Earnings Season: On the road back - CommSec

Economics | March 1, 2021

 Earnings Season: On the road back
 Corporate Profit Reporting Season
  Each ‘earnings season’ or ‘profit-reporting season’ CommSec tracks all the earnings results of S&P/ASX
   200 companies to obtain a comprehensive picture of the aggregate health of Corporate Australia.
  In total, 141 companies of the ASX200 index group reported half-year (interim) results for the 2020/21
   year. A further 31 companies with a December 31 reporting date have issued full-year or final results. The
   other ASX 200 companies have different balance dates.
  Despite the turbulent times, 86 per cent of companies reported statutory profits for the six months to
   December. But aggregate interim earnings fell by 17 per cent.
  Dividends are returning. Just under 79 per cent of companies issued a dividend (long-term average 86
   per cent). Aggregate dividends are actually up by 5 per cent on a year ago.
  The big trend has been the lift in cash holdings. Aggregate cash holdings are up by over 50 per cent to
   $124 billion. And 70 per cent of companies have lifted cash holdings over the past year. Add in the
   companies reporting full year results and cash holdings stand at $166 billion.

 The Profit Reporting Season
        Every six months CommSec tracks the earnings of Australia’s largest listed companies. Some analysts track
         whether companies have met broker expectations. That tells you little about the financial performance of
         companies. And unfortunately for many companies only a few brokers ‘cover’ all the stocks.
        Other analysts just track the earnings of those companies they ‘cover’ – the companies that they have detailed
         information on. CommSec includes all ASX 200 companies in its macro (big picture) assessment of the reporting
         season.
        For some companies it has been the toughest year in living memory. Notably companies most negatively affected
         have been those dependent on people mobility. Especially global mobility – companies dependent on foreign
         travel such as airlines and booking companies. Local lockdowns and the closure of foreign borders have buffeted
         services like hospitality, accommodation, arts &
         recreation and gaming operators as well as
         commercial and retail property businesses and
         toll road operators.
        Energy companies were hit over 2020 by lower -
         often government administered - prices and
         demand although 2021 is looking to be a better
         year.
        For others like retailers, conditions have been
         arguably the best since the recovery period of
         the previous economic ‘emergency’ – the global
         financial crisis.
        And then there are the miners, supported by
         favourable commodity prices and demand,
         although experiencing the headwinds of a firmer
         Australian dollar. It is worth pointing out those
         Aussie dollar headwinds for companies with a
         significant foreign presence.

Craig James, Chief Economist; (02) 9118 1806; Twitter: @CommSec
Ryan Felsman, Senior Economist; (02) 9118 1805; Twitter: @CommSec

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Economic Insights. Earnings Season: On the road back

The Numbers
  So to the numbers. And these numbers refer to
   those companies reporting half-year earnings to
   December 31, 2020.
Profits
   Of the 141 companies from the ASX 200 group
    that reported for the six months to December
    2020, 121 companies or 86 per cent managed to
    produce a statutory profit (net profit after tax).
    This proportion is well up on the 75 per cent of
    companies reporting statutory profits (net profit
    after tax) for the year to June.
   Over the past decade, on average around 88 per
    cent of companies have reported a profit rather
    than a loss.
   Of the companies to report a profit for the half-
    year to December, 60 per cent managed to lift
    earnings while 40 per cent recorded a fall in
    earnings.
   In aggregate (summing all the profit results), earnings are down 17 per cent on a year ago. Revenues fell in total
    by just 0.9 per cent, short of the 0.1 per cent aggregate lift in expenses.
Dividends
   In the six months to December 2020, 111 companies (79 per cent) elected to pay a dividend. If we go back to the
    full year to June 2020, only 68 per cent of companies elected to pay a return to shareholders. The average over
    the past 20 reporting seasons stands at 86 per cent. So dividends are returning, but there is still some way to go.
   Almost 35 per cent of companies lifted dividends; 14 per cent held dividends steady; 30 per cent of companies cut
    dividends; and 21 per cent of companies elected not to pay a dividend.
   Of the 30 companies not paying a dividend, 21 similarly elected not to pay a dividend six months ago.
   Of the 72 companies paying a dividend, 44 per cent lifted dividends; 18 kept the payout steady; and 38 per cent of
    companies cut the dividend.
 In aggregate, dividends were up 4 per cent on a year ago.
Cash
   In the full-year earnings season six months ago, companies elected to trim or not pay a dividend and instead use
    the cash to shore up stretched balance sheets.
   Companies are paying dividends again, but they remain wary, choosing to hold more cash.
   Aggregate cash at hand (cash as at December 31) was up over 50 per cent on a year ago (up from $82 billion to
    $124 billion). Add in the companies reporting for the year to December and cash holdings stand at $166 billion.
   Overall 70 per cent of companies lifted cash levels from a year ago, notably retailers and banks.

