What the half-year numbers tell us: it’s not so bad

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After what has been the most anticipated company reporting season for several years, the verdict is that the market has been a bit too pessimistic. The results are, by and large, not too bad. More ASX-listed companies reported results beat broker consensus forecasts for sales than didn’t, and while there have been more misses for EPS, this was pretty OK when you consider the downgraded lead-in expectations.

According to Reece Birtles, Martin Currie Australia CIO, negative sentiment on politics, financial conditions and house prices has driven the market more than company fundamentals. Things such as unseasonal weather – either too hot or too wet in the last few months – have also affected activity and prices.

“Coles is a good example of a weather impact,” he told a group of investors in Sydney. “They told us they had never had so many supermarkets, 71, closed at one time, primarily due to the floods in Queensland.”

Martin Currie Australia meets with about 150-160 companies each reporting season to draw out its themes for the Australasian listed market. “On top of our fundamental analysis. we also use an analytical top-down view of consensus forecasts versus the actual results,” Birtles said. “We then look at what’s likely going forward and how prices have reacted to recent news. We try to link the fundamental and analytical themes together.”

While 12 per cent of companies had consensus earnings revisions for full-year earnings, 36 per cent were downgraded by brokers. Companies also didn’t offer upgraded guidance. Birtles said given the market environment there was no real incentive for them to upgrade.

Birtles said that company revenue generally looked good and consumers’ personal income was “running fine”. In terms of their earnings, companies were talking about reinvestment, he said. They were hesitant to disclose their own upgrades because of the political and market uncertainties.

For example, JB Hi-Fi had a “very good” result, as did a number of other “good” retailers which have adapted well to the online disruption from the likes of Amazon. But they did not upgrade their forecasts to suit. “We are seeing the good retailers adapt their business models. For example, ‘Click and collect’ is resonating with Australian customers,” he said. “And Amazon had what you’d probably say was a disappointing launch in Australia.

Uncertainty is a problem for the market and is probably what is holding companies back from issuing upgrades to forecasts, Birtles believes. Two big elections are coming up – the NSW state election this month and the federal election in May. For the market, one of the big differences between the two parties federally is Labor’s plan to haul back negative gearing and franking credit refunds. As a result, there was a positive skew towards higher dividends, with companies looking to distribute their franking credits.

Will Baylis, portfolio manager for Martin Currie Australia , wrote to all big companies with large franking balances and strong capital positions to try to ascertain their views on dividends in the wake of a possible Labor victory federally. He said that “We got a positive response from every company. The issue is certainly top of mind. Wesfarmers, Woodside, Caltex, Flight Centre, Adelaide Brighton and others distributed more to shareholders.” But they tended to be “prudent”, he said. “With JB Hi-Fi, we would have liked them to do more because they have a lot of franking credits. They thought it was more prudent not to gear up,” he said.

The downturn in residential property prices also have a knock-on effect. Birtles discussed the impact of this for Stockland, which builds most of its new shopping centres in suburban growth corridors. These tend to include new stores owned by small-medium private companies where the directors would historically borrow against their house to open the new business. Stockland is seeing an impact now because of their difficulty to borrow. “This highlights the secondary impact of the banks’ credit tightening,” Birtles said.

But, Birtles said that on a six-month forward basis, there is unlikely to be any further tightening. “In terms of financial conditions, we have probably been through the peak stress.”

Overall, he said, one of the strangest things about the Australian economy was the balanced budget. “There is nothing wrong with the income level. Commodity prices are strong and there has been a strong increase in personal taxes (because of bracket creep),” he said. “We have an election coming up so all of that will get spent, either in tax cuts or increased infrastructure spending. So, household income should increase. It is said that about 90 per cent of personal propensity to spend is driven by income rather than the wealth effect (property or share prices). As a result, consumer sentiment is mostly unchanged even though property prices have dropped ~15 per cent.”

Birtles believes that the knock-on impact of the downturn in housing is still probably the biggest risk to the market and the economy. The large infrastructure pipeline, should help to counter the housing downturn, but is taking also longer than expected to deliver.

Note: Martin Currie is a sponsor of Investor Strategy News.

– G.B.

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