February 2018 Reporting Season Preview

Rudi Filapek-Vandyck

The February corporate reporting season in Australia takes place against a background of global equities going through a 'Risk Off' phase with Wall Street correcting from dizzying highs.

The rest of the world has equally been unable to escape gravity, even when the Australian share market has seldom been able to match the performance of its offshore peers post 2009, let alone over the year past.

C'est la vie, say the old folks; just goes to show one never can tell the exact outcome when forced selling and herd behaviour push rational decision making out the door.

Assuming corporate performances will still count this month, many a market strategist is expecting a generally solid performance from Australian companies.

The fact that confession season ahead of February has been rather quiet, plus ongoing strong economic momentum just about everywhere around the globe feed into expectations that this month more companies will be able to outdo analysts' forecasts.

This optimism in particular applies to resources companies where expectations have been steadily building on the back of stronger-for-longer commodity prices, and now analysts are looking forward to more capital management in the form of extended payouts and share buybacks from, especially, bulk commodity producers including Rio Tinto ((RIO)), BHP Billiton ((BHP)), Whitehaven Coal ((WHC)), Fortescue Metals ((FMG)), and a number of others.

[Rio Tinto, on Wednesday, responded by announcing a record final dividend plus an additional $1bn to the shares buyback]

Adding to the underlying bullish undertone is the fact that earnings forecasts for ASX200 companies have been rising over the months past, which is generally seen as a positive signal. As was the case throughout 2017, the bulk of earnings forecasts upgrades comes from resources stocks. Ex-resources, the picture looks a lot more benign (but positive, nevertheless).

On average, Australian profits are forecast to grow by 7-8% this financial year, with upside bias depending on how much exactly miners and energy producers can add into the mix. This is a marked slow down from the 17% EPS growth achieved in FY17. It is also markedly lower than the 14% that is being forecast internationally.

Thus, Australia is seen as remaining a laggard, internationally, but there remains support from a resilient housing market, benign growth in consumer spending, plus the global uptick in economic momentum.

Over the past few months, consensus earnings momentum has specifically improved for healthcare companies, diversified financials and utilities but deteriorated for insurers, telecom companies and retailers.

Since reporting season is all about expectations and whether they have been appropriately priced in, and how company results compare, there will always be expert voices that see dangers and threats in the former group and potential for opportunities in the latter sectors.

Quite a few analysts have expressed their doubt whether high growth, high PE companies will be able to meet lofty market expectations. On the other side of the coin, a number now sees potential for an upside surprise from Telstra ((TLS)), Coca-Cola Amatil ((CCL)), AMP ltd ((AMP)), Woolworths ((WOW)), Origin Energy ((ORG)), and various other large cap companies.

Could the market finally have become too bearish on Vocus Communications ((VOC))?

Sometimes expectations can fall low enough ahead of results, making it a lot easier for management teams to come out on top vis a vis market sceptics. But there are never guarantees.

Amcor ((AMC)) is one stock that is dividing the analyst community ahead of its result. Those with a positive view suggest the mild profit warning issued last year has triggered a re-basing, creating a platform to now return to business as usual. There are others though who sense it may have been a precursor to more bad news through a lowering of the FY guidance when the interim report is released.

In similar fashion, there seem to be risks regarding margin pressure at Challenger Financial ((CFG)), and slower execution at NextDC ((NXT)), Domino's Pizza ((DMP)) and Lend Lease ((LLC)), but all these stocks equally attract positive views elsewhere. Other divisive stocks include Insurance Australia Group ((IAG)), Computershare ((CPU)), and Seek ((SEK)).

Companies that feature high on analysts' lists for potential negative surprises include Healthscope ((HSO)), Primary Health Care ((PRY)), Regis Healthcare ((REG)), Silver Chef ((SIV)), Cabcharge Australia ((CAB)), GBST ((GBT)), Crown ((CWN)), and Retail Food Group ((RFG)).

Ardent Leisure ((AAD)) was widely nominated as well, and that has been proven correct. Citi continues to see danger surrounding Event Hospitality and Entertainment ((EVT)) and Village Roadshow ((VRL)). Internal instability at Domain Group ((DMG)) is also feeding market expectations for a (potentially) disappointing market update.

Every reporting season, or so it seems, there is one analyst somewhere who believes InvoCare ((IVC)) is going to miss market expectations badly. This February is no exception. One day, maybe.

Amongst those nominated for likely positive surprises are Altium ((ALU)), Ausdrill ((ASL)), Bingo Industries ((BIN)), Boral ((BLD)), Cleanaway Waste Management ((CWY)), Corporate Travel ((CTD)), Link Administration ((LNK)), Megaport ((MP1)), Perpetual ((PPT), Reliance Worldwide ((RWC)), Star Entertainment ((SGR)), and Webjet ((WEB)).

One of the sectors poised for some upbeat reports looks to be good old fashioned free-to-air TV with indications the sector has enjoyed a reasonably strong six months, while radio seems to be doing better as well. Citi analysts do not believe this revival in operational momentum is sustainable. The analysts think the market will thus zoom in on how well companies such as Nine Entertainment ((NEC)) are managing to keep cost growth under control.

Outdoor media continues to grab market share, but here the picture remains clouded because of contract losses for APN Outdoor ((APO)) and HT&E ((HT1)). oOh!media ((OML)) in particular is expected to release a strong performance.

The stand-out sector nominated for upside surprises is the local retail industry with analysts, on average, positive about JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). UBS even nominates The Reject Shop ((TRS))! Nobody mentions Myer ((MYR)), except in a negative sense.

One stock that is broadly being associated with retail, but incorrectly as far as I am concerned, is Bapcor ((BAP)). Most analysts covering the stock see but positives on the horizon, irrespective of market scepticism.

Nick Scali (NCK)), on the other hand, is steadfastly supported by lofty expectations. It's result this week probably deserves the rating "not bad".

As per usual, FNArena will keep a close eye on changes and opinions during reporting season, with daily updates available through The Australian Broker Call Report and Stock Analysis. From this month onwards, the service has been enriched with a dedicated and permanent Reporting Season Monitor on the website.

Also, Weekly Ratings, Targets, Forecast Changes, updated and published every Monday morning, keeps track of ratings, price targets and changes to earnings forecasts on a weekly basis.

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Late addition on Thursday morning: Macquarie analysts released their Highest Conviction forecasts prior the February reporting season. For an upside surprise they nominate Monadelphous ((MND)), Reliance Worldwide, Boral, AUB Group ((AUB)) and Nine Entertainment.

Two companies are named for a negative surprise: Cromwell Property Group ((CMW)) and Myer.

Rudi Filapek-Vandyck is Editor of FNArena. Investors can trial the service for two weeks at no cost and with no obligation: (VIEW LINK)

australian equities february 2018 reporting season

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