Earnings season: Who will be the winners?

As potential upside surprises, Wilson this week nominated ARB Corp, A2 Milk, Nick Scali, SomnoMed, Bravura Solutions, NRW Holdings and Perenti Global. Picture: James Croucher

On many accounts, the August reporting season about to be unleashed upon investors in Australia will mark a new low post-GFC, which ended 11 years ago.

However, this does not mean that by default the Australian sharemarket is ready for a big sell-off in the weeks to come.

In fact, reporting seasons are mostly about changes to forecasts (and perceptions) rather than what companies have achieved.

Within this framework it remains an open question as to what conclusions exactly can be drawn from company financials and updates when macro developments remain all-important, and unpredictability of events and outcomes high. Companies will be reluctant to provide concrete guidance, but those who do will be rewarded.

Likewise, bad news is not necessarily the equivalent of a fatal blow. Investors are definitely looking forward, in many cases to FY22 which is not one but two years away, which means high tolerance for bad news in the short term, as long as it does not impact on FY22 estimates and derived valuations.

Earnings estimates, on average, have been reduced by -15 per cent and dividend cuts will be larger still, double the cuts in profits on some forecasts, which will make 2020 the worst year for income seekers in a long while.

What sets this year apart from past references is that the global pandemic created beneficiaries in the form of medical tests, ventilators, sanitisers, home entertainment and online shopping.

There were no obvious beneficiaries around when the Nasdaq bubble burst in 2000 or when Lehman Bros went bankrupt in 2008.

More than ever, this reporting season comes at a time of extreme sharemarket divergence – winners versus losers.

Potential strong performances will be delivered by producers of iron ore and retailers enjoying the spoils from government stimulus programs JobKeeper and JobSeeker. In both cases investors will be wondering: how sustainable is this?

Dividends from mining companies are expected to make up one third of total payouts (Rio issued a 3 per cent dividend increase this week on steady profits) while banks may not be paying anything.

Sectors that on current forecasts are looking towards two years of pain are transport, insurance, diversified financials, and infrastructure.

Cash flows and balance sheets will be in constant focus, as will be “dividend certainty”.

More writedowns and revaluations are expected, as well as additional capital raisings.

Some analysts are grabbing the opportunity and reiterating their conviction in forecasts that are well out of synch with consensus.

Upside surprise

As potential upside surprises, Wilson this week nominated ARB Corp, A2 Milk, Nick Scali, SomnoMed, Bravura Solutions, NRW Holdings and Perenti Global.

Other companies for which simply achieving guidance would imply a significant upward adjustment for market consensus include AMA Group, AP Eagers, Costa Group, Whitehaven Coal, New Hope and Monadelphous.

Wilsons sees downside risk for GUD Holdings, Ramsay Health Care and Nanosonics.

Goldman Sachs likes QBE Insurance, Suncorp, Computershare, Pendal Group among non-bank financials, while investors are advised to sell ASX, Platinum Asset Management and Medibank Private.

Candidates for a potential positive surprise include A2 Milk, AP Eagers, AGL Energy, Superloop, Afterpay, Amcor and Domino’s Pizza.

Morgans sees Telstra potentially surprising through capital management.

Nominated for possible disappointment are Ramsay Health Care, Link Administration, Orora, Qube Holdings, Coca-Cola Amatil and Woodside Petroleum.

As analysts at Morgan Stanley put it: “Despite investor feedback that earnings ‘don’t matter’ amid the COVID-19 crisis, we think FY20 earnings are important: In a world where guidance has been withdrawn, earnings estimates are stale and earnings dispersion is very wide … Cash flows, margins, capex and balance sheets can now come back to base.”

Rudi Filapek-Vandyck is the editor of stock research service www.fnarena.com