Rudi's View | Aug 23 2023
This story features IRESS LIMITED, and other companies. For more info SHARE ANALYSIS: IRE
In this week's Weekly Insights:
-Resilience Shines, Forecasts Slide
-No Weekly Insights Next Week
By Rudi Filapek-Vandyck, Editor
August Signals: Resilience Shines, Forecasts Slide
August is well passed the half-way mark, but in Australia the all-important week four in the local results season has only just started.
In terms of numbers of corporate results updates, this week's running will more than double the total thus far. In terms of index weight, around 50% in market capitalisation has now reported with this week scheduled to add an additional 45% in index weight terms.
If Monday can be taken as our guide for the remainder ahead, share price volatility is about to regain prominence with shares in Iress ((IRE)) down -34.9%, losses on the day for Adairs ((ADH)) are -14%-plus and a2 Milk's ((A2M)) forward-looking guidance has caused its shares to retreat by -13.5%.
On the positive side, investors are discovering strong results from Audinate Group ((AD8)) are good for a 17% gain initially, later on pared back to 10.68%, while Premier Investment ((PMV)) shares are up 12.2% and Charter Hall's ((CHC)) confidence and relative resilience are good for a gain of 3.5%.
All the while, that big rally off the low in June has virtually disappeared, similar to what had happened back in February. Year-to-date the ASX200 ex-dividends is only up circa 1% from the 1st of January, thanks to this month's pullback to date of nearly -4%.
Corporate results are important, but they are not the only share market driver around. As was the case back in February, macro-economic influences are just as important.
Probably the most important observation is that bond yields, globally, are rising yet again, with plenty of narratives swirling around to keep investors guessing about the true meaning and implications of it all.
Are we preparing for higher-for-longer inflation? Pricing out near-term rate cuts? A consequence of the Japanese bond market reset? Global liquidity withdrawing? Or is this the end of future recession expectations and a warning signal for an imminent share market sell-off?
The number of warning signals generated by troubling signals and trend reversals on technical charts seem to be multiplying rapidly this month, which no doubt is having an impact on general sentiment too.
The one pivotal event that only just happened is the yield on offer from the Australian government's 10-year benchmark bond is now higher than the average yield for the ASX200; 4.30% versus 4.20%. This phenomenon has not been witnessed locally since 2009-2011, more than one full decade ago.
To be fair, the Australian bond market offering higher yields than what is available through the share market was pretty much the standard setting in Australia pre-GFC, but the general context is different today, and it certainly has been different over the past 15 years.
Equally noteworthy is the Australian dollar which has sunk to US64c, and lower, these past few weeks – a far cry from attempting to crack through the US70c level and now a potential source for additional inflation headache. The five-year average sits at US70c so this latest move definitely bears watching.
On Morgan Stanley's assessment, an average -10% decline in the trade-weighted AUD usually translates into 1ppt higher inflation over the following one to two years in Australia. On a trade-weighted basis, the AUD has now broken below 60 and is trading near post-covid lows.
Of influence in this process, no doubt, is investors reversing their optimism on all things related to China.
Earlier in the year, the sluggish recovery in the Chinese economy was feeding into market optimism that more stimulus was forthcoming, hence buy more exposure!
Recently, that sentiment has been replaced with a general realisation that all is not well in the Middle Kingdom. More stimulus is not the simple panacea for all ills weighing down on the Chinese economy.
In August, we are collectively worrying about how bad things actually are in the world's second largest economy, and whether they might get a lot worse still.
Share prices of iron ore producers on the ASX are in retreat, but they are still showing relative resilience in line with the price of their key product in China thus far.
But Monday's update by infant formula marketer a2 Milk ((A2M)) shows China has become one tough challenge for ASX-listed exporters.
Guidance provided for the year ahead by company management together with the FY23 result release implies consensus forecasts might have to reset lower by -10%, which is weighing down on the share price post market update.
Results Thus far: FY23 Resilience meets FY24 Challenges
On Monday, the FNArena Corporate Results Monitor comprises of 107 market updates, of which 32.7% (35 updates) have been marked down as "beats" and 28% (30 releases) as a "miss".
