Earnings Season: Companies battle headwinds - CommSec

Economics | August 31, 2020

 Earnings Season: Companies battle headwinds
 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.
  Overall, 137 of the ASX200 index group have reported full-year results for the 2019/20 year. A further 31
   companies with a December 31 reporting date have issued half-year or interim results. A small number of
   companies (AVH, COE, IFL, GOR and SKC are still to report).
  In these turbulent times, only 75 per cent of companies reported statutory profits for the year to June. It is
   the weakest outcome in over the decade that we have been tracking interim and final reports with an end-
   June or December financial year. Aggregate full-year earnings fell by 38 per cent.
  Just under 69 per cent of companies issued a dividend. Aggregate dividends fell by 36 per cent.

 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. Unfortunately for investors 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.
        Of the 137 companies to report for the year to June 2020, 103 companies or 75 per cent managed to produce a
         statutory profit (net profit after tax). The last time a similar low outcome occurred, around 80 per cent of
         companies issued a profit for the 2014/15 year.
        Overall, profits were down in the year to June, causing companies to slash or abandon dividend payments and
         instead lift cash holdings.
        Clearly for some companies it has been the toughest year in living memory. Other companies have done well,
         riding the wave of monetary and fiscal stimulus. In 2019 the focus was the US-China trade war and Brexit
         stalemate. In 2020 it has been the COVID-19 pandemic.

Craig James, Chief Economist; Twitter: @CommSec
Ryan Felsman, Senior Economist; Twitter: @CommSec

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Economic Insights. Earnings Season: Companies battle headwinds

   Admittedly a number of companies have prospered in the period. Gold companies have ridden the back of strong
    demand and record prices for the precious metal (Newcrest Mining, Silver Lake Resource, and Saracen Mineral).
    Iron ore miners (Fortescue Metals) are riding high with the steel-making ingredient recently hitting 6½-year highs
    on the back of the strong Chinese industrial recovery and policy stimulus.
   Some retailers – especially those with a good on-line presence – have reported higher sales and profits (Nick
    Scali, Adairs, and JB Hi-Fi). Woolworths doubled online capacity over the year and plans to expand it by another
    30-50 per cent. On-line sales are still only around 5.5 per cent of its total sales.
   Electrical goods and homewares retailers have clearly out-performed. People have been locked down or have
    continued to work from home and they have been keen to buy goods that enable them to work efficiently at home
    and be comfortable. This has shown up in several months of strong retail trade data from the Bureau of Statistics.
   Services companies – especially those firms dependent on domestic and global mobility (travel operators) – have
    experienced the toughest conditions over 2020, especially late in the first quarter and through the June quarter.
    And the ongoing digitisation and shift to streaming has weighed on media companies, which have
    underperformed. Australia’s uncertain energy policy weighed on Woodside Petroleum’s bottom line.
   Bank profitability has been weaker due to lower interest rates, the build-up of liquid assets and accelerating cost
    pressures.

The Numbers
 So to the numbers. And these numbers refer to those companies reporting full-year earnings to June 30, 2020.
Profits
   As noted above, 75 per cent of companies have reported statutory profits (net profit after tax) for the year to June.
    On average over the past decade around 88 per cent of companies have reported a profit rather than a loss. In
    fact, 92 per cent of the companies that announced interim results for the half year to December 2019 reported a
    profit.
   Of the companies to report a profit for the year to June, 48 per cent managed to lift earnings while 52 per cent
    recorded a fall in earnings.
   In aggregate (summing all the profit results), earnings were down 38 per cent on a year ago. Revenues were up in
    total by 3.4 per cent, which were more than matched by a 4.1 per cent lift in expenses.
Dividends
   Looking back over the six months to December 2019 (interim results), just over 87 per cent of the ASX 200
    companies issued a dividend. But for the full year to June 2020, only 69 per cent of companies have elected to
    pay a return to shareholders. The average over the past 20 reporting seasons stands at 86 per cent.
   Almost 23 per cent of companies lifted dividends; 12 per cent held dividends steady; 53 per cent of companies
    reduced dividends or didn’t pay a dividend; and 12 per cent of companies that didn’t pay a dividend last time (in
    February) also didn’t pay a dividend this time.
   Of those trimming dividends, 20 per cent of all companies or 27 companies that paid a dividend last time indicated
    that they won’t be paying a final dividend. And 47 companies (34 per cent) paid a reduced dividend.
   Of the 94 companies paying a dividend, 33 per cent lifted dividends; 17 kept the payout steady; and 50 per cent
    cut the dividend.
   In aggregate, dividends fell by 36 per cent on a year ago.

