Investment Matters

CIO's wrap up of company reporting season

Overview

Reporting season was a mixed affair for Australian corporates.

According to work by Deutsche Bank, 49% of companies reported results ahead of expectations - which was slightly below average.  On average, since the GFC, 53% of companies have reported ahead of expectations, with 47% being the worst result in recent years (H1 FY-12), and 60% being the best (H1 FY-14).

Notably, this was the best reporting season for post-reporting earnings upgrades (by analysts) since the GFC.  52% of companies having their earnings upgraded post-reporting (versus 40% usually).  This can largely be put down to the recent upswing in resource prices, and the effect it has on resource companies' earnings outlooks as analysts rebase their models.

Value stocks rallied

Also of note this reporting season was that 'value' companies (i.e. those with a relatively low P/E) delivered more than twice the number of positive earnings surprises than the high P/E companies (at 43% versus 16%). 

This means that post reporting variability in prices was high, as the beaten down value companies' share prices rallied, and the high P/E companies' (that disappointed) share prices fell markedly.  First Samuel's portfolio clearly has a value bias!

High cash weight will restrict dividend growth in FY-17

Collectively, the companies in the equity portfolios of First Samuel clients performed well, with H1 FY-16 dividends up +15.5% on H2 FY-15 dividends. 

For the full year, the dividend growth rate was much more sedate at +3.5%, as the effect of the -4.5% decline in H1 FY-16 dividends weighed.  This was caused by the high (and increasing) cash balance we hold for our clients, and cash interest rates falling further.

As it stands, the annualising of a lower cash rate combined with higher cash balance will make it difficult to see much in the way of dividend growth in FY-17. 

We see stronger growth in FY-18 and FY-19, as many of equity portfolio companies deliver their business plans, and the effect of the ever-lowering of interest rates is expected to abate.

Standout results

The stand-out results in clients' portfolios were Southern Cross Media and Paragon Health Care.  Both delivered results ahead of our expectations, and also spoke to good results expected in the coming years. 

Disappointing results came from QBE and BHP Billiton.  Both delivered poor profitability, and left us unimpressed with the credibility of management to manage company forecasts and expectations in what are difficult trading conditions. 

From a dividend point of view Suncorp, Origin Energy and BHP Billiton were worse than expected.  However, we are not inclined to be too harsh on companies being conservative with their payouts (and therefore cash retention) at this time.  QBE and Southern Cross both surpassed our expectations, and we see the new levels as being sustainable and sensible in light of how well these companies are financially positioned (both with the strongest balance sheets in many years).

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