Reporting Season Preview: July 2020
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 21 July 2020, 3:20 PM
- Sectors Covered:
- Equity Strategy and Quant
Messy FY20 financials will hold far less meaning this August, with management outlook commentary instead likely to draw intense focus.
We see the provision of formal FY21 guidance as far less likely this year due to economic/consumer spending uncertainty related to COVID-19 and the possible phase out of fiscal stimulus during 1H21.
We flag caution overall, but volatility does continue to create tactical money-making opportunities for nimble investors, which is the focus of our previews reports below.
We preview the coverage contained in our Reporting Season Preview report, including these six burning questions:
- Can higher prices continue to look through the earnings dip?
- Where’s the best source of secure yield?
- What could prompt a change of leadership in 2H 2020?
- How important is guidance during the pandemic?
- Do recovery expectations match reality and is there risk of upside surprise?
- Has equity raising/dilution risk diminished?
Put aside the near-term volatility – it's about the long game
ASX 200 companies won't have much pressure to beat gloomy FY20 EPS forecasts, but may need to balance out their outlooks or face investor pressure in coming weeks. Reporting season will be nasty, with EPS expected to drop ~15% vs FY19, but represent a turning point in the cycle.
Opportunities to beat forecasts may exist for domestic cyclicals, where expectations are the lowest, or small caps despite some revenue risk.
Capital expenditure and dividend cuts have been widespread, fuelling expectations for margins to drive a recovery in FY21. It also provides an opening for companies that address uncertainty by speaking to the longer term.
We think guidance will be rewarded.
Sectors to watch in August
Domestic cyclical sectors need better-than-expected results and confirmation of an improving outlook to break the ASX 200 out of its range.
- Financials may be hindered by the risk that the government rolls back its fiscal arsenal (JobKeeper).
- Lack of travel and recreation spending hamper the travel sector but provide opportunities for retailers.
- Tech is less likely to move the bar for stocks, with expectations tough to beat.
- Resources (iron ore and copper) is a rare bright spot for the market which could lead to earnings and dividend surprise.
Identifying the tactical opportunities
At the aggregate level for the market overall, we do question whether potential equity returns adequately compensate investors for the risks they are currently being asked to bear. External factors (vaccine and recovery trajectory, stimulus, rates and low inflation expectations) remain the critical broader drivers in the months ahead.
However several market segments were belted by 40% or more through the escalation of the pandemic from late February, and we've always flagged that volatility unearths opportunities in oversold stocks and segments.
Very strong price responses to the 'better than feared' updates delivered by retailers through May-June is testament to this. Catalysts in oversold segments and stocks is the focus of this preview. Login to view our Reporting Season Preview report.
Best tactical calls heading into results
Top ASX100 playbook
Our Top 100 playbook contains research coverage on 72 of the stocks in the S&P/ASX 100 Index, which represent ~88% of the index weight.
In this report, we preview our expectations for 56 stocks that will report their results in August (Morgans clients only).
The quality of performance this period will likely be distorted by COVID-19 impacts and new accounting standards (ie. AASB16).
We identify 12 that we believe will likely have positive share price reactions to their results, nine that will have negative reactions, and the remainder neutral.
In our Ex-100 playbook, we preview our expectations for the 103 stocks in our ex-100 coverage that will report their results in August (Morgans clients only).
The quality of performance this period will likely be distorted by COVID-19 impacts and new accounting standards (ie. AASB16). We identify 20 stocks that we believe will likely have positive share price reactions to their results, six that will have negative reactions, and the remainder neutral.
Over 65% of the stocks in this report have provided a comprehensive trading update and/or FY20 guidance in May/June, perhaps dampening short-term earnings risk this reporting season.
Liquidity positions will be closely scrutinised and likely a focal point for management commentary.
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