As reporting season kicks off, investors and analysts alike turn their attention to a critical period of corporate transparency. As ASX-listed companies disclose their earnings, our analysts identify key tactical calls around August results, where stock price reactions are flagged to surprise or disappoint.
To help you navigate this reporting season, our team of analysts have handpicked a list of key stocks in the Bank and Fund Manager space that are worth keeping an eye on.
Banks
Insight from Nathan Lead – Senior Analyst
Bank stocks have outpaced broader market performance recently. However, the high share prices do not seem fully supported by projected Return on Equity (ROE) and Dividend per Share (DPS) growth, which are expected to remain relatively flat over the coming years.
The recent share price performance has largely been driven by an increase in key valuation multiples (Price-to-Earnings (P/E) and Price-to-Book Value (PBV)); CBA’s multiples are especially elevated, trading well above historical norms and peers at about 23x P/E and 3x PBV. Meanwhile, cash dividend yields have compressed significantly, making banks less attractive as an income investment; CBA stands out again given its yield has compressed to about 3.4%. Major domestic banks also appear overvalued compared to global peers, based on the relationship between PBV and Return on Equity.; once again CBA’s valuation appears particularly stretched.
In summary, while bank stocks have performed well, their elevated prices may not be justified by future financial prospects and seem high relative to both domestic and international standards.
Commonwealth Bank of Australia
ASX: CBA | REDUCE | 14 August 2024
The REDUCE rating we apply to CBA is not a recommendation for complete divestment; rather, it is a directive to reduce overweight positions. Given current valuations and earnings outlook, it is difficult to foresee substantial returns from investments in CBA over the next 3-5 years. Loan growth is expected to strengthen, and the decline in Net Interest Margin (NIM) may moderate. However, cost pressures are anticipated from increased amortisation and staff expenses and upward normalisation of credit impairment charges.
Asset quality remains resilient, with low write-offs and limited provisioning growth potentially seeing credit impairment expenses being lower than consensus estimates.
For 2H24, we project pre-provision operating profit and Cash EPS to be 3% lower than 1H24, and the DPS remain flat on pcp at $2.40 per share with an increasing payout ratio.
Capital management will be a focus, with CBA undertaking only minimal share buyback activity ($130 million in 2H24) to distribute excess capital.
Key results to watch:
Loan Growth and NIM: Loan growth is expected to strengthen, while the decline in Net Interest Margin (NIM) is anticipated to moderate.
Cost Growth: An increase in costs is projected, primarily due to higher amortisation and staff expenses.
Asset Quality: Asset quality is likely to remain resilient, with low write-offs and minimal provisioning growth, potentially surpassing consensus expectations.
Capital Management: Watch for how CBA plans to distribute excess capital, given it spent only $130 million on share buybacks in 2H24.
Judo Capital aka Judo Bank
There’s more positive outlook on the small-cap JDO, which specialise in SME-focused business lending. As its ROE improves with earnings growth, we anticipate so too should its Price-to-Book Value. The company is reinvesting its earnings rather than paying dividends, which should result in high single-digit to low double-digit compound annual Book Value per share growth. Although JDO is a higher risk investment proposition than the major banks given it is a challenger bank, it offers the potential for higher returns. JDO presents a compelling opportunity if it meets its at-scale targets, potentially becoming Australia's fastest-growing, most efficient, and profitable bank. Current prices suggest a potential internal rate of return (IRR) of approximately 13% per annum over the next five years. For FY24, the projected profit before tax (PBT) is $107-112 million with gross loans of $10.5-10.7 billion. FY25 PBT is expected to rise to $123-129 million, reflecting about 15% growth.
Key results to watch:
Growth and Efficiency: If the company meets its ambitious targets, it could become the fastest-growing, most efficient, and most profitable bank in Australia.
Stock Valuation: Achieving its at-scale targets could make the stock worth around $2.50 per share, thanks to increased book value per share and a higher price-to-book ratio.
Investment Potential: Purchasing the stock at current prices could offer an estimated annual return of about 13% over the next five years.
Fund Managers | Platforms
Insights from Scott Murdoch – Senior Analyst
GQG Partners
ASX: GQG | ADD | 16 August 2024
Whilst current market conditions are volatile, we expect a positive reaction to GQG’s results. Key investment highlights include a potentially significant performance fee boost, notable operating leverage in the half, and impressive funds under management (FUM) growth of 29%, which supports a strong outlook. Additionally, diversification through the Private Capital Solutions business adds value long-term. Key financial expectations are for management fees up 49% compared to the previous period, and operating profit to increase by 65% including our performance fee expectations (57% excluding performance fees).
Key Results to watch:
Performance fee kicker: We think GQG can report above market expectations, with a kicker from performance fees.
Operating Leverage: Margin improvement is expected on the back of strong revenue growth.
Strong FUM growth: Funds under management grew by 29% in the last half, setting up a solid outlook.
Diversification: Expansion through the new Private Capital Solutions segment to provide diversification.
Want to unlock more investment insights? Our Reporting Season Playbook previews the upcoming results for the period to June 2024 of 155 stocks under coverage. In the report, we call out positive and negative surprise candidates and present an overview of the macroeconomic backdrop.
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