Reporting season’s key alpha generator

Welcome to the third episode of '4-minute Monday', a special series from Nikko AM built around ASX reporting season. Each Monday, I sit down with the team and summarise highlights of the prior week to give investors a pulse of company earnings as well as forward-looking views into upcoming results. I hope this material helps you make sense of the deluge of announcements typically associated with earnings months.

Read on or listen to my recap of week 3, where I highlight the key factor causing some companies' stock prices to soar on earnings day. I also discuss why I'll be watching Boral and SkyCity's results closely. Don't forget to hit FOLLOW on the left if you'd like to be notified of these updates each Monday and more of my wires in future.

With around 80 companies reporting, were there any standouts for you?

Suncorp (ASX:SUN) reported on Friday with a very solid result—up 10% on the day—and well above consensus. General insurance is seeing premium rate rises increase across most segments, including motor, home and the SME areas. This has led to better insurance margins. The fact that claims have tended to be pretty low given the lockdowns has also contributed. It was really a beat based on the underlying and, really, there were no one-off benefits that impacted materially.

Are you seeing any clear trends emerging?

This reporting season has been following quite a traditional path of sales, outlook and EPS beats all doing better. 

Sales beats appear to be a key alpha generator. We’re also seeing classic short squeezes on stocks that report quite well. The highlights on these were WiseTech (ASX: WTC) and IDP Education (ASX: IEL), which were up 30% and 25% respectively on the day.

Of the 60% of companies that have already reported, a high 30% beat consensus; a low 30% was in line with consensus and the remaining 30%-odd disappointed. The best performing sectors we've seen so far are IT, surprisingly consumer discretionary, which has done very well in the lockdown—and materials.

Some big-name resource stocks, like BHP, BlueScope and Viva Energy reported last week. How has the sector held out under the current climate?

Despite iron ore currently sitting at around US$130 a ton, both BHP (ASX: BHP) and Rio Tinto (ASX: RIO) have underperformed during August, even though they had pretty solid results with strong cash flows and quite solid dividends. Having said that, they both outperformed in July.

BlueScope (ASX: BSL) reported a result that was substantially down on 2019, but this was actually well understood by the market and expected. Where they did outperform was in their coated products division in Australia, which sells Colorbond, which had strong demand. They also performed much better in the NorthStar steel mill in Ohio in the USA, which sells most of their products to the car manufacturing industry. That had been down or offline for most of the half, and the market was surprised that they were able to sell all their product to alternate buyers.

Week four offers a mixed bag of stocks. Are there any stocks that you're paying close attention to?

Week four in reporting season is modestly busy. Some of the stocks that we're focusing on include Boral (ASX: BLD). It’s a company the market will be interested in given there's a new CEO and the interest will be around his first thoughts and perhaps any indication he may give on the strategy. 

One of the key areas will be around the US division and whether he will keep the business, exit it completely, or sell parts of it off. There's also conjecture around whether Boral needs to raise capital, which we expect will pique the market's interest.

SkyCity (ASX:SKC) of New Zealand is another company of interest. Prior to the New Zealand government closing down the economy again because of another outbreak of COVID-19, the business actually started to return to pre-COVID levels. This is despite the fact that the gaming floor is substantially less open than it was pre-COVID. So, it will be interesting to see what the management has to say about the current environment given the economy is closed.

Get the latest reporting season insights

Throughout August, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the follow button to stay up to date.