Surging ASX Defies Downgrade Warnings

  • Jan 21, 2020 AEDT
  • Team Kalkine
Surging ASX Defies Downgrade Warnings

On 20 January 2020, the benchmark index, S&P/ASX 200, closed at another record high 7,079.5, up by 0.22% during the day from the previous close of 7,064.1 on Friday, 17 January 2020. The gain in the benchmark index was supported by the top gainers below:

Silver Lake Resources Ltd (ASX:SLR) closed at $1.505, indicating upward movement of 6.74%,

Fortescue Metals Group Ltd (ASX:FMG) closed at $11.83 indicating upward movement 3.68%,

PolyNovo Limited (ASX:PNV) closed at $2.54 indicating upward movement 3.67%,

Beach Energy Ltd (ASX:BPT) closed at $2.87 indicating upward movement 3.61%,

NEXTDC Limited (ASX:NXT) closed at $7.32 indicating upward movement 3.10%,

Although the market has been rallying at its all-time high, the consumer discretionary index fell by 18.3 points on 20 January 2020 to 2,845.0, subject to the downgraded earnings in the consumer discretionary sector.

Does this raise doubts about market fundamentals and the market being shaky?

Well, the downgraded earnings by several companies in not only consumer discretionary but also other sectors like financials have added to the uncertainty and have resulted in speculations in the market.

It may be considered that the companies look less optimistic about the earnings in the year 2020, subject to the international economic slowdown and trade tensions holding strong in the market. However, it is not only in the international trade space but also individual factors that have compelled the companies to downgrade their earnings.

Let us examine these downgrade events and know about these compelling factors.

 

nib Holdings Limited (ASX: NHF) believes that the increase in claims expense across several of the Group's underwriting business lines shall impact the Company’s Underlying Operating Profit (UOP).

Considering the looming uncertainty of increasing claims expenses, NHF brought down its FY20 Group Underlying Operating Profit (UOP) to $170 million (Statutory Operating Profit at least at $150 million) from $200 million (Statutory Operating Profit of at least at $180 million) which it had previously indicated.

NHF Managing Director Mark Fitzgibbon believes that there has been an uptick in claims and the company had expected some level of inflation in claims across the Group in FY20. However, the same thing is increasingly spreading across several other business lines than previously projected by NHF.

He further added:

The NHF stock was trading at at a price of $5.630 on 21 January 2020 at AEDT 3:58 PM, down by 1.401% with a market capitalisation of $2.6 billion.

Another company with downgraded earnings is the Super Retail Group Limited (ASX:SUL). The first half FY20 segment EBIT (prior to the application of AASB 16) of the Group is expected to be between $113 million and $115 million with the following breakdown of provisional trading performance by brands:

Company's Report 

The Group believes that higher store labour costs and the underperformance of Macpac along with the impact of the bushfires has affected the Group earnings.

Partial implementation of the retail and clerical enterprise agreement was the key influencer of the higher store labour costs and wage investment. Moreover, a delay in price increases for the peak winter promotion period negatively impacted Macpac’s gross margin.

The SUL stock was trading at a price of $ 9.340, down by 2.505% during the day at AEDT 3:58 PM on 21 January 2020, with a market capitalisation of $ 1.89 billion.

 

Additionally, earnings for the half-year ending 31 January 2020 of Nufarm Limited (ASX: NUF) were expected to be significantly lower than the prior comparative period. Nufarm’s estimated EBITDA for the first half of FY20 is now expected to be in the range of $55 million to $65 million.

  • Industry-wide weak demand for crop protection products in North America had impacted earnings in the first quarter by approximately $20 million which was persistent in the second quarter;
  • The company expects earnings from the North American business to be more heavily weighted towards the second half of the year compared to the prior comparative period;
  • The Europe segment is expected to record a loss before interest, tax, depreciation and amortisation in the first half;
  • Due to a continuation of extreme climatic conditions, the company has experienced a significant reduction in sales in Australia;
  • Influenced by the difficult climatic conditions and high inventory levels at the customer level constraining demand, the Sales and EBITDA in Asia are expected to be lower than the prior comparative period;
  • The company expects earnings to be slightly lower than the prior corresponding period for the Seed Technologies segment due to a ramp-up in omega-3 commercialisation activities and additional costs to support the new carinata business;

NUF maintains manufacturing and marketing operations throughout Australia, New Zealand, Asia, the Americas and Europe, selling products in over 100 countries across the globe.

In the Consumer Discretionary sector, Gentrack Group Limited (ASX: GTK) is currently experiencing difficult conditions in its utility markets with the regulatory price caps on electricity, combined with competitive market conditions in the UK and Australia which have further led to reductions and deferrals of IT investment.

As an Information Technology company, Gentrack serves more than 220 utility and airport sites globally with its leading solutions facilitated via its worldwide located offices across New Zealand, Australia, the USA, the UK, Singapore, and Europe.

Moreover, while the company is in the transition from an upfront license model to a recurring SaaS model, there is a decline in the initial contract revenues, and these are and being replaced by more predictable contracted recurring payments.

Most importantly, forecast revenue is expected to decrease significantly according to a recently completed detailed FY20 reforecasting exercise. The current expectations of the company for the full year FY20 EBITDA are between NZ $8 million and NZ$12 million.

Bottomline

Currently, the ASX market movement is on the opposite side to what is indicated in the forecasts made by some of the companies. However, downgrading earnings does not necessarily mean a stagnating stock market. The ASX comprises of several sectors that are performing well to compensate the downs in few other sectors. However, the de-escalation of international trade tensions seems to be creating breathing space for the companies and investors are hopeful of more lucrative market in the future.


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