Were these numbers to remain unchanged by the end of next week, August 2023 would rank among the better result seasons locally as total beats seldom reach higher (36% in August 2020 is the highest to date) but equally the percentage of misses is usually a lot smaller.
In what might be an ominous signal, the gap between beats and misses has been narrowing as more company results are being released.
At the very least, the two high percentages on both opposing sides illustrate yet again the Australian economy, and by extension the Australian share market, remains extremely polarised. And the huge gap between the winners and losers is not only determining different outcomes between segments and sectors, it is also separating the stronger from the more vulnerable inside sectors.
The first three weeks have already delivered plenty of examples:
-Goodman Group's financial performance once again solidified its position as the prime sector leader on the ASX
-All of Audinate Group, Carsales ((CAR)), Cochlear ((COH)), James Hardie ((JHX)), Netwealth Group ((NWL)), and Pro Medicus ((PME)) yet again proved a premium valuation can be sustained on persistent operational strength
More Downgrades For FY24
A general observation up to this point is that corporate performances have been far more resilient than had been feared beforehand, in line with the domestic and international economies that have proved to be rather resilient too.
Two very important factors need to be added to keep things into the correct context:
-Earnings estimates have fallen quite dramatically over the year past. Without analysts adjusting their estimates significantly lower, the large majority of companies reporting would be missing forecasts this season
-While circa 72% of reports is either meeting or beating expectations, more 'misses' are happening with forward-looking guidances and forecasts
To illustrate the big gap between FY23 results (in the past) and FY24 forecasts (the future), quant analysts at Barrenjoey report FY23 EPS numbers have beaten forecasts in 28% of releases versus 12% misses. But on FY24 EPS forecasts, only 13% of upgrades have been registered against 31% downgrades.
To some, like the market strategists at UBS, this heavy skew towards more downgrades for expectations in the year ahead is at least partially the result of business leaders adopting a more cautious approach. It cannot be ignored, however, many a company that is still performing well up until now has been noticing slower momentum throughout June-July-August.
It is still possible that analysts downgrading forecasts for the year ahead are being too cautious, but we won't know until after the February results season next year, if not six months later. As things stand today, the aggregate average EPS for corporate Australia (ASX200) is projected to grow at no more than 1.8% in FY23, a number likely to decline over the two weeks ahead.
More downgrades than upgrades for FY24 means the reference EPS for the coming year has now sunk to -5.4% on Morgan Stanley's assessment.
The good news is, EPS growth numbers look a lot better for FY25 (up 5.4%) and for FY26 (up 4.7%), though these projections usually come down over time.
In terms of general valuations, the average PE ratio for the ASX200 now sits marginally below 15x on FY24 forecasts, which remains above the circa 14.5x long term average. But, as everyone is probably aware of by now, underneath any generalised market average these days hides extreme bifurcation at the individual company level.
Also interesting is that financial results to date have been underwhelming at the sales level, suggesting the pressure is real for most companies, with managing costs and passing inflation on to end users responsible for better-than-expected profits overall – or should that be more accurately: not-as-bad-as-feared?
On UBS's number crunching, to date twice as many companies have issued negative guidance versus a positive outlook. Statements issued appear to be guided by challenges for further top line growth, whereas the number one challenge so far this August appears to be the ability to control costs.
One sector that stands out already through mostly margin disappointments is the local media sector, with Macquarie analysts identifying each of Domain Holdings, Southern Cross Media ((SXL)), Seven West Media ((SWM)) and Seek ((SEK)) as having updated with weaker-than-expected margins.
Macquarie also points out the defensives are largely releasing disappointing or unimpressive results, though this generally does not inflict heavy sell-offs to share prices. Think Amcor ((AMC)) and Orora ((ORA)), but also Telstra ((TLS)) and Spark New Zealand ((SPK)), and Endeavour Group ((EDV)).
