In this briefing:
- Aussie Equities Reporting Season Wrap: March 2019
- GrainCorp (GNC AU): Better Late than Never Move to Get an LTAP Binding Proposal
- China – Eurozone Negative Feedback Loop.
1. Aussie Equities Reporting Season Wrap: March 2019
- Australia rallied strongly through a relatively solid reporting season, with the benchmark ASX 200 posting a strong 6% gain in the month. EPS was a little disappointing, given that only 50% of stocks that reported beat consensus estimates, with weaker-than-expected revenue the main culprit. EPS growth for FY19 was downgraded by 1.1%pts to 3.5%, but analysts left EPS growth unchanged in 10 out of 19 industry sectors. Materials, Pharmaceuticals, Consumer Services and Energy saw the largest downgrades relative to history after reporting half-year results.
- Government is having a Heavy Hand on Results. The Royal Commission in Financial Services is lifting compliance costs for the Banks, Wealth Managers and Mortgage Brokers. Similarly, the Royal Commission into Aged Care is raising the same costs for stocks in this industry. More stock-specific examples of Government intervention include AZJ, SKI, LYC and CAR (tighter credit supply from Banks).
- Cost pressures seem generally well-contained. US tariff-related cost pressures eased, but threats remain until a trade deal is negotiated with China. Compliance costs are hitting Banks, Wealth Managers, Mortgage Brokers and Aged Care stocks. However, the market seems to be more comfortable with the outlook.
- Growth Stocks Not Raising Guidance Were Hit. Growth names such as COH, CSL, TWC and TWE that delivered strong results without an upgrade to full-year earnings were dealt heavy blows. However, stocks such as WEB, which revealed new growth opportunities were rewarded handsomely.
- Good Management of Consumer-facing Stock Saves the Day. Filling slowing demand with higher-margin product offering delivered for JBH and SUL, while good performance from offshore stores came to the rescue for HVN. DHG saw weaker listings but fought this by selling higher margin products to agents. However, some stocks struggled. FBU, BLD, BAP ABC all succumbed to housing weakness.
- Grasping the Infrastructure Opportunity. CIM, MND and SVW all delivered on the back of the upswing in public and mining infrastructure spending. In contrast, LLC’s struggling Engineering Division is a good example of how a poorly managed business misses out on opportunities when industry conditions are buoyant.
- Model Portfolio Implications. We will soon update our model portfolio, but reporting season showed there is probably more upside in Resources than we thought at the end of last year. The worst seems to have passed for the Banks, but we struggle to see significant upside in earnings. We will retain a defensive bias in the portfolio, but most likely reduce it somewhat.
2. GrainCorp (GNC AU): Better Late than Never Move to Get an LTAP Binding Proposal
Graincorp Ltd A (GNC AU)‘s ability to generate shareholder value remains in doubt as LTAP enters its fourth month of due diligence. Yesterday, GrainCorp announced the first result (but overdue) of its portfolio review – the deal to sell its Australian bulk liquid terminals business to ANZ Terminals for A$350 million.
The option with the highest potential to unlock shareholder value remains the LTAP bid. The sale of the Australian bulk liquid terminals business would represent 13% of the current EV which in the absence of an LTAP bid, is unlikely to sustain GrainCorp’s current rating. However, we believe that the proposed sale is a necessary step to push LTAP towards a binding proposal.
3. China – Eurozone Negative Feedback Loop.
Historically, Germany and China have depended on exports to lead growth. With the US unwilling to play the role of consumer of last resort and being determined to limit its current account deficit, this avenue is not available anymore. In the absence of a rethink by German policy makers as to how to make German growth more self -sustaining a deflationary feedback loop is developing between the EU and China.
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