Themes
   Usually each quarter there are a number of themes, covering a range of issues. This reporting season – just like
    the last – Covid-19 has understandably dominated.
   Investors are clearly more sympathetic with any lack of
    earnings guidance provided. Investors have seen how
    quickly conditions can change. But certainly investors
    are interested in the initiatives and strategies that
    companies have chosen – and those that are planned.
   Six and twelve months ago there was a focus on
    strengthening the capital position. But now with those
    positions shored up, the question is ‘what’s next?’ and
    ‘what is the best use of the huge cash stockpiles?’
   There is a big focus on supply chains – especially
    global supply chains. Not only the response to Covid-
    19 but also those companies affected by the trade
    restrictions applied by China. Have diversification
    efforts begun, and how successful have they been?

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Economic Insights. Earnings Season: On the road back

   There are the inevitable questions on staffing
    levels, especially companies in receipt of
    JobKeeper. Some companies have decided to
    repay JobKeeper payments to the Government
    but others are torn on the issue – arguing that
    they ‘protected’ jobs.
   Just like six months ago, solid retail sales have
    featured over the reporting period, especially on-
    line sales. Some continue to benefit from low or
    lower rents. Retailers benefiting most are in
    homewares, electrical or those focussed on
    delivery. There was a bigger pay-off from
    companies that already had invested in the on-
    line presence (sales and distribution).
   While retailers, supermarkets, gold, mining-more-
    generally, and stay-at-home stocks have out-
    performed in the COVID environment, energy,
    tourism, travel-dependent companies and some
    REITS have been buffeted. It’s been an uneven economic downturn and recovery.

Selected observations & notations
   Rio Tinto: Iron ore unit costs to rise from US$15.40/tonne to US$17.70 in 2021.
   Domino’s Pizza Enterprises: Intends to accelerate expansion.
   Ingenia Communities: will repay $1.7 million of $5.1 million JobKeeper payment. Surging revenues from holiday
    parks.
   Adairs: Returned $6.1 million JobKeeper payment. Lifted gross margins from 61.1 per cent to 66.1 per cent.
   Breville: Cut dividend as part of strategy to reduce payout ratio to 40 per cent.
   ARB Corp: Won’t repay $9.8 million in JobKeeper.
   BHP: Optimistic on global economic recovery and prospects for commodity prices.
   SCA Property: It will take two years for earnings to reach pre-Covid levels.
   Aurizon: Expansion into ports and trucks to complete supply chain.
   Mineral Resources: Record iron ore sales and profits. Sharp lift in dividend.
   Cimic: Back in profit but actual and projected profits miss analyst forecasts. Delays in big roads projects.
   Dexus: Will continue to expand flexible space offering.
   James Hardie: Strong demand for fibre cement for renovations.
   Boral: Hurt by slump in apartment projects.
   Altium: To use excess cash for acquisitions.
   Telstra: Aim for mid-to-high single digit growth in earnings.
   Downer: Plan capital return; buyback or special dividend.
   Graincorp: Has diversified sales from 30 countries to 50 countries.
   GPT: Plans to lift share of industrials from 20 per cent to 30 per cent.

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Economic Insights. Earnings Season: On the road back

   Seven West: Sharp focus on operating costs.
   CQR: Record leasing deals at higher rents.
   Cochlear: Will repay $24.6 million in JobKeeper payments.
   Shaver Shop: “is in strongest shape it has ever been in.”
   Coles: Expressed concern about absence of population growth to drive sales.
   McGrath: First dividend since 2017; raised prospects of acquisitions.
   BlueScope Steel: strongest orders in a decade; net profit up 78 per cent.
   NIB Health: 16,000 more members; expects final dividend to lift to pre-Covid levels.
   oOh!media: Advertising market fell 15 per cent in 2020.
   CSL: Challenges ahead with fewer plasma donations.
   Wesfarmers: Maintaining a strong balance sheet is prudent.
   Fortescue: Up to 10 per cent of capital may be used in clean energy ventures.
   Harvey Norman: Latest profit result described as “off the map”.
   Beacon Lighting: Higher home prices to lift sales; profit margins doubled over the year.
   Abacus Property: Swing to self-storage – strong trading conditions.
   Woolworths: Focus on digital sales; absence of foreign students impacting sales.
   AP Eagers: Won’t repay $130 million JobKeeper that helped save 2,000 staff.
   Adbri: will be aggressive bidder for infrastructure project work.

