Australian Strategy: Reporting Season Preview

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
24 January 2020, 3:10 PM
Sectors Covered:
Equity Strategy and Quant

  • Record market highs confound the fundamental headwinds from weaker earnings expectations. Logic suggests February results look far more likely to generate downside rather than upside price risk, but we argue how this disconnect may actually weather another uninspiring profit season.
  • Dividend sustainability, the tussle between value and growth and the outlook for domestic cyclicals are among five burning questions also addressed in this report.
  • In the ASX100 & Ex100 Playbooks, also published today, our Research team previews expectations for 174 stocks under coverage.
  • We reveal our best tactical buys (login to view)

EPS trends versus record valuations leave little room for error 

FY20 EPS growth expectations for Aussie companies (ASX200 ex-Resources) have eroded from around 6.1% post August 2019 results to only ~2.2% now.

Remediation required of the major banks is a key driver, but the broader trend has been persistent for 2-3 years.

Overall, we expect the market’s most important 'portfolio' stocks (Commonwealth Bank (CBA), Telstra (TLS), Transurban (TCL), Sydney Airport (SYD)) to deliver robust results in February, but that overall aggregate market earnings growth will erode into negative territory for FY20.

This will likely test the nerve of record valuations (ex-Resources) trading at 19.3x 12mf PE, versus the 10-year average of 14.4x.

Results look far more likely to generate downside rather than upside price risk. 

What to watch in February

Impact of fire and drought – while several companies have already issued trading updates, we expect further updates from affected sectors (retail, ag and travel).

Surging Iron ore price - elevated earnings, a lack of capex commitments and healthy balance sheets have combined to see BHP/RIO with sizable ammunition to lift their dividend payout ratios and/or pursue buybacks.

Turnaround in global growth – outlook will be key as recent global PMIs and economic surprise turn positive (Ansell (ANN), Amcor (AMC), Santos (STO), Woodside (WPL)).

Regulatory risk – ongoing inquiries into the financial sector and ACCC M&A outcomes will be key catalysts to watch amongst the results (Link Administration Holdings (LNK), Australian Finance Group (AFG), TPG Telecom (TPM)).

Growing structural threats – shifting consumer behaviour and structural headwinds continue to affect several industries (Woolworths (WOW), Coles Group (COL), Telstra (TLS), TPG Telecom (TPM), AGL Energy (AGL), Medibank (MPL), NIB Holdings (NHF).

Reporting season playbooks and best tactical ideas

The Morgans ASX100 and Ex-ASX100 reporting season playbooks are also published today (available for Morgans clients only).

These preview result expectations for 174 stocks under coverage, and detail 23 stocks expected to react positively and 22 negatively.

From these, the best looking tactical buys and sells have been selected and published in our full Reporting Season Preview Research note. Please login to view or contact your Morgans adviser.

More information

Additional details regarding our reporting season hit and miss candidates are provided in the Reporting Season Preview Research note. (Morgans clients can login to view). Also download our ASX100 and Ex-ASX100 reporting season playbooks for further detail on each stock.

Please contact your Morgans adviser or nearest Morgans office for access. You are also welcome to start a two-week trial of our online platform.

Create trial account

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.

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