group ((MAH)), Eagers Automotive ((APE)), and AdBri ((ABC)).
As far as prominent sissers and missers are concerned, a2 Milk ((A2M)), AGL Energy, Appen ((APX)), Boral ((BLD)), Bravura Solutions ((BVS)), Kogan ((KGN)), Lendlease ((LLC)), Link Administration, Monadelphous ((MND)), nib Holdings ((NHF)), oOh!media ((OML)), Origin Energy ((ORG)) and Platinum Asset Management ((PTM)) spring to mind, as well a number of smaller cap miners and energy producers, with special mentioning of Afterpay ((APT)) and Woodside Petroleum ((WPL)) whose share prices proved immune but only because of pending deals in the making.
Remarkable, also, is that the numbers of 'beats' versus 'misses' for the ASX50 look decidedly different. FNArena's Monitor currently stands at 35.7% in beats against 31% in misses. Clearly, smaller cap companies are still outperforming their large cap peers on the ASX. At least that trend of the past couple of years has remained unchanged.
This observation is backed up by Macquarie, whose analysis shows more negative revisions to forecasts have gone to Top100 companies with ex-100 smaller caps faring better. Financials have been outperforming all other sectors on this aspect in August.
All up, and before all reports are in the open with subsequent re-modeling and updates by stockbrokers' analysts, it looks like FY21 will place average growth in earnings per share for ASX200 companies on circa 26.5%. This compares to a -20% decline a year ago and circa 10% growth expected for the year ahead. But as said: the latter number is now under downward pressure, thanks to delta.
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To showcase the market's ability to look beyond the immediate and over the hill on the horizon, look no further than travel agent Flight Centre ((FLT)). The release of its FY21 financials has been highlighted as a particularly weak set of results, though strictly taken it proved in-line with market forecasts, probably illustrating how low those forecasts had been set.
Flight Centre has been in existential crisis for most of the past 18 months, and the business is still struggling under the duration of renewed lockdowns in NSW and Victoria, but the share price is refusing to lay down. On current forecasts, the consensus price target sits at $16.66 and that's exactly where the shares are trading at as we approach the end of August.
The apparent resilience in Flight Centre shares matches a similar resilience for other covid-victims and shows investors are prepared to sit and wait in anticipation of a change in fortune which should arrive as soon as lockdowns are being lifted and the prospect of borders re-opening becomes a realistic point of focus.
Of course, when it comes to picking Winners from winning the war against covid, companies immediately on investors' mind would be the airports, travel agents, airlines, hotels, cinemas and leisure activities, but today's share market contains many more companies that stand to benefit from the prospect of successfully morphing into more 'normalised' societies yet again, including the likes of CSL, Ramsay Health Care ((RHC)), IDP Education ((IEL)), Audinate Group ((AD8)), and others.
In contrast, investors have become more cautious towards those companies that benefit from lockdowns and closed borders. Here it is good to realise by now today's covid-beneficiaries also include BlueScope Steel ((BSL)) and Sims ((SGM)), point out analysts at Macquarie. They believe current elevated US steel prices are not sustainable with a direct warning to investors: rapid falls in prices of lumber and iron ore show that when market dynamics change, the trend reversal downwards can come quickly and without proper warning beforehand.
Having said so, indications are coal producers might be the next commodity segment temporarily swimming in cash in the year(s) ahead.
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Allowing people to again move around and opening up borders will no doubt inspire a rally in stocks that are part of the so-called 'Value' trade on equity markets, but will it lead to a repeat of what happened between October and March when news about vaccines triggered a seldom seen sharp turn in market momentum in favour of financials, resources and other cyclicals, with Quality and Growth temporarily in the sin bin?
For that to happen, and to be sustained, the Value trade must be backed up by government bonds selling off, I believe, with sharply rising bond yields providing the necessary motivation to move money out of highly valued Quality/Growth and into lower valued cyclicals.
The problem with that scenario is that global growth is currently decelerating while market participants seem content with the general sentiment that this year's spike in price inflation is but a temporary phenomenon. Yet, many a forecaster is still projecting 10-year US treasuries at 1.80% or higher by year-end.
The enigma of the coming months does not stop with central banks or bonds. So far, equity indices haven't had a decent correction because underlying market momentum has simply flip-flopped between Value and Quality & Growth, and back and forth again. Will this remain the scenario for the months ahead?
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Analysts at CommSec are cautious for the year ahead, though still positive. They expect the ASX200 to move inside a range of 7500-7700 by mid-2022.
