Most companies listed on the Australian Securities Exchange (ASX) report their earnings as at 30 June (full year) and 31 December (interim or half-year). For investors and businesses alike, these are anxious times, full of unexpected movements in a company’s stock performance, driven by the earnings reports and announcements. There are noticeably thin volumes and no direction in the market until results are announced.
According to CommSec, ASX companies that reported earnings for the year ended June or half-year ended December 2018 struggled broadly. Only approximately 52.2% of companies were able to report an increase in profits. However, despite the tough conditions, companies issued dividends (few even elected to pay special dividends to shareholders!).
But how is 2020 expected to be?
In 2020, the market consensus believes that global markets will be favourably impacted by earnings growth. However, investors should expect some volatility driven by geopolitical risks (trade wars, deglobalisation and potential wars). We are currently passing through times wherein acquiring money is cheap; stock quality is varied, and investors are chasing returns in riskier assets. One should be wary of economic factors that directly hit investor sentiment- further rate cuts by the Central Bank, signing of a phase one US-China trade deal and the upcoming US Presidential elections later this year, to name a few.
In this backdrop, let us look at 7 companies, that are on the investor’s radar for the upcoming earnings season (Please regard the below as information, not recommendation)-
Boral Limited (ASX: BLD)
2019 closed on a disappointing note for the Australian manufacturing industry with production and employment both recorded weaker in December. Producers linked to construction and housing (basically the companies making material for construction) suffered from the slump with drought and adverse weather also taking a toll. This is a warning of the growing risk of a more broad-based weakening of the Australian economy which is already in the slow lane.
What’s slightly positive is the fact that The Australian Industry Group Australian Performance of Manufacturing Index was up by 0.2 points to 48.3 points in December 2019, indicating that manufacturing in the region contracted at a slightly slower rate in December than in November (seasonally adjusted).
Australia’s largest construction materials and building supplier, Boral Limited’s Chairman Kathryn Fagg acknowledges that market conditions across a number of regions, were more challenging than expected in FY19. In Australia, housing starts were down 15% and the value of work done in roads, highways, bridges and subdivisions was down by an estimated 6%.
However, to combat these prevailing issues, BLD reduced costs, resized activities and sought new opportunities to grow revenues, recording a 4% increase in revenue to $5.8 billion and a 2% increase in EBITDA to $1.03 billion in FY19. The company’s balance sheet is robust as it remains within the group-funding covenants. In FY19, BLD paid a 13.5 cent final dividend.
In FY20 BLD expect to see modest fly ash volume increases in FY2020 and more significant volume growth in the coming years as it targets net increase of 1.5-2 million tons per annum on FY2018 volumes of available fly ash over the next two years, with volume growth expected to come from a range of initiatives. Prior to significant items, the NPAT is likely to be ~5- 15% lower in FY20 relative to FY19 (lower earnings and higher depreciation charges). Property earnings are estimated to be around $55 to $65 million in FY20.
Crown Resorts Limited (ASX: CWN)
One of Australia’s largest entertainment groups contributing to the economy via tourism, training, employment, and corporate responsibility programs, CWN incurred over $650 million in taxes to all levels of government in Australia in FY19.
Executive Chairman John Alexander acknowledges the fact that the Company underwent multiple formal assessments by AUSTRAC on its compliance with its AML and CTF Programs, both in Melbourne and Perth. For sensationalist allegations raising some concerns amongst stakeholders, he stated that the Victorian and NSW regulators have taken a decision to examine issues raised in recent media reports, and CWN is on track to respond to all the recommendations within the timeframes agreed with the regulator.
In FY20, CWN aims to work towards improving the underlying performance of its resorts through investments to restore top line performance as well as through the management of costs. It remains focussed on the delivery of Crown Sydney on time and on budget. The One Barangaroo project recently had over $450 million in sales contracted.
On the acquisition front, CWN finally owns 100% of the development site of One Queensbridge.
