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Earnings Season Wrap 2019

The February/March 2019 reporting season was preceded by a relatively brutal confession period, where several meaningful downgrades led to a widespread readjustment in consensus estimates. Consequently, the lower expectations were generally met, although as usual there were still surprises, both positive and negative.

Markets rallied in relief not because results were strong but because they weren’t worse than recently trimmed expectations. In fact, excluding resources, industrials struggled to achieve mid-single digit growth. After months of getting beaten up by the revelations emerging from the Hayne royal commission, the heavily weighted major banks bounced. TPG Telecom provided Telstra with a surprise, withdrawing from the mobile market. And another tragic dam disaster in Brazil gave iron ore prices another shot in the arm, lifting market leader BHP and Rio.

Capital management initiatives—special dividends and share buybacks—were a feature. Dividends and distributions for the year ended June 2019 are estimated to total near $85bn, the highest on record. This surge reflects robust cash generation in the resources and energy sectors; the proceeds of asset sales; higher payout ratios; and action to pay out franking credits given the threat to the rebate of surplus credits should there be a change in government in May. These payouts need to be funded and have raised gearing levels, although balance sheet strength remains generally sound.

Consensus earnings per share growth estimates for the June half have been trimmed slightly to around 6%, with commodity-reliant companies continuing to provide meaningful support. Excluding the resources and energy sectors, growth expectations for the remainder of the S&P/ASX 200 are nearer 3%. Expectations for FY20 see a reversal in the drivers, with commodity-related earnings growth stalling and industrials recovering. Banks and financials are likely to continue to struggle in the wake of the Hayne royal commission.

Resources and energy stocks continued to produce strong results, robust cash flow and engage in meaningful capital management initiatives. Both BHP and Rio Tinto results were affected by production disruptions but share prices continued to rise with surging iron ore prices after another dam disaster at Vale in Brazil. BHP paid an early special dividend and we anticipate a large final distribution. Rio announced a US$4bn special dividend taking total cash returns declared in 2018 to US$13.5bn. Fortescue Metals completed the iron ore trifecta with a special dividend and both South32 and Whitehaven Coal also paid specials. In the energy sector, Woodside lifted its payout to 100% and Santos declared a strong final dividend.

The major banks reported modest improvement in earnings despite increasingly challenging operating conditions. All face meaningful remediation costs, which will be separate from underlying cash profits. Assets quality remains the feature. Earlier repricing protected net interest margins.

Unless there is a call for significantly increased capital, all will comfortably meet APRA’s 1 January 2020 requirements.

The usually reliable healthcare sector experienced a mixed reception to announced results. The share prices of the big three global players, CSL, Cochlear and Resmed, retreated by 4%, 8% and 12% respectively in the 24 hours after announcements. Ramsay Healthcare’s share price bounced on results after a stressful six months. InvoCare recovered strongly despite a lower result as management announced the improved trading in 4Q18 had continued into early 2019 as market conditions normalised.

The media sector was mixed. In new media, both Domain and SEEK were winners while Carsales.com disappointed. Nine Entertainment was the feature in the traditional media space while Seven West struggled. The gaming sector saw mixed reactions as VIP turnover declined. Star Entertainment’s share price moved nicely higher while Crown Resorts slipped by 5.3%.

a2 Milk was the standout in the consumer space with strong results pushing the share price 10% higher. Chinese demand for infant formula grew 45% from 1H18. Blackmores’ share price slumped 34% on a soft 1H19 result and a downgrade to FY19 guidance. Sales to Chinese customers fell in 2Q19, reflecting weaker consumer sentiment and changes in the channel mix. Supermarket operators disappointed with both Coles and Woolworths results underwhelming. Wesfarmers also struggled, but a $1.00 per share special eased the pain.

The share prices of Magellan and Platinum surged for different reasons. Magellan on the back of an excellent result and growth in funds under management, Platinum more relief after expectations had been downgraded.

The REIT sector continued to be led by Goodman, while Charter Hall also added to positive results. Low bond yields and dovish central bank policy continues to push capitalisation rates lower, lifting valuations. Dexus continued to ride the office supply shortages in Sydney and Melbourne. Building materials suppliers Adelaide Brighton and Boral faced a challenging environment as residential construction activity retreats from peak levels in early 2018.

 

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