Investment Matters

Reporting season Dec-17: It's a wrap

Reporting season generally

Australia’s reporting season wasn’t too bad.  It was actually quite acceptable. 

Overall, earnings expectations for the FY-18 year (ending 30-Jun-18) have been slightly upgraded, as compared to expectations prior to reporting season.

Given Australia’s elevated market valuation (but not anywhere near the eye-watering extent of the US), it was nice to receive some solace from the aggregate of the H1 company results.

It is useful to review the season on a sector basis:

  • The broad-reaching Industrial sector had a good reporting season, and it supported the market more generally.  H1 earnings were 4.0% higher than Deutsche Bank estimates (Australian Equity Strategy 1-Mar-18), and full year consensus earnings were upgraded 0.8%.  Additionally, large cap industrial companies beat earnings expectations at a rate of 3 to 1 (source: Morgans Australia Strategy 2-Mar-18).
  • Traditional media had a better reporting season than was expected.  Better positioned balance sheets and lower costs were of note.  Specific companies worth mentioning are Nine Entertainment, Seven West Media and Fairfax.
  • The telco sector (dominated by Telstra) showed continued pressures from competition, structural change (e.g. NBN), and individual company issues (Telstra dividend sustainability, growth outlook and corporate strategy, and Vocus [where do I begin…])
  • Insurance was marred by a record catastrophe season, and a low point in the insurance cycle (with premium increases expected to accelerate in coming periods).
  • Companies with overseas operations generally did well.  Examples include Bluescope, A2 Milk, and CSL.
  • Non-bank financials outshone their bank cousins – FY-18 profit growth forecast pre-reporting season (+3.3%), was upgraded post reporting season to +4.1% (source: Morgans).
  • Resource and energy companies produced bumper profits driven by commodity / energy prices.  This flowed through to dividends and share buybacks.  But many resource companies saw cost inflation coming though, and some pressures on production levels.  So this reporting season may well mark their heyday – for this commodity cycle anyway.
  • Retailers on the whole disappointed.  Their financial numbers are showing considerable top line (revenue) and margin pressure – which is flowing through (negatively) to the bottom line (profit).  Notable exceptions were Lovisa, The Reject Shop and Nick Scali.  Retail sales figures for January (released this week) would not have brightened many in the sector.
  • And then there was the drabness of the banks.  Very slight pre-reporting season expectations for growth (+0.1%, source: Morgans) in FY-18 consensus earnings, turned to a contraction post results (-0.3%, source: Morgans).  The tide has turned, and we would not be surprised to see it accelerate.

Your equity portfolio

Reporting season for your equity investments was quite acceptable too.

There was one main disappointment – QBE Insurance.  Southern Cross Media disappointed slightly on the back of higher costs but has had a positive start to the calendar year.  On the upside CML Group was the standout.  A summary table is provided below – please refer to the last three weeks of Investment Matters for more detailed information on each company.

The key takeaway for your Investment Team is that the portfolio is on track.  Each investment is sitting in line with our expectations, on its medium-term (3-year) investment horizon. 

Aggregate dividends are a little lower than we would like and lower than they have been historically.  This reflects the opportunity set in the market and the resultant portfolio composition. 

The portfolio remains inexpensive (at 10.8x P/E) with good growth (+11.0% earnings growth p.a. for the next three years) and, as mentioned above, reasonable dividends (at ~4% p.a.). Broadly speaking with this construction, we would expect that your portfolio will deliver fairly similar growth in the next 3 years as it has historically - albeit it won’t be linear!