Australia Strategy: Reporting Season Review
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 06 March 2020, 7:00 AM
- Sectors Covered:
- Equity Strategy and Quant
- February results were slightly better than expected, particularly among large-cap
leaders, which should give investors some comfort amidst the ongoing volatility.
- Consensus FY20 and FY21 earnings forecasts remained surprisingly resilient, but
likely downward revisions in the months ahead will put a strain on valuations which
do remain elevated despite the market pullback.
- We think investors will be rewarded for holding their nerve through current
uncertainty. Our refreshed Morgans Best Ideas list profiles standout opportunities
on weakness including Sydney Airport (ASX:SYD), Telstra (ASX:TLS), and BHP (ASX:BHP).
OK results overwhelmed by the COVID-19 curveball
Record ASX Industrials (ex-Financials) valuations ahead of results season (12-month
forward PE +20x) made beating expectations a difficult task.
So we were impressed with
stronger-than-expected results from key large-caps (including Commonwealth Bank of Australia (ASX:CBA), CSL Limited (ASX:CSL), Woolworths (ASX:WOW), Wesfarmers (ASX:WES), Coles Group (ASX:COL), Aurizon Holdings (ASX:AZJ)) which offered comfort to holders of balanced/lower risk portfolios.
Small-caps
again disappointed, while glamour growth/tech (WiseTech Global (ASX:WTC), Altium (ASX:ALU), Kogan (ASX:KGN), Treasury Wine Estates (ASX:TWE), Zip Co (ASX:Z1P)) buckled
under the weight of volatility and hyper-expensive valuations.
Unfortunately, the ongoing
COVID-19 health emergency overwhelms what were broadly robust results printed by the
more important large-caps, to become the market’s driving force in the interim.
An uncertain earnings outlook
Corporate outlook statements/guidance leave a lot of wiggle room given COVID-19
uncertainty with some also choosing to retain dry capital (BHP (, RIO).
Earnings revisions
for FY21 and FY22 were surprisingly resilient, with forecast FY20 EPS growth (Industrials
only) eroding only slightly to 2.0% (from 2.3%) through February.
This implies the market
expects that disruption will be largely confined to FY20.
We're uncomfortable with this,
and suspect we’ll see downgrades in the months ahead, putting a strain on valuations
which remain elevated despite the market pullback (ASX Industrials 12-mf PE ~18.5x).
Other insights
Some other observations:
- Defensive positioning taking place well before the onset of
the panic in markets
- Narrowing of the growth and value basket of stocks
- Tentative corporate outlook
- Significant changes to analyst recommendations
Updated tactics as volatility flushes out compelling ideas
To say that our market was vulnerable to a correction heading into February is an
understatement. Australian Industrial stocks had delivered stunning 12-month total returns
(27%) and were trading at record valuations despite the likelihood of negative FY20 profit
growth and growing external risks (bushfires, virus).
The +10% correction has finally
unearthed some value, and we think long-term investors will be rewarded for holding their
nerve through current uncertainty.
We advocate topping-up exposure to our favourite
businesses with strong balance sheets and market positions capable of weathering
economic uncertainty.
Standout ideas currently include Sydney Airport (ASX:SYD), Telstra (ASX:TLS), BHP (ASX:BHP),
Macquarie Group (ASX:MQG) and Amcor (ASX:AMC).
Morgans best ideas
Today we have also published our refreshed Morgans Best Ideas list (Morgans clients only), which includes 40 stocks that we’re comfortable with holding today.
Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month time frame supported by a higher-than-average level of confidence.
They are our most preferred sector exposures. See the full publication here, for extended commentary on all stocks mentioned in our reporting season review.
More information
Additional details regarding our reporting season hits and misses are provided in our full Reporting Season Review Research note. (Morgans clients can login to view).
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.
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.
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