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Economic Insights. Earnings Season: Companies battle headwinds

Cash
   Profits are down, so companies have elected to trim or not pay a dividend and instead use the cash to shore up
    stretched balance sheets. Cash conservation has been a highlight of recent business-related surveys.
   Aggregate cash at hand (cash as at June 30) rose by 31 per cent on a year ago (up from $84 billion to $110
    billion)
   Overall 70 per cent of companies lifted cash levels from a year ago, notably real estate investment trusts (REITS).
   Once the half-year reporting companies are added in, cash levels totalled a record $141 billion as at June 30
    2020, up from $111 billion as at June 30, 2019.

Themes
   Usually each quarter there are a number of themes, covering a range of issues. This reporting season COVID-19
    has understandably dominated. Investors have been interested to know:
     Are companies able to provide future guidance?
     What action have companies taken in response to the crisis? Have they trimmed expenses; slashed capital
       expenditure; devoted more resources to on-line spending; or perhaps fundamentally re-assessed the
       business model?
     What have companies done on staffing levels, especially companies in receipt of JobKeeper?
     What action has been taken on longer-term strategies as opposed to short-term responses?
     How has the capital position been managed?
     And how have those companies caught up in escalating Australia-China political tensions responded?
   Solid retail sales featured over the reporting period, especially on-line sales. Some have benefited from low or
    lower rents. Retailers to benefit most in the lockdown were in homewares, electrical or have been focussed on
    home delivery. There was a bigger pay-off from companies that already had invested in an on-line presence
    (sales and distribution). Solid results include those from: ARB, Adairs, JB Hi-Fi, Nick Scali, Coles, Breville, Baby
    Bunting, Domino’s Pizza, Treasury Wine, Premier Investments, Kogan, Wesfarmers (Bunnings and Officeworks)
    and Woolworths.
   Retailers, supermarkets, gold stocks, 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.
   Companies have mostly refrained from providing guidance for investors – especially dollar figures or ranges.
    Clearly the environment is unpredictable. It only takes one cluster to get out of control and other states will
    experience ‘second wave’ challenges like Victoria. But while guidance has been vague or non-existent, investors
    will value more regular updates from companies to keep them informed and ensure dynamic market valuation is
    being maintained. That said, Wisetech, Goodman Group, Amcor, CSL and Brambles were just a few companies
    guiding for growth.

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Economic Insights. Earnings Season: Companies battle headwinds

Discussion points
   A raft of interesting discussion points have come out of the earnings season.
   Ingenia: The property group noted that requests for rental relief were ‘non-existent’. The company also noted that
    business was booming for holiday parks.
   Abacus: The REIT also downplayed issues of rent, saying that it had collected rent from 90 per cent of office
    tenants and 98 per cent of self-storage facilities.
   Nick Scali: The furniture retailer has forecast a 60 per cent lift in December half-year profit.
   Monadelphous: The engineering group painted a positive outlook on the back of new contracts in Australia and
    Chile.
   BHP: Discussion centred on the future for coal including a possible demerger.
   ARB: The maker of 4WD equipment has noted record order books. People are keen to take intra-state regional
    and camping holidays.
   Aurizon: The rail freight operator reported minimal disruption from COVID. There was reduced coal demand as
    Asian factories shut down.
   Goodman: Supported by its industrial warehouses operation, it beat guidance for the 9th year. Only 10 per cent of
    its employees were working at head office in Castlereagh Street Sydney.
   Gold outperformers include: Evolution, Newcrest, Saracen, Silver Lake Resource, and Northern Star.
   GPT: has reduced operating costs; deferred development projects and non-essential capital expenditure.
   Coca-Cola Amatil: cut costs $60 million in the June half-year and plans to cut $80 million in the current
    December half year.
   Retailers vs landlords: Retailers have generally done well but landlords like Scentre Group have been trimming
    rents and writing down the value of properties.
   Cost of COVID: While some observers have been quick to criticise companies that have accepted government
    financial assistance – JobKeeper or otherwise – less focus has been on the costs that have been incurred in
    keeping customers and staff safe in the COVID era. Woolworths noted that it had spent $404 million on ‘COVID
    costs’ in the second half of 2019/20 and a further $107 million in the eight weeks to August 23.