Casting our net wider, there's probably an argument to be made one should equally include the likes of Aurizon Holdings ((AZJ)), CSL ((CSL)), Sonic Healthcare ((SHL)), the insurers, and many of the local REITs as local defensives. Admittedly, not one amongst them has to date genuinely delivered a big positive surprise.
On Macquarie's assessment, the underlying operational skew appears to be less favourable in comparison with February or August last year, with many of the disappointments linked to margin weakness. It is Macquarie's observation that margin pressure is one of the key culprits responsible for disappointing outlooks provided by companies this season.
Measured against forward-looking guidances, the A-REITs stand out above all other segments with some 50% of financial updates from the sector including negative guidance as more expensive debt combines with higher costs and top line pressures.
The sector also continues to devalue asset valuations, opening up balance sheet pressures that might result in forced asset sales.
Dividends Under Pressure
More disappointments from local REITs are shining a light on one of the key negative developments to date from the current season: dividends and distributions for shareholders.
Australian investors have been truly pampered through ongoing dividend increases in recent years, as exceptional circumstances for iron ore producers made each of BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)) Top Ten dividend payers globally.
In nominal terms, BHP had become the world's largest dividend payer, beating banks locally and everywhere, as well as the world's largest technology companies listed on Wall Street. But iron ore's price peak above US$200/tonne is now well and truly in the past, which has made those dividends from the past unsustainable.
Those dividends have now dropped by -40% and more, creating significant overhang for Australian dividends and distributions in aggregate. Hence the general forecast is for total payout to shrink in 2023, even though Australian banks will still be adding sizeable increases, as also shown by CommBank and 'Bendelaide' this month.
However, the first 107 corporate releases this month are suggesting there's a lot more happening than simply the impact from a weaker iron ore price; even more so for the year ahead than for the six months past. Consider Barrenjoey's assessment that when it comes to dividends for FY24, 19% in upgrades compares with 33% in downgrades.
On Macquarie's numbers, no less than one third of companies reporting have lowered their dividend outlook by at least -5% with only 4% of companies issuing material upgrades.
On FNArena's observation, the number of payout disappointments to date far outweighs the small number of positive surprises. The latter predominantly relates to AGL Energy ((AGL)), AMP Ltd ((AMP)) and Super Retail ((SUL)), plus a few others.
On the negative side, we find the coal miners even though both Coronado Global Resources ((CRN)) and Stanmore Resources ((SMR)) are believed to be hoarding cash for the potential acquisition of BHP assets.
But all of the ASX ((ASX)), Aurizon Holdings ((AZJ)), Challenger ((CGF)), Computershare ((CPU)), QBE Insurance ((QBE)), Rio Tinto, Seek ((SEK)), Sonic Healthcare, Suncorp Group ((SUN)) and Transurban ((TCL)) disappointed with their dividend announcements.
The irony is that Australia, otherwise known as the Dividend Capital of the World, is now poised to weigh down global dividend projections this calendar year and next.
A recent estimate by S&P Global Market Intelligence projects global dividends to remain flat in 2023, carried by a 2.7% increase in the US and 5% in Europe, with a pull back in the order of -2.2% for Developed Asia-Pacific with Hong Kong SAR and Australia the main culprits.
S&P Global estimated total payout in Australia will decline by -6% this year. Judging by the trends thus far this August, Australian shareholders should not expect things to improve in the year ahead.
Incidentally, as also observed in similar situations in the past, when things turn genuinely challenging globally, Australian companies cut their dividends in (much) larger chunks, an observation last made during the covid pandemic in 2020.
–The FNArena Corporate Results Monitor (updated daily): https://www.fnarena.com/index.php/reporting_season/
–Weekly Ratings, Targets, Forecast Changes (updated weekly on Monday morning): https://www.fnarena.com/index.php/2023/08/21/weekly-ratings-targets-forecast-changes-18-08-23/
–Rudi's Views (archive of stories, including Conviction Calls and detailed previews to the August results season): https://www.fnarena.com/index.php/analysis-data/rudis-views/
No Weekly Insights Next Week
The results season calendar has been relatively nice to me thus far in August, but next Monday might prove a bridge too far, with plenty of smaller cap companies scheduled to release their financial performance as the end of the month draws nearer.
