Livewire has acquired Market Index, the country’s leader in free stock market data.
Find out why.

Compelling ideas are still out there

Andrew Tang

Morgans Financial

FY19 proved to be a difficult year for earnings, excluding Financials, Utilities, Resources and REITs, earnings contracted 3.0%. However, fewer significant misses from market stalwarts imply results were likely no worse than feared.

Investors were prepared to look forward and back companies that appear to be at an earnings inflection point. Some early trading updates confirm that a change in consumer and business confidence is underway despite the global uncertainty.

Our standout opportunities include Cleanaway, Sonic Healthcare, Treasury Wine Estates and Woodside.

Familiar dynamics at play as we enter FY20

Aussie Industrial companies (ASX200 ex-Resources) grew their profits by only 1.0% in FY19 reflecting the challenging economy and a remedial year by the major banks (EPS down ~6%).

Important portfolio stocks reported robust results (Commonwealth Bank (CBA), Wesfarmers (WES), Woolworths (WOW), Telstra (TLS), Transurban (TCL)), however more than usual delivered 'misses' on their FY20 outlooks.

We'd flagged that expectations for FY20 looked far too heroic heading into August, so it wasn't surprising that forecast FY20 EPS growth (again ex-Resources) has eroded from 8.3% prior, to 6.2% currently.

We're cautious about ongoing erosion in the context of dividend sustainability (supporting the 'equity yield arbitrage' trade) and upward pressure on stretched valuations which leave little room for error.

Green shoots domestically trump offshore earners

Global economic uncertainty continues to weigh on the ASX's offshore earners. They were one of the few bright spots for the market in recent years but the prolonged trade war and slowdown in Chinese growth is putting a dent in the earnings outlook.

The median FY20 revision in some of the key names (Brambles (BXB): -15%, Orora (ORA): -8%, Amcor (AMC), -6%, Corporate Travel (CTD): -9%) reflects the challenges ahead.

Domestically, early trading updates confirm that a stabilisation in housing, tax cuts and lower interest rates are working their way through the economy.

We see better value looking local Cleanaway (CWY), Westpac (WBC), Wesfarmers (WES) and People Infrastructure (PPE).

Other interesting themes from August

Retailers enjoyed a good bounce on evidence of a consumer turnaround, helped by undemanding valuations.

Expensive Online stocks popped (Seek (SEK), REA Group (REA), Domain Holdings (DHG)) despite EPS downgrades, driving PE expansion to ~33x which we're still struggling to rationalise (late cycle exuberance anyone?).

Buybacks and Specials featured heavily (+$2bn in new buybacks from Qantas (QAN), AGL Energy (AGL), Amcor (AMC), Link Administration Holdings (LNK)), but our growth starved market now prefers to reward those willing to invest, rather than return capital.

High Growth/PE saw some profit taking as several key names missed investors' lofty expectations (Appen Limited (APX), Nearmap (NEA), Breville Group (BRG), A2 Milk (A2M), Bellamy's (BAL), Blackmores (BKL)), perhaps a sign that the 'growth at any cost' trade may be nearing a reversal.

Compelling ideas are still out there

We continue to identify compelling value in select companies, amongst a broader market which looks expensive. Standout opportunities include Cleanaway, Sonic Healthcare, Treasury Wine Estates and Woodside.

Find out more

This report was contributed to Livewire from the Morgans Blog

Andrew Tang
Analyst - Equity Strategy
Morgans Financial

Andrew is a member of the Morgans Investment Committee, and is responsible for equity strategy bulletins, high conviction stocks, model portfolios and other products focusing on key areas such as reporting season, factor analysis and short interest.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.