In the background, however, sits Macquarie's observation the latest OECD leading indicator suggests the US cycle is slowing faster than after the GFC. And the Federal Reserve is preparing for less monetary stimulus ("tapering").
It's probably a fair assumption to make that things are likely to become less straightforward, more volatile now that earnings forecasts are no longer rising, effectively removing one solid piece of support that has kept share market indices in a firm uptrend since last year.
I would as yet not be too worried about it all, but a bit of cash on the sideline might come in handy before the year is over.
September Blues
Last year, September was simply a pause in between the recovery from the pandemic sell-off and the subsequent low-volatility up-trend that still remains in place today.
In 2019, however, September delivered a lot more volatility and share market weakness. Things werent't looking too bright for the old economy parts of the Australian economy, and banks and cyclicals began announcing dividend cuts soon after.
In 2018, economic data started rolling over and the Federal Reserve seemed hell-bent on continuing to lift the official cash rate. Equities started to weaken and soon in quite the violent way, until the US Fed backtracked from its intention, but not before late December.
Pick your pick. September historically is the weakest month for US equities and more often than not does the month inject more volatility into financial markets, if only because we, the human participants, expect it to do exactly that.
Usually, the weakest and potentially most volatile period for the year announces itself between the second week of September and the second week of October. Roughly from mid-month to mid-month. Nobody knows exactly why.
So should we be worried?
As per the above mentioned three years past, the scenario for September is never set in stone. And only once in the three years did September open up the floodgate for something more serious to unfold than a pause or a temporary retreat.
This year, the focus is on decelerating global growth. How serious is it? How long will it last? I suspect most market participants are still quite sanguine about it. And there's a very straightforward reason for it: covid and lockdowns are to blame.
Media and commentators are constantly asking the question whether inflation is to remain 'transitory' or not, but I think most investors see the second half slump as 'transitory', and that's in itself an important observation.
It means investors are by definition looking beyond the months ahead and focusing on January 2022, and beyond. Covid and lockdowns are excruciatingly tough on small businesses and the most vulnerable in societies, but many consumers are running up their savings and are expected to re-emerge while wildly swinging their wallets, once they are allowed to.
It is this prospect, I believe, that will act as a natural deterrent to seeing markets drop into a violent black hole, irrespective of pockets of market exuberance, in particularly in the US, and generally elevated valuations, more so in the US than elsewhere.
My advice is therefore the same as with every other period of share market volatility: investors should use this period to reshuffle their portfolios.
Excellent long-term performers might become available at share prices that seemed impossible only a week ago.
And aren't we extremely lucky in Australia in that the August reporting season has only just finished; all data, forecasts, insights and views have been freshly updated.
Post-August: Five Themes For The Year Ahead
Corporate reporting seasons are the ideal event to update thoughts, views, even whole strategies. Ord Minnett's Australian Equities Strategist, Sze Chuah, has taken the opportunity to review key investment themes for the year ahead. An exercise that should benefit us all.
Investment Theme #1 – Reopening societies and recovering economies:
-Consumers will increase their spending, but probably more towards restaurants, travel and entertainment, and probably more domestically as international travel won't be as popular or even available;
-Increased mobility will lead to a pick-up in energy usage and transport;
-This theme is most likely to favour the so-called 'Value'-trade
Ord Minnett's list of stocks to play this theme already contained ANZ Bank ((ANZ)), Origin Energy ((ORG)), Ramsay Health Care ((RHC)), SeaLink Travel ((SLK)), Star Entertainment ((SGR) and Tyro Payments ((TYR)). Post-August, Webjet ((WEB)) has now been added to the selection.
Investment Theme #2 – Income remains important
Interest rates and bond yields remain exceptionally low, hence investors' demand for income through the share market remains strong.
Post-August, Amcor ((AMC)) has been removed from Ord Minnett's list of preferred stocks to play this theme, but only because a rising share price had pushed Amcor's prospective yield below 4%. Weakness in September can make this assessment redundant quite quickly.
The four remaining favourites under theme #2 are APA Group ((APA)), Bank of Queensland ((BOQ)), Charter Hall Retail REIT ((CQR)), and Waypoint REIT ((WPR)).
Investment theme #3 -Financials that benefit from rising asset values
As an aside: the fact this remains one of the key themes on Ord Minnett's strategy menu tells us a few things about where the broker sees financial markets heading to over the year ahead. Merger and acquisition deals are equally included.
