Reporting Season Review: August 2021
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 06 September 2021, 12:00 PM
- Sectors Covered:
- Equity Strategy and Quant
- August rounded out another successful reporting period for listed companies boosted by resilient demand and healthy balance sheets. Investors were treated to a record +$38bn in dividends despite the near-term uncertainty, signalling confidence in the post-pandemic economy.
- The ASX200 was up another 1.9% in August, marking 11 straight months of positive returns. However, the headline result masks one of the most volatile results season we have witnessed in a while with average positive reactions up 4.1% while average negative reactions were down 3.8%, underscoring the need for investors to be selective in market exposure.
- Our best ideas from reporting season include CTD, STO, ANN, TCL, TAH, RWC, TPG, NXT, LOV and HUB.
Another solid season with the market poised to look through FY22
August was another very strong season, with Beats strongly outnumbering Misses. While “Beats” reduced compared to the impressive February 1H21 season – particularly for large-caps – stocks disappointing expectations remain close to record lows.
Only a small cohort of companies (16%) provided quantitative guidance, reflecting the challenging outlook. AGM season could again prove critical in setting the tone for the important Christmas period. Overall, FY22 profit (EPS) expectations for ASX200 Industrials stocks reporting in August were trimmed by 1.3%, with this cohort now expected to grow EPS by a solid ~9.7% in FY22.
The easing in profit expectations did disagree with the 5% surge in ASX Industrials index through August, stretching the 12-mf earnings multiple to 22.9x, its most exuberant level since February. We need to look to FY23 multiples to see better value in this segment, so it’s clear to us that investors continue to look through another ‘transitional year’ for the economy and corporate earnings.
Domestic cyclicals again featured strongly similar to recent seasons, with Insurers (SUN, QBE), Fund Managers (PNI, PPT) and Industrials (IPH, BSL) notable segments of surprise.
Keeping a strong foothold on our cyclical tilt
Uncertainty surrounding the timing of reopening has resulted in analysts taking a conservative approach to medium-term earnings estimates (FY23 and beyond), as has been the case since the onset of the pandemic.
We think this dynamic will ultimately lead to upgraded forecasts once the path out becomes clear. Key to our pro-cyclical call is: 1) broad cross-section of strong FY22 earnings growth; 2) cyclical valuations sit near the 5-year average; and 3) medium-term earnings forecasts remain unchanged over the past 12 months.
Our preferred cyclical exposures include ANN, RWC, LOV, TYR, CTD, and STO.
Yield story not over yet – potential for further surprises
A record +$38bn in dividends declared in August 2021 is up from the prior record of $27bn set in August 2019, and dominated season headlines.
This was led by ~$17bn in iron ore dividends (BHP+RIO+FMG), but we’re even more encouraged by the recovery in dividends declared by the traditional “Industrials” (ex Resources, Utilities and REITs).
Industrials' proportion of growing dividends recovered strongly to 68%, in line with the long-term average. Of this cohort, 23 companies reinstated their dividends in August, with large-caps COH, BEN, CGF, TAH, IAG, SEK and RHC the most notable.
CBA, NAB, ANZ, WOW, TLS, SUN, AMC, LNK, BSL and SGM announced stock buybacks. RIO, SUN, BSL, S32, and OZL announced special dividends. Corporate balance sheets are in good shape, and payout ratios at ~72% remain below the pre-pandemic average of ~75%, so we see the potential for further capital management surprise in coming periods.
Other notable themes discussed
The sell-off in resources creates opportunities and we outline our tactics for an eventual resumption of momentum in the sector.
Cost inflation featured widely and we look at why some companies are better placed than others to combat rising prices.
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