More opportunities among value stocks and an increasing disconnect between market sentiment and company fundamentals, particularly for companies focused primarily on Australian demand, are among the highlights for the latest annual reporting season.
In its semi-annual review of the reporting season results, including broker and company revisions, and with the aid of more than 150 company visits with senior management, Martin Currie Australia has given a relatively positive view for the majority of ASX 200 stocks.
Reece Birtles, the firm’s CIO, says: “The negative back drop of ongoing weakness in global economic growth, net downgrades by brokers, and conservative management outlooks during the August 2019 reporting season, hide the ‘green shoots’ that are beginning to appear in the Australian market, and the heightened valuation dispersion opportunities.”
Nevertheless, the negative sentiment that had marred the March, 2019 reporting season continued to bring uncertainty in both the local and global markets over the past six months. But, on average, the results reported last month were roughly in-line with lead-in expectations, “which we see as a good effort given the economic backdrop”, the review says.
“While it is understandable that the market had expected to see weak results due to the ongoing global uncertainty since the last reporting season, we believe that the market had expected to see a much more optimistic outlook going forward. Instead, management across the board talked about ‘air pockets’ in their outlook, such as low infrastructure spending and advertising, and guided very conservatively for the periods ahead.”
The Martin Currie analysts say that poor revisions by brokers and conservative outlooks from company management mask some of the positive signs and fundamental themes they found in the results and through engagements with both boards and management.
For instance, the consumer sector was better than had been feared. Results for consumer-exposed companies were generally better than the lower forecasts leading in. The relaxation of lending conditions for housing and financing, household tax cuts, and lower interest rates have put more cash into people’s hands and have improved consumer confidence.
Jim Power, one of the analysts, points out that companies like JB Hi-Fi, Super Retail Group, Beacon and Bapcor, have done well out of that theme and have reported better trading in the new financial year versus the prior comparable period.
A significant impact for some companies has been from this year’s accounting standards changes, known as AASB 15, 16 and 9. The Martin Currie paper suggests that some broker analysts may not pick up on the significance of the changes “given that coverage by the street has thinned considerably, with sell-side firms stripped of senior analysts (especially in small caps) and some brokerage firms shut down”.
AASB 15 relates to the booking of revenue from customer contracts which is a tougher standard and had implications for contractors such as CIMIC, Lend Lease and Downer. AASB 16 relates to leases, removing the distinction between operating and finance leases, which impacts some companies with long leases. AASB 9 relates to financial instruments and new principles for measuring impairment of financial assets. An example was an increase from $60 million to $300 million in a provision by AGL Energy in default expectations from customers.