Ord Minnett's four theme favourites remain unchanged: Hub24 ((HUB)), Macquarie Group ((MQG)), Magellan Financial ((MFG)), and Perpetual ((PPT)).
Investment Theme #4 – Infrastructure investment
Ord Minnett remains of the view that governments, both in Australia and overseas, will continue their push for increased investment in infrastructure. This creates demand for raw materials and offers fresh opportunities for services providers through new contracts.
Ord Minnett has added Cleanaway Waste Management ((CWY)) to its selection of preferred exposures, with the stock joining Alumina Ltd ((AWC)), Orocobre ((ORE)), Rio Tinto ((RIO)), Service Stream ((SSM)), and Telstra ((TLS)).
Investment Theme #5 – Downside Risks
The fifth and final theme is a negative one; companies to avoid or to sell as it appears the risks are to the downside.
Post significant share price weakness -from near $7.50 to below $6- Boral ((BLD)) shares are now no longer included in the broker's Best to Avoid-list, but the following still are: AusNet Services ((AST)), Reece ((REH)), Orora ((ORA)), and OZ Minerals ((OZL)).
August: The Final Numbers
There are but a few certainties in life. Death. Taxes. And more disappointments are hiding in the tail end of each local corporate reporting season.
Now the dust has settled on the August season in Australia, the FNArena Corporate Results Monitor has determined that, out of the total of 346 companies covered by the seven stockbrokers that make up the Australian Broker Call Report, some 117 companies (33.8%) delivered a positive surprise ('beat'), while 75 companies (21.7%) surprised to the downside ('miss'), with the remaining 154 (44.5%) reporting broadly in-line with market expectations.
Historically, this still categorises as a net positive season, especially as estimates had been in an up-trend for 11 consecutive months prior to August, but the numbers looked a lot better two and three weeks into the season, as they always do.
Of more importance is that the exceptional numbers from post-August last year -when up to 49% managed to beat expectations- are now in the distant past, potentially to never be repeated ever again.
The percentage of negative disappointments fell as low as 13% in February.
Last week I reported Macquarie's forecasts had been revised down to 10% growth on average, and in aggregate, for the year ahead for the ASX200. This week I can add according to data-service Refinitiv market consensus has 20% EPS growth penciled in for FY22. Morgan Stanley sits at 19.4%. UBS, on the other hand, has post-August only 7% left for FY22.
It goes without saying, the local index looks a lot less/more attractive depending on whose numbers we take guidance from. Equally noteworthy: UBS sees dividends per share (DPS) only growing by 2% in FY22 following the spectacular rise of 59% in FY21, which was preceded by last year's -37.3% decline.
Somewhat disappointing, I found, Ord Minnett's most favourite themes for the year ahead did not include Megatrends or Structural Growth, which features prominently in my own research, strategy and share market approach. Strategists at Wilsons, on the other hand, do pay attention to this theme and their observation matches mine in that large numbers of companies that enjoy structural growth might be looking "expensive" on static looking data; they do continue delivering the goods.
On Wilsons' assessment, such companies include: Xero ((XRO)), Domino's Pizza ((DMP)), James Hardie ((JHX)), Charter Hall ((CHC)), Goodman Group ((GMG)), Afterpay ((APT)), ResMed ((RMD)), CSL ((CSL)), Carsales ((CAR)), REA Group ((REA)), and Fisher & Paykel Healthcare ((FPH)).
Among so-called emerging business models, Wilsons points at ARB Corp ((ARB)), Breville Group ((BRG)), Nick Scali ((NCK)), NextDC ((NXT)), Rural Funds Group ((RFF)), ReadyTech Holdings ((RDY)), Telix Pharmaceuticals ((TLX)), and Clinuvel Pharmaceuticals ((CUV)).
The overlap with my own research into All-Weather Performers is noticeable (see dedicated section on the website for paying subscribers, 6 and 12 months).
Wilsons has equally lined up its favourite stocks to position for benefit from reopening economies: Qantas Airways ((QAN)), Crown Resorts ((CWN)), Star Entertainment, APA Group ((APA)), Cochlear ((COH)), CSL, Computershare ((CPU)), Insurance Australia Group ((IAG)), IDP Education ((IEL)), Ramsay Health Care, Seek ((SEK)), Tabcorp Holdings, Transurban Group ((TCL)), Worley ((WOR)), Vicinity Centres ((VCX)), and Boral.
But also the following emerging companies (smaller caps): Integral Diagnostics ((IDX)), Silk Laser Australia ((SLA)), Costa Group ((CGC)), and Select Harvests ((SHV)).
