Australia has just entered corporate confession season, with the vast majority of share market listed companies due to update investors on their results for the financial year just ended on June 30.
It’s one of two times a year — the other in February — that investors are guaranteed to see some light shed on how their companies are performing.
These accounts are externally audited and it’s a serious offence to mislead, so shareholders should have reasonable confidence they’re getting a true picture of the past six months’ performance.
And what a six months it’s been.
There’s never been a confession season quite like this — one that coincides with a pandemic, recession and record stimulus to keep entire industries from collapsing.
Since the panicked market sell-off in March, a large number of ASX-listed companies have slashed dividends, raised extra cash to stay afloat and provided scant detail about their outlook.
Many have also refrained from disclosing whether their business is being kept alive by JobKeeper wage subsidies, which are due to be scaled back in October before ending in March next year.
Morgan Stanley’s analysts say that lack of disclosure is a good reason to watch this reporting season closely.
“Despite investor feedback that earnings ‘don’t matter’ amid the COVID-19 crisis, we think FY20 [financial year 2020] earnings are important,” they wrote.
Much of that detail is likely to be brutally negative.
Profits tipped to plunge
Investment bank Citi says the consensus among its peers is for Australian corporate earnings to be down more than 15 per cent over the past financial year — more than half of which was unaffected by the pandemic — with no earnings recovery in the current year.
That would match up neatly with share prices, which are around 15 per cent off their pre-pandemic peaks on the ASX.
That’s despite the quickest rebound in history, from a 36.5 per cent slump at the trough, as investors welcomed unprecedented government and central bank stimulus and bet on a successful vaccine being found in record time.
But Citi’s analysts are more pessimistic. They expect earnings to have dropped 20 per cent last financial year.
With earnings down and the outlook uncertain, dividends are likely to be drastically cut, on average.
Citi analysts are predicting dividends could fall by 37 per cent (from $72 billion last year, to $45 billion this year), with the biggest declines from banking stocks. (The regulator has already warned banks not to pay out more than half their earnings to shareholders.)
Citi is also warning that earnings could remain depressed for some time, forcing many companies back to investors to ask for more cash through discounted share sales.
“Renewed outbreaks in Victoria and NSW mean rolling lockdowns are likely to remain a reality for some time, meaning a healthy balance sheet is key,” the bank’s analysts wrote.
“We expect more raisings in the coming months.”
Morgan Stanley analysts agree that the share price recovery looks too optimistic and that there’s scope for great pain this reporting season as companies reveal just how badly they’ve been battered by the pandemic recession.
“Multiples look stretched,” Morgan Stanley’s equity strategists warn.
They believe the Australian market is trading at 19.4 times what earnings will likely be in the next 12 months.
But while there will be great losers — and probably a few more high-profile casualties who don’t make it to the other side of the pandemic — some companies have capitalised on COVID-19.
Mining stocks, for example, are expected to be responsible for a third of dividends in the upcoming reporting season, up from 26 per cent last year, as Chinese iron ore demand recovered rapidly, underpinning the profits of the big three — BHP, Rio Tinto and Fortescue.
And the news has only been getting better for gold miners over the past few months as the precious metal hit record highs.
Another group of COVID beneficiaries, at least in the short term, are some large retailers that sold goods in demand just before and during the lockdown.
Supermarket giants Woolworths and Coles benefited from hoarding and a shift from eating out to dining at home.
Coles’ one-time owner Wesfarmers saw strong sales at its Officeworks and Bunnings stores as customers set themselves up for more work and leisure time at home.
Electronics and appliances giants JB Hi-Fi and Harvey Norman got similar boosts, with Gerry Harvey’s outfit also benefiting from rising furniture sales.
Other retailers saw a rapid recovery once the lockdowns ended, due to pent up demand. On Friday, Super Retail Group — which operates the Supercheap Auto, Rebel Sport and BCF outdoor chains — reported a 27.7 per cent jump in June sales.
But Citi is urging caution before people climb onto the retail bandwagon.
“Trading updates for the reporting season are expected to be positive given government support and the superannuation withdrawal,” its analysts noted.
“This may prove misleading as there will be a step down in stimulus come the December quarter, which is likely to result in weaker retail sales growth.”
This reporting season may be a case of the tortoise and the hare, with some companies racing ahead now only to jump into a great hole next financial year, while others that have struggled but survived continue to move forward.
For other firms, like those in travel, survival is the only game in town until an effective vaccine or treatment is found, the pandemic conquered and borders reopen.
The key figure to watch for there is debt and continuing costs — how long can these companies exist on shareholder, bank and government life support before the plug gets pulled?
Reporting season calendar
These are the major Australian ASX-listed companies reporting their earnings between July 29 and August 28.
The entries will be updated over the next few weeks as dates change and with links to the relevant ABC News stories as the results come out:
July 29 – 30
|Rio Tinto (RIO)|
|CIMIC Group (CIM)
August 6 – 7
|Insurance Australia Group (IAG)
News Corp (NWS)
REA Group (REA)
August 10 – 14
|GPT Group (GPT)
Nick Scali (NCK)
James Hardie Industries (JHX)
SCA Property Group (SCP)
|Commonwealth Bank (CBA)
Downer EDI (DOW)
Magellan Financial Group (MFG)
QBE Insurance Group (QBE)
|AGL Energy (AGL)
Breville Group (BRG)
Evolution Group (EVN)
Goodman Group (GMG)
Treasury Wine Estates (TWE)
Woodside Petroleum (WPL)
|Iluka Resources (ILU)
Newcrest Mining (NCM)
August 17 – 21
Beach Energy (BPT)
Bendigo & Adelaide Bank (BEN)
GWA Group (GWA)
JB Hi-Fi (JBH)
Sydney Airport (SYD)
Viva Energy (VEA)
Estia Health (EHE)
Westpac (WBC) third quarter update
Corporate Travel Management (CTD)
Domino’s Pizza Enterprises (DMP)
Michael Hill (MHJ)
Mineral Resources (MIN)
The a2 Milk Company (A2M)
The Reject Shop (TRS)
Coca-Cola Amatil (CCL)
Domain Holdings (DHG)
Medibank Private (MPL)
Mirvac Group (MGR)
Origin Energy (ORG)
Sonic Healthcare (SHL)
The Star (SGR)
Mayne Pharma (MYX)
August 24 – 28
Fortescue Metals Group (FMG)
G8 Education (GEM)
Monash IVF Group (MVF)
Senex Energy (SXY)
Super Retail Group (SUL)
Bingo Industries (BIN)
Integral Diagnostics (IDX)
Oil Search (OSH)
Qube Holdings (QUB)
Scentre Grouop (SCG)
Seven West Media (SWM)
Spark Infrastructure Group (SKI)
Adelaide Brighton (ABC)
APA Group (APA)
Cleanaway Waste Management (CWY)
Japara Healthcare (JHC)
Seven Group (SVW)
Whitehaven Coal (WHC)
Atlas Arteria (ALX)
Flight Centre (FLT)
Nine Entertainment (NEC)
Ramsay Health Care (RHC)
Regis Healthcare (REG)
|Bega Cheese (BGA)