Reporting Season Review
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 02 March 2021, 11:10 AM
- Sectors Covered:
- Equity Strategy and Quant
- A significant number of results beating market expectations entrench the post-COVID earnings recovery, however share price reactions were lacklustre (Beats flat, Misses down 12%), suggesting the good news was priced in.
- While upgrades were largely expected, COVID 'losers' (travel, financials, media) were the winners from February. Confirming our belief that the reflation trade has further to run.
- After going missing in 2020, dividends made a big return in February. With key sectors Banks, Resources and Insurers providing positive income surprise.
Earnings continue to defy expectations but largely in the price
February results confirmed a better-than-expected earnings recovery as a stunning 45% of ASX50 stocks beat market expectations (vs 18% 5-year average). Of the 205 companies we monitor, FY21 earnings were revised up 2.8%. This figure comes on the back of 10.2% upgrades from the previous reporting season (August 2020).
However, share price reactions were far more muted (Beats flat +0.1% since result), which suggests to us that:
- Given the ASX 200 is nearly back at the Feb 2020 peak, valuations have mostly priced in the upgrades;
- Demand has been brought forward and will likely taper off quickly as the generous government handouts end - we note very few companies (27%) have provided earnings guidance; and
- A broad reflationary rotation has prompted profit-taking in expensive COVID-19 winners.
Market positioning confirms a reflationary tilt
February returns were led by the pandemic losers: Banks (5.6%), Diversified Financials (3.9%), Energy (2.4%), Travel (13.7%), Consumer Services and Gaming (4.3%), Materials (7.3%).
Despite decent results COVID-19 winners were used as funding sources for the reflationary exposures: Retail (-7.6%), Technology (-8.9%), Online Classifieds (-5.1%).
Our base case remains that the pace of the vaccine rollout will support a further rebound in economic activity and recovery in corporate earnings.
Taking the current US and UK vaccination rate (0.5 persons per 100) as a baseline, herd immunity could be achieved in Australia by October (view further analysis in full report) which could provide further upside to earnings estimates.
Dividends back with a bang as corporate confidence returns
After going MIA in 2020, dividends made a big return in February.
Having already been revised up 8.1% from August, dividends per share (DPS) was revised up a further 4.6% over the month.
Of the companies that reported 57% declared a dividend, a step up from 53% in August.
And as a further sign of corporate confidence, 43% of those are paying a higher interim dividend than the full year in August.
On the back of surging commodity prices, miners led the way with FY21 forecast yields up: BHP 5.1%, RIO 4.9% and FMG 12.5%.
Banks also saw a strong lift in dividends on lower asset impairment charges: Westpac 5.5%, ANZ 5.4%, NAB 4.9% and CBA 3.9%.
Other notable themes
- Offshore earners reporting better than expected results more than offsetting currency headwinds
- Improved operating leverage to provide further upside as companies streamline operations
- Company earnings making good progress towards normal
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