And then there is the flipside of the coin: companies that might find life tougher once covid and lockdowns are less of a dominant factor in our societies: Coles Group ((COL)), Metcash ((MTS)), Woolworths ((WOW)), Amcor, Sonic Healthcare ((SHL)), Reece, Reliance Worldwide ((RWC)), Fisher & Paykel Healthcare, JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Wesfarmers ((WES)), and BlueScope Steel ((BSL)).
And among smaller cap companies: Eagers Automotive ((APE)), ARB Corp, Autosports Group ((ASG)), Motorcycle Holdings ((MTO)), Marley Spoon ((MMM)), Collins Foods ((CKF)), Nitro Software ((NTO)), Breville Group, and Aroa Biosurgery ((ARX)).
Macquarie observes growth in FY21 mostly related to resources and banks, but both stories are labeled "one-offs" and growth's pendulum in Australia is expected to again tilt towards offshore earners. While shares in most of these companies are trading on higher valuations, Macquarie believes their EPS growth is equally poised to come out (much) higher than the market average.
Stocks to consider include: James Hardie, Ramsay Health Care, Cochlear, Brambles ((BXB)), Amcor, Seek, and Computershare.
Macquarie has also lined up a small selection that, based on their history, is likely to upgrade FY22 guidance later on: James Hardie, Charter Hall, Amcor, and Goodman Group.
Morgan Stanley has a target for the ASX200 of 7200 by mid next year. No surprise, the firm's local share market strategist is preaching caution.
All-Weathers In August
August, would you believe, marked the sixth consecutive month of relative outperformance with the All-Weather Model Portfolio returning 3.17% ex of fees for the month. The return over the past three months has risen to 12.27%.
I always feel inclined to add these returns are achieved without taking on above average risk. On my observation of the past 6.5 years (since inception) reporting seasons tend to mostly benefit the Portfolio. Maybe Quality has a habit of mostly performing well?
Changes made were few and far between throughout August. The Portfolio used weakness in Ansell to buy additional exposure and following weakness in Breville Group it was decided to initiate inclusion for the latter.
It is not expected the lists of companies on my personal radar will undergo a lot of changes post-August, as per tradition. A number of stocks did catch my attention, and they are mostly situated in the smaller segment of the share market, which means higher risk, even if management at the helm does nothing wrong.
Investors should always conduct their own research, but post-August they might well direct some of their attention towards: Audinate Group ((AD8)), Aussie Broadband ((ABB)), Class ((CL1)), Codan ((CDA)), EML Payments ((EML)), Fineos Corp ((FCL)), Hub24 ((HUB)), Jumbo Interactive ((JIN)), MNF Group ((MNF)), PWR Holdings ((PWH)), Silk Logistics ((SLH)), and Uniti Group ((UWL)).
Unfortunately, financial updates by the likes of Appen ((APX)), Altium ((ALU)) and Bravura Solutions ((BVS)) once again proved many inside the local technology sector are finding market dynamics a lot tougher these days, but then WiseTech Global ((WTC)) delivered one of the big upside surprises for the season. Gone are the days that offshore and local shorters seemed to have the last laugh.
Conviction Calls
Key large cap stocks to own on a 6-12 months view post the August reporting season, according to Wilsons, are: CSL, Goodman Group, Insurance Australia Group, James Hardie, National Australia Bank ((NAB)), News Corp ((NWS)), OZ Minerals, ResMed, Telstra, and Xero.
Key smaller cap stocks: Adairs ((ADH)), ARB Corp, Aroa Biosurgery, Collins Foods, Countplus ((CUP)), EML Payments, NextDC, Plenti ((PLT)), Pacific Smiles ((PSQ)), ReadyTech Holdings, and Universal Store Holdings ((UNI)).
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Macquarie's favourites to play the re-opening through vaccines trade are: Qantas Airways, Webjet, Star Entertainment, SkyCity Entertainment ((SKC)), Ramsay Health Care, Cochlear, Transurban, Dexus ((DXS)), Mirvac Group ((MGR)), Seek, IDP Education, and Cleanaway Waste Management.
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Morgan Stanley's ten selections for the Australia Macro+ Focus List remain: Ansell, APA Group, BlueScope Steel, Downer EDI ((DOW)), Qantas Airways, QBE Insurance ((QBE)), REA Group, Scentre Group ((SCG)), Telstra, and Westpac ((WBC)).
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