Market reaction
   Some brokers maintain estimates for companies on metrics like profits and dividends. So they determine if the
    earnings results were ‘good’ or less positive on whether the companies met, beat or missed their forecasts.
   In normal times, companies themselves will provide guidance on future results.
   But clearly these aren’t normal times. Companies remain reluctant to provide guidance and are holding larger-
    than-normal cash balances.
   So the best way to determine whether investors are encouraged or discouraged by a company’s profit result is to
    examine the sharemarket reaction on the immediate days after the report was delivered.
   Overall, almost 57 per cent of ASX 200 companies that reported results saw a lift in their share price on the day of
    earnings release with an average gain of 0.3 per cent and a loss of 0.1 per cent after two days.

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Economic Insights. Earnings Season: On the road back

What are the implications for investors?
   If one thing is clear in the Covid-19 environment, companies need to be agile. When the crisis hit, the priority was
    on shoring up the capital base, especially by equity raisings, as well as some debt. And those companies that
    acted quickly and decisively were successful. Then it was a case of having a plan on lockdowns – especially the
    situation on staffing and trying to fulfil customer sales and orders.
   Certainly the retailers that either had a good online presence to begin with, or were quick to put plans in place,
    have been hugely successful.
   We now move into a new phase. The economic recovery has been swifter than expected. Vaccines are being
    rolled out in Australia as they are across the globe. That may mean that domestic lockdowns become a thing of
    the past. Corporate Australia is in solid shape with strong balance sheets being maintained.
   So should the extra cash held by companies be used for capital spending, mergers/acquisitions or should it be
    returned to investors? As always the answer will vary across companies and sectors. But investors will be
    carefully assessing the decisions made. Companies will also need to determine when earnings guidance is
    reinstated. Again it will reflect on company management and strategy and the direction that companies are taking.
   Of course this is still early days. Mutant strains of the virus could be less responsive to vaccines, putting us back
    to square one. And the foreign borders are still closed.
   There is still plenty of stimulus and support being applied to the economy. And that won’t be removed too quickly,
    especially if the Reserve Bank has any say in the matter. The Reserve Bank is adhering to the view that low cash
    rates will be maintained for three years. Some businesses are sceptical, given that input costs are rising and job
    shortages are appearing. And the imminent tapering of JobKeeper payments poses a test to the most virus-
    affected firms and industries.
   Infrastructure spending will be important in driving economic recovery and will support prospects for industrials,
    especially engineering and construction materials. The success in keeping the jobless rate down will be important
    for consumer-focussed companies, especially retailers.
   Spending on infrastructure, super-low interest rates and a home-building boom spurred on by HomeBuilder (and
    state-based schemes) will provide the economy with momentum over 2021. Then there is the external factor –
    China and other countries driving growth in their economies through infrastructure spending. The Biden
    Administration has made infrastructure a priority policy with a focus on renewables. That means more demand for
    Australian resources.
   The recovery of the Chinese economy remains encouraging for mining and engineering sectors. The iron ore
    price is near 9-year highs. Copper is near 9½-year highs. Oil prices are near 13-month highs.
   The main challenges for the resource sector are a firmer Australian dollar and the global production delays
    caused by shortages of labour, parts and shipping containers. Firms are already reporting skilled labour shortages
    in the building industry and border closures present challenges to agricultural harvesters reliant on temporary
    overseas workers.
   CommSec expects the All Ordinaries to be in a range of 7,200-7,600 by end-2020, with the range for the ASX 200
    between 7,000-7,400 points. The hard part is in determining whether equities have become – or are becoming –
    too expensive. While less of a challenge with ‘normal’ interest rates, it is harder to resolve the ‘cheap/dear; debate
    with near zero rates. The ‘chase for yield’ is supportive of risk assets, but rising real interest rates - as inflationary
    expectations mount - present the biggest near term challenge to interest rate sensitive sectors of the sharemarket.
   Maintenance of fiscal and monetary stimulus will continue to support prospects for Australian companies. But
    governments would like to see a transition from government support to a business-led recovery. Improving
    business conditions bode well for hiring intentions and business investment. And the domestic vaccine roll-out will
    also be fundamentally important to future prospects as
    will be how overseas countries transition out of lockdown.
   Issues to watch in coming months include lifting market
    interest rates; migration (opening up of the borders);
    rising cost or inflationary pressures; difficulty of accessing
    stock and labour; the ‘green’ agenda of the new US
    President; risk of policy errors will the roll-back of
    stimulus; the rising Australian dollar; and the trade
    relationship with China.

Craig James, Chief Economist, CommSec;
(02) 9118 1806; Twitter: @CommSec

Ryan Felsman, Senior Economist, CommSec;
(02) 9118 1805; Twitter: @CommSec

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