Market reaction
   Some brokers maintain estimates for companies on metrics like profits and dividends. So they determine if the
    earnings results were ‘good’ – or perhaps less positive – based 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. During February and March the majority of companies abandoned previous guidance; some raised extra
    capital; some cut recurrent and capital spending; and some did all three.
   This earnings season, companies have again been understandably reluctant to provide guidance on future sales
    and profits.
   So the best way to determine whether investors were 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 53 per cent of ASX 200 companies that reported results saw a lift in share prices on the day of earnings
    release with an average gain of 0.7 per cent and a gain of 0.8 per cent after two days.

What are the implications for interest rates and
investors?
   Australian companies understandably withdrew earnings
    guidance as the virus crisis unfolded due to the
    heightened level of uncertainty. So expectations were set
    low ahead of the start of earnings season. It was a similar
    story in both the US and Europe. With the bar set so low,
    companies safely cleared the lower height.
   COVID-19 still dominates the landscape. But investors
    will likely show lower tolerance from here. Crisis-time
    responses have been made such as raising capital and
    cutting or trimming dividends. And some balance sheets
    and employment levels have been supported by the
    government’s JobKeeper wage subsidy. But now

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Economic Insights. Earnings Season: Companies battle headwinds

    investors want to know what positive strategies will be followed in the short and longer-term.
   There has been discussion of the fact that some of the companies that received the JobKeeper wage subsidy
    have reported profits or even higher profits. But any criticism relies on perfect hindsight. At the time that
    JobKeeper was announced there was significant risk of large scale job losses. The companies supported by
    JobKeeper – especially profitable companies – are more likely to retain or lift jobs. And that is the whole point of
    the scheme – saving jobs – and keeping the jobless rate down to hasten economic recovery.
   Corporate Australia remains in good shape with strong balance sheets being maintained. But the economic
    outlook remains very uncertain – especially with the government tapering stimulus. Still, the significant fiscal and
    monetary policy measures provide encouragement together with the success by many states and territories in
    ‘flattening the curve’. 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.
   The closure of international borders has hit travel-dependent areas of the economy hard. But the full impact of the
    drying up of in-bound migration is still to be felt more broadly across the economy, especially home construction,
    office demand and agriculture. The shift from international and inter-state tourism to intra-state travel is still to be
    played out.
   The recovery of the Chinese economy remains encouraging for mining and engineering sectors. Australia is a
    key global exporter of gold, copper and iron ore, in particular. However there are challenges for the agricultural
    sector due to fractious relations between China and Australia.
   CommSec expects the All Ordinaries to be in a range of 6,350-6,750 by end-2020, with the range for the ASX 200
    between 6,200-6,600 points. We expect sharemarket returns to be largely flat over 2020, supported by easy
    monetary and fiscal conditions. While shares remain ‘expensive’ valuation-wise relative to history, clearly these
    are not normal times. Earnings from financial assets are low. Corporate earnings will remain challenged in the
    near-term and dividend payouts are likely to be lower. From here much depends on virus containment, finding a
    vaccine and opening domestic and international borders.
   Current investor positioning in Aussie shares suggests that the profit reporting season was better-than-expected
    (albeit off low expectations). Some investors covered their ‘short’ positions in companies whose results surprised
    on the upside. According to Bloomberg and ASIC data, total weighted short interest of the ASX 200 index
    members was 1.7 per cent on August 27 – the lowest since November 2017 – down around 25 per cent since the
    March 23 low.

Craig James, Chief Economist, CommSec;
Twitter: @CommSec

Ryan Felsman, Senior Economist, CommSec;
Twitter: @CommSec

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