Westpac Banking Corporation (ASX: WBC)
One of the Big Four banks of Australia, WBC was subjected to AUSTRAC’s allegations related to IFTI claims. The regulator, in a Statement of Claim, initiated civil proceedings towards WBC in November 2019 pertaining to suspected contraventions of its responsibilities under the Anti-Money Laundering and Counter-Terrorism Financing Act.
To address the same, WBC established a Board Financial Crime Committee with the intent to fix issues and stay focussed on overall performance. It is also co-operating with APRA in the investigation and review, which an increase of operational risk capital requirement by WBC of approximately $500 million.
With 2019 being a disappointing year for banks, WBC is making strategic progresses by improving technology infrastructure and migrating to digital channels. The Bank believes that 2020 might see a balance sheet growth as well without much deterioration on the credit quality.
There is an interesting twist here!
As the consensus is with the banking and financial sector not performing well through FY19, there are few exceptions. AMP Limited (ASX: AMP), that provides superannuation, life insurance, investments and advice and is a fast-growing retail bank in Australia experienced strong demand for its real assets’ investment capabilities in FY19. There were robust infrastructure debt inflows and commitments of US$6.2 billion were received for its fourth infrastructure debt strategy portfolio.
Especially considering banks, AMP Bank deposits increased by $0.6 billion in Q3 19 to A$14.5 billion and total loan book grew by $0.1 billion to $20.3 billion.
Inghams Group Limited (ASX: ING)
A family company for nearly a century, ING is a consumer staples business that supplies to major retailers, QSR operators, food service distributors and wholesalers. In the current challenging and changing environment of FY19, ING delivered an underlying $103.2 million NPAT, down by 4.4% relative to FY18.
There was pressure and impact of drought on feed and selling prices. To combat these, ING leveraged a range of strategic and sustainable improvement initiatives. On the good side, the Board deliver a fully franked final dividend of 10.5 cps at year-end.
In FY2020, the EBITDA run rate is expected to be lower in the 1H than the 2H of FY2020 reflecting impact of feed prices and Further Processing. The Company is confident of a strong operating cash flow generation and the dividend policy with a pay-out ratio of 60-70% of underlying NPAT remains unchanged.
ING believes that Adoption of AASB16 will have no economic impact to the group and review of operating capital plan was nearing conclusion.
Platinum Asset Management Limited (ASX: PTM)
One of Australia’s most trusted international investment managers, global equities remain the sole focus for PTM. In his AGM Address from November 2019, Chairman Michael Cole acknowledged that fact that FY19 was difficult with investment returns for majority of the managed funds and portfolios which were trailing the broader market for the 12 months ending 30 June 2019.
The triggers of this were the US/China trade war and the grim prospects for future economic growth. Even though markets continued to appreciate in value, investors were sceptical and feared favouring companies that were perceived to be immune from external events.
The growing divergence between growth and perceived safety on one side and appealing valuation on the other, led to few short-term investment underperformances for PTM that led to lower fund flows, lower investment performance fees and a reduced investment contribution from the seed investments. However, PTM declared a 2019 final fully franked ordinary dividend of 14 cps (though the DRP was not activated).
Average FuM for FY19 was down by 4% to $25.3 billion from an average FuM of $26.4 billion for FY18.
TPG Telecom Limited (ASX: TPM)
Communication services provider, TPM faced a difficult FY19 with two major regulatory decisions adversely impacting the ability to deliver on long-term strategies:
- The Australian Government’s decision to prohibit the use of Huawei equipment in 5G networks
- The decision by the ACCC to oppose TPM’s planned merger with Vodafone Hutchison Australia.
These regulatory challenges were followed by NBN’s growing involvement in the business market in areas where several competitive carriers already prevail. Moreover, the NBN rollout is expected to continue to create significant margin headwinds for the Group over the next couple of years, though TPM believes that it would be well positioned for growth once the headwinds subside following the end of the NBN rollout.
With these stocks surpassing the dynamics of macro and micro economic factors, it will be interesting to look out for their earnings release in 2020. With the new year just in and investor sentiment growing as ever towards Australian equities, let us await the flow of information that these stocks have to offer!
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