For some bizarre reason, many of the small caps prefer the Friday, possibly thinking any unfavourable news released then might be forgotten about by the start of the new week? (Yes, as I said, bizarre).
Many of Friday's updates will be incorporated in FNArena's seasonal Monitor on Monday.
There will be no Weekly Insights next Monday. The general work load here at FNArena will simply be too heavy. The following week we can all digest the end results with final statistics and conclusions that might guide investors for the six months ahead.
A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (20 since 2006); examples below.
(This story was written on Monday, 21st August, 2023. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).
For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED
For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED
For more info SHARE ANALYSIS: ADA - ADACEL TECHNOLOGIES LIMITED
For more info SHARE ANALYSIS: ADH - ADAIRS LIMITED
For more info SHARE ANALYSIS: AGL - AGL ENERGY LIMITED
For more info SHARE ANALYSIS: AMC - AMCOR PLC
For more info SHARE ANALYSIS: AMP - AMP LIMITED
For more info SHARE ANALYSIS: ASX - ASX LIMITED
For more info SHARE ANALYSIS: AZJ - AURIZON HOLDINGS LIMITED
For more info SHARE ANALYSIS: BEN - BENDIGO & ADELAIDE BANK LIMITED
For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED
For more info SHARE ANALYSIS: BRG - BREVILLE GROUP LIMITED
For more info SHARE ANALYSIS: CAR - CAR GROUP LIMITED
For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA
For more info SHARE ANALYSIS: CGF - CHALLENGER LIMITED
For more info SHARE ANALYSIS: CHC - CHARTER HALL GROUP
For more info SHARE ANALYSIS: COH - COCHLEAR LIMITED
For more info SHARE ANALYSIS: CPU - COMPUTERSHARE LIMITED
For more info SHARE ANALYSIS: CRN - CORONADO GLOBAL RESOURCES INC
For more info SHARE ANALYSIS: CSL - CSL LIMITED
For more info SHARE ANALYSIS: DHG - DOMAIN HOLDINGS AUSTRALIA LIMITED
For more info SHARE ANALYSIS: EDV - ENDEAVOUR GROUP LIMITED
For more info SHARE ANALYSIS: ELD - ELDERS LIMITED
For more info SHARE ANALYSIS: FMG - FORTESCUE LIMITED
For more info SHARE ANALYSIS: IRE - IRESS LIMITED
For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED
For more info SHARE ANALYSIS: JHX - JAMES HARDIE INDUSTRIES PLC
For more info SHARE ANALYSIS: NCK - NICK SCALI LIMITED
For more info SHARE ANALYSIS: NWL - NETWEALTH GROUP LIMITED
For more info SHARE ANALYSIS: ORA - ORORA LIMITED
For more info SHARE ANALYSIS: PME - PRO MEDICUS LIMITED
For more info SHARE ANALYSIS: PMV - PREMIER INVESTMENTS LIMITED
For more info SHARE ANALYSIS: QBE - QBE INSURANCE GROUP LIMITED
For more info SHARE ANALYSIS: REA - REA GROUP LIMITED
For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED
For more info SHARE ANALYSIS: RWC - RELIANCE WORLDWIDE CORP. LIMITED
For more info SHARE ANALYSIS: SEK - SEEK LIMITED
For more info SHARE ANALYSIS: SHL - SONIC HEALTHCARE LIMITED
For more info SHARE ANALYSIS: SMR - STANMORE RESOURCES LIMITED
For more info SHARE ANALYSIS: SPK - SPARK NEW ZEALAND LIMITED
For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED
For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED
For more info SHARE ANALYSIS: SWM - SEVEN WEST MEDIA LIMITED
For more info SHARE ANALYSIS: SXL - SOUTHERN CROSS MEDIA GROUP LIMITED
For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED
For more info SHARE ANALYSIS: TLS - TELSTRA GROUP LIMITED