Rudi’s View: Corporate Profits – The Next Challenge

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jul 14 2022

In this week's Weekly Insights:

-Corporate Profits - The Next Challenge
-Conviction Calls

By Rudi Filapek-Vandyck, Editor FNArena

Corporate Profits - The Next Challenge

The first six months of 2022 have not been easy to navigate for investors, but the next challenge might turn out to be just as tricky with analysts forecasts looking too rosy and companies potentially too optimistic about their ability to absorb the many changes happening while also maintaining their profit margin.

While much attention is going out to local retailers and other consumer-related companies, as share prices for the likes of Nick Scali ((NCK)), Super Retail ((SUL)), Temple & Webster ((TPW)) and Wesfamers ((WES)) might have been over-sold (at least for the medium term), one sector that has equally caused a lot of damage to investment portfolios is the local mining sector.

It was not simply a matter of macro-factor selling either as companies including OZ Minerals ((OZL)), St Barbara ((SBM)) and Dacian Gold ((DCN)) fessed up to what should have been on every investor's mind beforehand: miners might have been enjoying strong price rises for their raw products, but those companies in the field are equally users of electricity, diesel, gas, and other commodities, while higher transport costs and staffing problems, not to mention excessive rain on the East Coast and yet another wave of covid infections further add to operational risks.

Sure, the prospects of an economic recession in key countries next year should be on every investor's mind, but what about cost pressures right here, right now?

The team of metals and mining analysts at JP Morgan believes the upcoming reporting season won't be pretty for the sector, with cost inflation accelerating while worker absenteeism remains a problem too.

JP Morgan has now factored in more conservative forecasts, but still, the team is forecasting "the current doom-and-gloom to last through the July/August reporting season (negative news flow) before a more constructive macro backdrop (China reopening) helps support the sector".

More conservative projections have led to reduced valuations and JP Morgan reports the average cut in Net Present Value (NPV) has been -15% across the sector. Only one company received a downgrade in rating; Newcrest Mining ((NCM)) moved to Neutral from Overweight. OZ Minerals, post public shellacking, was upgraded to Overweight from Neutral.

While expecting the weeks ahead might prove a real challenge for investors in the sector, the team at JP Morgan has nominated four sector Top Picks: OZ Minerals, BlueScope Steel ((BSL)), IGO Ltd ((IGO)), and South32 ((S32)).

As Evolution Mining ((EVN)), equally post-shellacking, is now seen trading near five year-lows, this stock has become the broker's most preferred among gold producers.


The upcoming results season won't simply be an extended line-up of negative corporate confessions, of course. There will be surprises to the upside. Plus some share prices will be seen as having fallen too far, even after releasing disappointing operational numbers.

A recent preview published by stockbroker Morgans on the local gaming sector singled out Jumbo Interactive ((JIN)) as one company that is likely to report strong growth numbers in August, followed by yet another year of strong growth in FY23. The analysts are equally positive about Tabcorp spin-off The Lottery Corp ((TLC)).

While noting Morgans' projections for Jumbo are slightly below market consensus, the company is the only one whose forecasts have not been downgraded ahead of August.

The other companies are BlueBet Holdings ((BBT)), Star Entertainment ((SGR)), Tabcorp Holdings ((TAH)) and The Lottery Corp, as well as Aristocrat Leisure ((ALL)) which does not report in August; the company only just released its six-monthly update in May.

Equally important: with the notable exception of Star Entertainment and Tabcorp, all four other companies are Buy-rated ('Add') at Morgans, with price targets that are double-digit percentages above present share prices (except for Tabcorp).

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