With the profit reporting season getting into its stride this week, ASX-listed companies are on target to deliver close to double-digit earnings growth. However, there will be significant variations between sectors.
UBS says it expects earnings growth of around 9 per cent for 2017/18, which is a little above trend. This is an increase in expectations; six months ago UBS was expecting growth of around 7 per cent.
The change is due to earnings revisions in the resources sector, thanks to higher commodity prices.
Taking resources companies out of the equation, UBS says reported earnings growth will be around 5 per cent.
The banks, which have been hit by higher funding costs and lower credit growth, will be a significant drag on overall earnings growth. UBS estimates that bank earnings in 2017/18 will fall by 2 per cent.
Companies should report top line (revenue) growth of around 5.5 per cent. Companies are enjoying some margin expansion and labour costs remain subdued.
UBS says strong growth sectors will be utilities, insurance, health care and general insurance.
Based on this outlook, the market’s prospective price earnings multiple is 15.4 times, which “does not appear particularly expensive” relative to the 20-year average of 14.7 times or the low cash rate and bond yields, UBS says.
“However, higher growth areas of the market are trading well above their historical premiums.”
UBS says “large-cap upside surprise candidates” include Alumina, Ansell, BHP Billiton, BlueScope Steel, Domino’s Pizza, Flight Centre, Suncorp and Treasury Wine Estates.
Among the small caps there could be pleasant surprises from mining services companies Imdex and Ausdrill, and travel company Webjet.
UBS’s candidate for “downside surprise” include real estate listing companies Domain and REA Group, Inghams and Primary Health Care. Among the small caps, Cabcharge, Retail Food Group, Galaxy Resources titanium plan Orocobre and Syrah Resources could disappoint.
Macquarie Securities has its eye on a number of stocks for “upside consensus earnings risk”. These include Bluescope Steel, Reliance Worldwide, Downer EDI, IDP Education, Beach Energy, Bapcor and Lovisa Holdings.
Macquarie sees the potential for downside risk from Cochlear, Woolworths and AGL Energy.
A number of companies issued profit warnings in the lead-up to reporting season. These include AMP, Link Administration, Orica, Ramsay Health Care, Telstra, Automotive Holdings, Nufarm and Sigma Health Care.