Reporting season: Investors brace for shocking profit results

Getting an accurate sense of just how badly businesses have been hit could be difficult this reporting season, say analysts.

Investors are bracing for a brutal full year profit season. Picture: Damian Shaw

Australian investors are bracing for what is set to the worst reporting season since the global financial crisis with listed companies expected to unveil a collapse in headline earnings results and dividend cuts over the next month.

The results season kicks off in earnest this week, with sleep device maker ResMed unveiling its full-year results on Wednesday. Insurer IAG, REIT Centuria and News Corp, publisher of The Australian, also report annual results figures this week.

A bunch of companies including AMP, IAG and IOOF have pre-announced their results, given the wide range of forecasts, while energy interest Santos has outlined heavy writedowns.

Perpetual head of equities Matt Sherwood said he was expecting poor results this season after the COVID-19 pandemic sent the Australian economy into its first recession in almost 30 years.

“What we’ve seen this year so far has been the COVID-19 virus and the stresses on corporate balance sheets have been amplified. As a result firms have raised about $20bn in equity and they’ve slashed dividend payments,” Mr Sherwood said.

“To me the real risks are around the guidance statements seeing what’s happened in Victoria, how those lockdowns and restrictions and the flow-on effects to consumer confidence have impacted spending, so guidance is going to be very important as well as the dividend announcements.”

Citi said in a note to clients that dividend forecasts for its coverage had fallen 34 per cent since March, from $74.6bn to $49.3bn.

Macquarie analysts said that of the nine ASX-listed companies that had reported so far, just one had issued earnings guidance. The investment bank noted that only 22 per cent of the 128 S&P 500 companies that had reported second-quarter earnings in the US by July 24 had issued earnings guidance.

Mr Sherwood, who oversees $27bn in funds, said the market could see some upside in earnings estimates because of more stimulus from the government.

One bright spot is resources companies, which are experiencing a windfall from strong iron ore prices given the relative strength of the Chinese economy, while local gold producers are also surging.

“We would expect resources to do better than the industrial sector and we think financials are under the most pressure,” Mr Sherwood said.

Rio Tinto unveiled a pre-tax earnings on $US7.7bn, slightly ahead of last year’s $US7.5bn result. The miner declared a slightly lower dividend of $US1.55 a share, but this is still the equivalent of $US2.5bn in payouts.

Ahead of its results announcement on Thursday Fortescue flagged a bumper full-year number, saying it had beaten its own production records and realised a high average price for its iron ore.

The financial sector is likely to be hardest hit, given expected rising lending losses.

CBA is the only major bank to report its full-year results in August. The others report in November.

Regional lenders Bendigo Bank, Bank of Queensland and Suncorp post results in the August reporting period. Dividends for the banks remain a major focus, after the Australian Prudential Regulation Authority limited payouts to 50 per cent of earnings.

However, financial dividend amounts are likely to be determined by a round of “stress testing” of balance sheets required by APRA as well as forward lending capacity.

“We’ve got almost a perfect storm (for the banks), driven by lower investment income, tighter margins and increased bad and doubtful debts, so that’s going to be really pressuring the bottom line for the financials,” Mr Sherwood said.

Argo senior investment officer Andy Forster said getting a good understanding of the underlying strength of a business was going to be a challenge for investors this reporting season, with many companies expected to disclose various benefits they had received, including JobKeeper.

“It’s going to be a pretty messy time just trying to get a sense of the underlying picture of businesses,” he said.

Mr Forster said companies exposed to iron ore, healthcare players, and Coles and Woolworths were likely to outperform.