Reporting season is almost upon us and for equities it will prove to be a very interesting one for many reasons.
This season will show us just how bad the impact of COVID-19 has been for the majority of companies in the ASX200. Analysts from all brokers, as the enormity of the health crisis became apparent, have been adjusting their numbers trying to get a gauge on the impact COVID-19 has had on individual earnings and importantly what the next 12 months could have in store.
From a top down perspective, the market has seen earning revisions downwards of 15% to 20% initially, and then even further to 30% in some cases. From a low base, analysts have then tried to come to terms with 2021, with some expecting a sharp rebound to levels close to 2019, while others are expecting almost no growth from 2020 levels. Where consensus now sits can only be described as vague. Citi has put out a good piece where they suggest consensus earnings overall will be down 15% for 2020 and no growth at all for 2021.
Over the next few days, in a two-or-three-part note, we will take a look at some of the sectors that will be reporting. In this note we look at Rio Tinto, Building materials, energy and the consumer discretionary sectors as well as the likelihood of further capital raisings.
Rio Tinto starts the season after market on the 29th July. The iron ore space has been strong, with demand for Australian iron ore being robust over the past 4 months, due to supply constraints in Brazil, and China’s faster recovery from COVID-19. Rio’s result always has a degree of seasonality to it with the 2nd half weaker due to weather issues. Macquarie expects an EBITDA number of US$9.5bln with a NPAT of US$4.5bln. The market will also be watching Rio’s dividend announcement, hoping for a positive surprise. The range according to Vuma is pretty wide from US$0.94 to US$2.21 for the half. Macquarie is predicting US$1.70 on a 60% payout ratio, while Citi is at the top of the range at $2.21. Given Rio did not pay a special dividend in 2019, and given their net debt is only US$3.2bln, Macquarie believes it could pay a special dividend of up to US$1.00 per share.
While on the topic of dividends, brokers have been paring back their forecasts for 2020 dividends. In the Citi universe of stocks covered, dividends paid has fallen 37% from $72bln to $45bln. The level of disparity is quite high, even when dealing with the well covered stocks like the banks. CBA is a case in point, with UBS still factoring in a 2nd half dividend of $1.50 per share, while Citi has CBA not paying a dividend at all, despite the fact that the sale of Colonial went through in the last quarter. CBA reports on the 12th of August. In 2019, bank dividends made up circa 33% of all dividends paid but with the deferral of dividends by WBC & ANZ this is expected to drop to circa 18%.
The building materials sector will be another that is closely watched by market analysts. Construction data, both residential and non-residential dove tail into construction finance, home loans and bank profitability. The shock from COVID-19 is expected to see earnings fall although the impact of government stimulus will cushion this to some extent. There are some green shoots though with James Hardie (JHX) being exposed to the US housing sector which is expected to rebound the quickest in 2021, and Brickworks (BKW) which has a property portfolio that may hold up.
The Energy sector has already announced much of the pain it has endured through a double whammy of COVID-19 and a weak oil price. Impairment charges for WPL (US$3.92bln), OSH (US$250m to US$300m) ORG (A$1.16 to A$1.24bln) & STO (US$700m to US$800m) have now been absorbed by the market. Who knows if more could follow.
If there was one sector that has confounded the market it’s the consumer discretionary sector. Depending on which area of the retail space you’re in very much determined how the market treated each stock. With all stocks suffering steep falls with the onset of COVID-19, some have bounced back while others have languished. It is also a sector where government stimulus has helped and the working from home phenomenon assisted. Housing retailers have faired best with Nick Scali, Beacon lighting, City Chic & Baby
Bunting all recovering to pre-COVID levels while Myer, Harvey Norman and Michael Hill are still below their February peaks. Of course, market guidance for 2021 will be a focal point but with the recent lockdowns in Victoria, I would not expect too much from executive teams in regard to 2021.
Reporting season is also a time when companies may raise more capital, especially if there is some economic crisis in play, as those around during the GFC will recall. According to Goldman Sachs, the following companies’ balance sheets are in the bottom quartile, with dividends being cut by some 20% and to date have yet to raise capital: SYD, APE, SCG, URW, TCL, GPT, BLD, MGR, HLS, SGR, NUF & LNK. As can be seen the infrastructure, Utilities and REITS stocks feature heavily on the list. Whether these companies actually come to market remains to be seen.
The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.