##{"id":60487,"date":"2012-08-29T09:53:32","date_gmt":"2012-08-28T23:53:32","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/08\/29\/a-rather-uncharacteristic-reporting-season\/"},"modified":"2012-08-29T09:53:32","modified_gmt":"2012-08-28T23:53:32","slug":"a-rather-uncharacteristic-reporting-season","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/08\/29\/a-rather-uncharacteristic-reporting-season\/","title":{"rendered":"A Rather Uncharacteristic Reporting Season"},"content":{"rendered":"<p>\n\tBy Rudi <span>Filapek-Vandyck<\/span>, Editor <span>FNArena<\/span><\/p>\n<p>\n\tWith more than 75% of <span>ASX-listed<\/span> companies having reported either <span>FY12<\/span> or half-yearly results this month, early trends have been confirmed, making an early wrap all but appropriate this year.<\/p>\n<p>\tIn terms of market <span>capitalisation<\/span> less than 10% of the Australian share market is still due to report over the next four days (if we include trading updates by three of the Big Four banks).<\/p>\n<p>\n\tTwo of the stand-out conclusions have provided this year&#039;s August reporting season in Australia with a rather unusual characteristic: on one hand corporate earnings reports have vindicated the strong divergence in share price performance between solid defensives and vulnerable <span>cyclicals<\/span> over the past 16 months, but on the other hand this hasn&#039;t prevented the latter from catching up during this reporting season, reducing the relative gap in valuations that had blown out to extreme levels in the weeks leading into August.<\/p>\n<p>\n\tThe relative gap in valuations also played a dominant role&nbsp;in the avalanche in stockbroker ratings downgrades that has flooded the Australian share market over the past three weeks; the 23 upgrades registered since the start of the month have easily been outnumbered by no less than 86 downgrades. This means for every upgrade there have been three downgrades this season. To make matters even worse: many of those upgrades only went from Sell to Neutral.<\/p>\n<p>\n\tA similar picture emerges when we focus on earnings forecasts and on how the released earnings reports have impacted on analysts&#039; estimates for the year ahead. While most reporters like to distinguish the &quot;beats&quot; from the &quot;misses&quot;, as they do in the US every quarter, I largely dismiss these statistics and instead pay close attention to what happens to future estimates. After all, there is a big difference between beating rising expectations or doing slightly better than already beaten down estimates. Most of all, what matters most for investors is to how changes in future assumptions impact on today&#039;s prospects and valuations.<\/p>\n<p>\n\tHere the immediate observation is one that seems rather awkward given the positive performance of the Australian share market since June (or even: year-to-date thus far): measured by the impact on future profit expectations, this year&#039;s August reporting season might still turn out the second or third worst for the past ten years. It will easily be the worst since 2009 when the full impact from the <span>GFC<\/span> was being felt, with resources and domestic <span>cyclicals<\/span> carrying the main blame for this.<\/p>\n<p>\n\tBy Monday next week the average earnings per share (EPS) performance for the <span>ASX200<\/span> is likely to show a negative growth figure for fiscal 2012, keeping corporate growth in the world&#039;s miracle economy in single digits for the period 2009-2012. In comparison: corporate earnings in the US are now higher than in 2007, and still growing faster than over here (albeit the gap has virtually closed by now).<\/p>\n<p>\n\tAs things stand right now, average growth in earnings per share for <span>FY12<\/span> might well fall as low as minus 5% and for <span>FY13<\/span> growth expectations have now dropped into single digits. This is a major difference from the two previous years when high double digit growth expectations dominated at the start of each new financial year, only to see endless downgrades reduce the numbers over the subsequent twelve months. Australia&#039;s share market has been under attack from earnings downgrades for most of the post-2007 era, with only few times when positives resurfaced (on the earnings front) which proved both short-lived and incorrect.<\/p>\n<p>\n\tThe good news on this account is that strategists at the likes of Deutsche Bank, Macquarie and Goldman Sachs estimate that current expectations for global economic growth should allow for around 5% in average EPS growth in Australia this financial year (&quot;top down approach&quot;). If accurate, this suggests the level of further downgrades should subside significantly once we move into September.<\/p>\n<p>\n\tThere remains one obvious vulnerability behind any assumptions for the year ahead and that is that most companies in the mining and energy sectors are projected to return to growth this year or next, depending on fiscal June or December cut offs. Short term, this keeps the underlying bias to the downside. Since the share market is not taking guidance from earnings but from central bankers&#039; intentions, this shouldn&#039;t necessarily be a problem (in the short term).<\/p>\n<p>\n\tOne other stand-out observation is that while Australia&#039;s corporate earnings report is once again looking at a dismal performance for the year to June, the average pay-out in dividends has continued to surprise to the upside with quite a few companies raising the payout ratio this month. Others, such as <span>BHP<\/span> <span>Billiton<\/span> ((<span>BHP<\/span>)) and Rio Tinto ((RIO)) raised their dividends despite a large drop in earnings. Interestingly, analysts at Deutsche Bank have calculated resource companies which have reported so far lifted their dividend payout ratio from 28% in <span>FY11<\/span> to 35% in <span>FY12<\/span>. There is a trend amongst US companies to pay more dividends too.<\/p>\n<p>\n\tThe jury is still out whether this is a signal of increased confidence in a better earnings outlook or whether boards have simply acknowledged the importance of dividends for shareholders in the present environment.