Reporting season wrap-up: This time it’s different!

From
Reece Birtles

Reece Birtles

Strong sales growth across industry sectors was a stand-out feature of the February 2018 reporting session, according to the active equity specialist Martin Currie, an affiliate of Legg Mason, one of the world’s largest funds management groups with A$962 billion in funds under management[1].

Martin Currie Australia Chief Investment Officer (CIO) Reece Birtles says that despite high expectations for good results before companies reported, reflecting the growing confidence in the economy’s growth, the positive news on sales “surprised the market, with actual results beating consensus forecasts on sales growth by a long way.

“For companies in the S&P/ASX 200, 38 per cent exceeded consensus sales forecasts and another 46 per cent were in line with projections, with only 17 per cent below expectations[2]. In fact, this is the best ratio of beats/misses of sales numbers that we have seen in a long time.

“This sales growth translated into higher earnings per share (EPS) surprise, with 37 per cent above expectations and 29 per cent in line with projections2. And this was despite higher costs and lower margins, as companies appear to be spending more to achieve higher sales, resulting in lower profit margins. This contrasts with the past few years where cost outs were the driver of profit growth.

“What was particularly pleasing was the improved sales numbers for the industrials sector (i.e. the market ex resources), finally reversing the persistently weak trend of the past five years.

“This is a sign that global growth and inflation looks to be finally making its way into corporate Australia. Strong PMI (Purchasing Managers Index) numbers and an increase in capex of almost 10% in 2017, up from -14% in 2016 point to the return of corporate ‘animal spirits’[2].

“We see that growth, based on greater investment and lower margins, is a much more sustainable position for the economy to have than very low sales growth and cost out stories of the past few years.”

Birtles says other significant developments to emerge from the February reporting season are:

  • Best reporting season for EPS revisions since the Global Financial Crisis bounce-back, with 22 per cent more upgrades than downgrades2;
  • Higher capex didn’t put a dent in dividend payments which remained steady;
  • Delivered EPS and forward expectations both rose, with the latter showing the strongest lift in five years;
  • Positive revisions appear a bit under-baked given the strong sales data, with most of the uplift coming from the fact that actuals came in ahead of the forecasts; and
  • Given the market selloff during February, and the ongoing macro uncertainty, we feel that brokers have not been as bullish when revising their models for future earnings growth, and that we should see further upgrades going forward.

As an active equity specialist, Birtles also gave an insightful sketch of some stocks in Martin Currie Australia Value Equity portfolios (also available as a unit trust via the Legg Mason Martin Currie Select Opportunities Fund APIR SSB0009AU)[3]:

  • JB Hi-Fi:  One of the most productive retailers in Australia with a national network of stores. He argues sales/sqm and cost of doing business ratio means it will remain competitive post Amazon.
  • IOOF: Unique low-cost platform and advice business model that is attracting IFAs away from vertically integrated businesses. Offers a high cashflow business and ongoing organic and acquisition driven growth;
  • AGL Energy: Due to a gas shortage and the lag in benefitting from the rising wholesale electricity prices, is well positioned to continue delivering good EPS growth over the next two years; and
  • Fonterra: Attractive based on demand growth for protein from emerging markets, and mix shift from commodity powder producer to value-added branded product producer.

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[1] Source: Legg Mason, as 31 December 2017
[2] Source: Martin Currie Australia, Factset; as of 28 February 2018. Calculated using the weighted average of broker consensus forecasts of each holding – because of this, the returns quoted are estimated figures and are therefore not guaranteed.
[3] Source: Martin Currie Australia; as at 28 February 2018. Based on a representative Martin Currie Australia Value Equity portfolio. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.

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