We’ve already seen a scattering of 2009 interim results from some of the small listed investment companies, while a lengthening line of companies have lowered their interim earnings guidance in the first weeks of the New Year.
Now the local interim earnings season starts this coming week in a fairly low key way. It won’t be as dire as the US where forecasts have shifted lower with each week.
Analysts at both Citigroup and Goldman Sachs JBWere have taken a stab at some of the themes and what to look for in what will be the most important reporting season for some time.
Citi analysts looked at some of the themes for 2009, as did GSJBW analysts, who then linked them to the about to stat reporting season.
Citi analysts amusingly talked about ‘despair’ being ahead of us. After the past year, I’d say despair has been with us for a awful long time.
Citi analysts said they saw the key themes of 209 as being “timing the turn (in the market overall and in banks and industrial cyclicals in particular); economic momentum (especially the second derivative); credit spreads; earnings and dividend pressure; over- and under-owned stocks; re-regulation risk (especially financial and environmental); the housing cycle dilemma; the outlook for style investing (size, momentum, fundamental); and we contemplate the possibility of a sharebuying panic emerging late in the year.
The Despair Stage Could Still Lie Ahead — If sharemarkets “rise on worry, peak in euphoria, fall on hope and bottom out in despair”, we believe that the “despair” stage still lies before us – potentially in the June or September quarters.
Consensus is still worryingly sanguine.
We expect major index swings through the year – our central case is for an indecisive battle between poor momentum and good value.
Against that backdrop, our S&P/ASX 200 year end target of 4,500 for year-end 2009 requires the year to finish on an upward zig, not a downward zag.
Second Derivative Crucial said: For the economy and profits, the path is likely to be downward all year. More interesting is whether the rate of deterioration accelerates or ameliorates.
We are confident enough of good value to be buying the dips in 2009, but wary enough of poor momentum to be selling rallies.
Goldman Sachs JBWere said the ratio of stocks our analysts believe which have downside risk to earnings this reporting season “outnumber the upside risk by 7.8 to 1 (only 1.4:1 this time last year) and highlights the pervasive negative sentiment now across the market.
“The percentage of companies that we expect to provide no guidance this reporting season has increased from 40% this time last year to over 50%, highlighting the limited earnings visibility in the current environment.”
“This highlights the negative sentiment (and no doubt the reality) which is currently pervasive across the market”.
“The stocks which our analysts believe have upside earnings risk during this reporting season include:
- AIX, ANZ, AUB, GNC, IRE, NUF, TOL, WBC, WPL (of these ANZ, NAB, WBC and GNC have September balance dates and will not be reporting till late April/May).
- Of these stocks onlyAUB, IRE have recently experienced positive consensus earnings revisions.
Stocks which our analysts believe have downside earnings risk and where recent consensus earnings revisions have exceeded -20% are: AAC, WSA, AXM, BBI, MGX, TIM, PNA, ABY, MRE, AVG, CEU, IGO, PLA, TEN, IPL, NFK, FKP, SEV, HVN.”
Goldman Sachs said the “Key themes investors will be focusing on include:
1. Balance sheet/Refinancing Risk
2. Asset Impairments/Write downs
4. Currency/Oil price impact
Balance sheet/Refinancing risk – with tight credit markets continuing to be a major focus of the market, investors will be closely watching balance sheet strength and the potential requirement for companies to deleverage.
We also expect that companies might take the opportunity to raise equity during this reporting period having provided the market with their most recent trading numbers, an updated balance sheet and potentially some comments on the trading outlook.
Asset Impairments/Write downs – given the sharp pull back experienced in the market over the last 12 months we expect companies will be examining the carrying values of recent acquisitions intangibles/goodwill).
While the majority of companies will be reporting interim results during this reporting period and therefore potentially delaying any asset impairment until the June year end, it could well feature over the next 4-5 weeks.
In times of poor results we also expect companies to take the opportunity to announce restructuring programs/costs (if the market is expecting the worst, why disappoint?).
We expect companies would treat any restructuring charges as “one off” and to strip them out. We remain cautious on this treatment given the potential for restructuring to be an ongoing feature for the next 2-3 reporting periods.
Dividends – another key focus for investors will be dividends and their sustainability.
Investors are currently pricing the ASX300 Industrials on a prospective FY09 yield of 7.1% (73% franked). This represents a grossed up yield of 9.3%; a +500bps positive spread over the current RBA cash rate.
This spread is unprecedented and not sustainable with our yield forecasts being too high or the market too cheap (we suspect a combination of both).
Currency impact – a potential positive outcome for companies during this reporting season is the impact the currency will have on translated earnings.
The AUD has averaged around 78¢ during the 6 months to the end of Dec’08, compared to 87¢ during the p.c.p. (-10%).
Industrial stocks (reporting in AUD) which have the highest level of positive earnings sensitivity to the AUD/USD exchange rate include: PPX, CTX, IPL, BSL, CSL, CSR, RMD, BLY, ANN, WOR, ALL, AMC, AXA, and SGM.
The negative side of the currency fall is not expected to become apparent until the Jun’09 half given the hedging we believe was in place leading up to the Christmas period.
This is expected to be an issue, for retail companies in particular which import the majority of their COGS, and will experience a significant increase over the next 6 months. Outlook comments will potentially focus on this issue during this reporting season.
Falling oil prices – in a similar theme to the AUD, there could also be a small positive impact from lower energy prices, reflecting the sharp correction in the oil price since July 2008.
Again we expect this will be more apparent during the Jun’09 half given the timing of the fall (oil averaged US$88/bbl during the Dec’08 half compared to US$84/bbl in the pcp).
Stocks which have the greatest cost sensitivity to oil prices include: VBA, QAN, AIO, AMC, TOL, CRG, GWT, JHX, SPT, BLD, TPI, ABC and CCL.
Revenues – Earnings will be most leveraged to declining revenues and we expect investors will be very focused on trends emerging in this area.
Historically slowing revenue growth has been difficult for analysts to forecast, particularly at key inflection points.
While the revenue figures for the Dec’08 period could well prove more resilient due to the fiscal stimulus packages from the Government prior to Christmas, this wi
ll remain a key risk for companies in the current operating period.
While outlook comments are expected to be thin on the ground, any comments around revenue expectations will be closely scrutinised.
IMPORTANT: AIR reports about financial markets and investment products in the widest sense possible. The AIR website and all its contents is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before making any investment decisions.
Australasian Investment Review