Earning their keep

Published in the Herald Sun, August 2015 by Karina Barrymore

With the bar set low this reporting season, there are rewards for those who clear it, writes Karina Barrymore.

Shareholders and and investors are taking a “realistic” approach to the corporate results season, analysts say, with Australia’s patchy economy and the global financial rollercoaster already factored into expectations.

But there may yet be a few surprises.

If companies exceed the low expectations, share prices could rise. However if they are not met, those companies can expect to get a hammering.

This week kicked off the season with most market players optimistic that companies will be on target or slightly ahead of forecasts.

This calm insight, however, has only been achieved after almost six months of “conditioning” as researchers, analysts and companies have constantly updated performances and forecasts in line with the changing economic conditions.

Shareholders are now nicely primed to expect very little in the way of profit and dividend growth with the latest UBS market consensus forecasting total earnings growth of less than 1 per cent this profit season.

That’s the big picture; if you focus a little closer, the outlook is a lot brighter.

After stripping out resource companies, the market is expecting earnings growth of about 9 per cent this year.

And if you strip out the financial sector, expectations are for 13 per cent growth, UBS strategist David Cassidy says.

This is good news for shareholders in need of a steady period across the share market and even better news for investors counting on a healthy dividend.

However, it won’t be all smooth sailing.

“Investors are realistic, they understand things aren’t firing on all four cylinders,” Morningstar head of Australasian equities Peter Warnes says.

“There is a rebalancing trying to occur from resources to more east coast-based activity and although that’s gaining some traction there will still be a lot of companies which have done it tough.

“Low inflation and an economy performing below trend make it difficult to get any significant revenue growth.

“The halcyon days of double-digit [per cent] returns are well and truly over. This reporting season we don’t expect too much and we don’t think investors do either.”

Resource Sector

Resource stocks are set to carry the brunt of the disappointing returns, although there will be some upside from the fall in the Australian dollar.

Unfortunately for BHP and Rio Tinto, which report their profits in US dollars, most of the benefit from this currency movement will not be translated.

Despite a forecast plunge in profit for BHP, down 34 per cent to about $9.5 billion, shareholders are expected to be rewarded with a steady dividend, Mr Warnes says.

Lonsec Stockbroking general manager of equities research Bill Keenan also says resource shareholders are braced for a bad profit season.

Instead of looking at the profit they should be carefully analysing statements about future growth and alert for potential barriers to improvement.

“People will be focused on the balance sheet. They’ll want to make sure the balance sheet is OK because it’s no good owning a resource stock on a long-term view if there are balance sheet issues.

The key will be the outlook,’’ Mr Keenan says.

Financial Sector

The only big bank to report for the full year during August is the Commonwealth Bank, with the other majors having a different reporting year.

CBA, however, is expected to set a new record profit of about $9.2 billion, up 6.5 per cent this year.

And shareholders are set to get a similar boost to their dividend.

Insurance Australia Group is heading for a big profit fall, according to forecasts, as weather-related claims once again batter the insurer’s returns. IAG’s profit is expected to be down 32 per cent to about $900 million.

Despite recent concerns about compliance issues, wealth manager IOOF has had a good operating year, according to Lonsec’s Mr Keenan, with expectations of profit coming in at $171 million, up almost 11 per cent, and dividends up about 9 per cent.

“Net inflows have been good, it’s generally been a positive year for the share market and superannuation.

IOOF is basically a superannuation play and super contributions keep coming in every year,’’ Mr Keenan says.

Industrial Sector

Many industrial companies will get a “free boost” from the fall in the value of the Australian dollar, however, shareholders are expected to look beyond this type of gain to examine underlying
earnings and future prospects, Wealth Within founder Dale Gillham says.

With wide expectations that most companies will meet their profit expectations this season, Mr Gillham says attention will fall on the next set of projected numbers.

The outlook for the year ahead will drive share price movements on announcement days, he says.

“Statements about the coming year will drive the share price, investors will be looking for earnings forecasts— what’s ahead, what’s next,” Mr Gillham says.

“Some investors are often surprised when the share price falls after a good result but this is because shareholders are looking ahead to the next 12 months.”

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