Reporting Season Review

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
02 March 2021, 11:10 AM
Sectors Covered:
Equity Strategy and Quant

  • A significant number of results beating market expectations entrench the post-COVID earnings recovery, however share price reactions were lacklustre (Beats flat, Misses down 12%), suggesting the good news was priced in.
  • While upgrades were largely expected, COVID 'losers' (travel, financials, media) were the winners from February. Confirming our belief that the reflation trade has further to run.
  • After going missing in 2020, dividends made a big return in February. With key sectors Banks, Resources and Insurers providing positive income surprise.

Earnings continue to defy expectations but largely in the price

February results confirmed a better-than-expected earnings recovery as a stunning 45% of ASX50 stocks beat market expectations (vs 18% 5-year average). Of the 205 companies we monitor, FY21 earnings were revised up 2.8%. This figure comes on the back of 10.2% upgrades from the previous reporting season (August 2020).

However, share price reactions were far more muted (Beats flat +0.1% since result), which suggests to us that:

  1. Given the ASX 200 is nearly back at the Feb 2020 peak, valuations have mostly priced in the upgrades;
  2. Demand has been brought forward and will likely taper off quickly as the generous government handouts end - we note very few companies (27%) have provided earnings guidance; and
  3. A broad reflationary rotation has prompted profit-taking in expensive COVID-19 winners.

Market positioning confirms a reflationary tilt

February returns were led by the pandemic losers: Banks (5.6%), Diversified Financials (3.9%), Energy (2.4%), Travel (13.7%), Consumer Services and Gaming (4.3%), Materials (7.3%).

Despite decent results COVID-19 winners were used as funding sources for the reflationary exposures: Retail (-7.6%), Technology (-8.9%), Online Classifieds (-5.1%).

Our base case remains that the pace of the vaccine rollout will support a further rebound in economic activity and recovery in corporate earnings.

Taking the current US and UK vaccination rate (0.5 persons per 100) as a baseline, herd immunity could be achieved in Australia by October (view further analysis in full report) which could provide further upside to earnings estimates.

Dividends back with a bang as corporate confidence returns

After going MIA in 2020, dividends made a big return in February.

Having already been revised up 8.1% from August, dividends per share (DPS) was revised up a further 4.6% over the month.

Of the companies that reported 57% declared a dividend, a step up from 53% in August.

And as a further sign of corporate confidence, 43% of those are paying a higher interim dividend than the full year in August.

On the back of surging commodity prices, miners led the way with FY21 forecast yields up: BHP 5.1%, RIO 4.9% and FMG 12.5%.

Banks also saw a strong lift in dividends on lower asset impairment charges: Westpac 5.5%, ANZ 5.4%, NAB 4.9% and CBA 3.9%.

Other notable themes

  1. Offshore earners reporting better than expected results more than offsetting currency headwinds
  2. Improved operating leverage to provide further upside as companies streamline operations
  3. Company earnings making good progress towards normal

Find out more

Download Reporting Season Review

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.

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