<\/p>\n<p>\n\tAs with every reporting season, there have been winners and losers, but the message to investors is less straightforward this year due to the large gap in relative valuations. As such, many of the winners have seen their share price appreciate further, including <span>CSL<\/span> ((<span>CSL<\/span>)), Coca-Cola <span>Amatil<\/span> ((<span>CCL<\/span>)), <span>Breville<\/span> Group ((<span>BGR<\/span>)), <span>Monadelphous<\/span> ((<span>MND<\/span>)) and <span>ResMed<\/span> ((<span>RMD<\/span>)), but this time rising share prices have triggered more and more questions about justifiable future upside potential. The bias towards more downgrades this month can serve as an indication as to what most <span>stockbroking<\/span> analysts&#039; response is to those questions.<\/p>\n<p>\n\tA few other observations that may surprise or become of use in the year ahead are:<\/p>\n<p>\n\t&#8211; When it comes to future earnings certainty, nothing beats Real Estate Investment Trusts (<span>REITs<\/span>) or so it seems with the sector largely reporting in line with expectations and triggering no downgrades to expectations for circa 4% growth in the year ahead. Analysts note the sector is securing EPS growth&nbsp;through continuing to restructure balance sheets by cancelling out-of-the-money interest rate swaps and lowering the cost of funding<\/p>\n<p>\n\t&#8211; Banks continue&nbsp;to operate&nbsp;in a low growth environment, but their dividends remain solid and highly reliable. The average yield exceeds 7% for the Big Four and at least one stockbroker (<span>Citi<\/span>) continues recommending the sector to its international clientele<\/p>\n<p>\n\t&#8211; The strong have reported strong numbers, including Domino&#039;s Pizza ((<span>DMP<\/span>)), McMillan Shakespeare ((MMS)) and Carsales.com ((<span>CRZ<\/span>)), but many of the weak and vulnerable could not escape issuing very weak reports, including Fairfax Media ((<span>FXJ<\/span>)), Alumina Ltd ((<span>AWC<\/span>)), APN News &amp; Media ((APN)), David Jones ((DJS)) and St Barbara ((<span>SBM<\/span>))<\/p>\n<p>\n\t&#8211; Despite widespread concerns, and a general de-rating since March, many of the services providers to miners and energy projects reported robust numbers with ongoing positive <span>guidances<\/span>, including <span>Monadelphous<\/span>, <span>NRW<\/span> Holdings ((<span>NWH<\/span>)), Skilled Engineering ((<span>SKE<\/span>)), <span>QR<\/span> National ((<span>QRN<\/span>)), <span>Ausenco<\/span> ((<span>AAX<\/span>)) and <span>WDS<\/span> ((<span>WDS<\/span>)). While a return to previous high multiples seems unlikely, many of these stocks look undervalued and offer relatively high dividends<\/p>\n<p>\n\t&#8211; Capital management remains an important prospect with companies including Reckon ((<span>RKN<\/span>)), Hills Holdings ((<span>HIL<\/span>)), <span>Emeco<\/span> ((<span>EHL<\/span>)), <span>CSL<\/span> and <span>QR<\/span> National all announcing share buy-backs while others such as <span>Breville<\/span> Group ((<span>BRG<\/span>)) remain flush with cash, offering potential capital management options in the year ahead<\/p>\n<p>\n\t&#8211; Tough times are leading to shorter tenures for underperforming CEOs. On Goldman Sachs&#039; calculations, the average CEO tenure for <span>ASX100<\/span> companies is now shorter than four years. This reporting season saw CEO replacements at companies including <span>PaperlinX<\/span> ((<span>PPX<\/span>)), <span>Flexigroup<\/span> ((<span>FXL<\/span>)), <span>Mirvac<\/span> ((<span>MGR<\/span>)), <span>ARB<\/span> Group ((ARP)) and Pacific Brands ((<span>PBG<\/span>)). Note not all these departures are due to <span>underperformance<\/span> with <span>Flexigroup<\/span>, <span>Mirvac<\/span> and <span>ARB<\/span> Group amongst the winners this year<\/p>\n<p>\n\t&#8211; Industrials have staged a come-back this reporting season, delivering most of the positive surprises. At the same time, this was also the space for some notable disappointments, including <span>UGL<\/span> ((<span>UGL<\/span>)), <span>Tabcorp<\/span> ((<span>TAH<\/span>)), Echo Entertainment ((<span>EGP<\/span>)), <span>Boral<\/span> ((<span>BLD<\/span>)), Woolworths ((WOW)) and <span>Stockland<\/span> ((<span>SGP<\/span>)), among others. Pre-August <span>favourite<\/span> Telstra ((TLS)) also disappointed<\/p>\n<p>\n\tUsually, companies that beat expectations and force analysts to lift future estimates reward their shareholders through a better than market average share price performance in the three months post the reporting season, but this year, with many of the winners from the past year trading at elevated valuations, investors will be hoping for a different dynamic as it seems unlikely that the Australian indices can move much higher from present levels without a noticeable upswing for the <span>cyclicals<\/span> and the higher risk stocks, many of whom failed to outperform expectations this month.<\/p>\n<p>\n\tThe chart below (from Goldman Sachs) shows how the relative valuation gap between defensives and <span>cyclicals<\/span> has now retreated to the post-2009 average. What happens next will determine the outlook for Australian equities.<br \/>\n\t&nbsp;<\/p>\n<p>\n\t<img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/Defensives vs Cyclicals Aug 2012.jpg\" style=\"width: 550px;height: 457px\" \/><\/p>\n<p>\n\t(This story was originally written on Monday, <span>27th<\/span> August, 2012. It was published on that day via an email to paying subscribers).<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Rudi Filapek-Vandyck, Editor FNArena With more than 75% of ASX-listed companies having reported either FY12 or half-yearly results this&#8230;<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[85],"tags":[48],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/60487"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=60487"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/60487\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=60487"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=60487"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=60487"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}