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Boomsday scenario: Earnings season set to defy COVID doom

But while banks and miners celebrate the boom time, their momentum is expected to slow down a touch. “Australia’s run of positive earnings per share (EPS) revisions – the best in decades – is in its 11th month. The key drivers were banks and resources; but both are cyclicals and the cycle is slowing,” according to the Macquarie Equities team.

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It will be hard to apply these broad brush strokes to the rest of the companies reporting over the next month with forecasts expected to be buffeted by lockdown uncertainty, Airlie Australian Share Fund’s portfolio manager Emma Fisher says.

“Last year we saw corporates unwilling to put any earnings expectation out there. I think we’re going to see that come back, given the lockdowns. Companies will take the free pass not to anchor themselves to any expectations,” she says.

Expectations will be particularly hard to manage in the retail sector, which has already provided some unexpected casualties.

Online retailer Kogan’s financial update will offer a glimpse into the perils for those betting that digital native retailers can do no wrong in the current environment. Kogan shocked investors recently with a downgrade thanks to an inventory glut and logistics problems.

Meanwhile, the alleged retail dinosaur Harvey Norman is soaring higher than a Pterodactyl as consumers channel their collective $65 billion budget usually devoted to overseas travel each year to home comforts.

Temple & Webster’s strong results this week has made Macquarie even more optimistic about Harvey Norman’s upcoming results, thanks to the domestic boom in home spending for the June half year.

A big focus will be on Harvey Norman’s outlook to see what further upside may come from the pandemic carnage. “With the lockdown in NSW extended for a further month, commentary around current trading will be of focus,” Macquarie says.

Margins call

Long-term changes to profit margins pre and post-COVID are the other two big trends that will be closely watched this earnings season.

“Our analysis of margins pre and post-COVID shows a bias for lower margins across industrials and consumer staples and a bias for higher margins across technology and materials,” says Wilson Equity Research.

“Reporting season will likely see consensus margin forecasts adjusted as management teams provide more colour on costs expectations.”

Margins and dividends aside, for many companies this earnings season will also be about more than just the financial numbers.

The only number that matters for Kerry Stokes-controlled Boral is what price it thinks it can get for its US fly ash business. The business is expected to fetch a price of up to $1.5 billion and investors will be hoping for the final price tag to land in that territory when Boral provides an update at its full year results.

However, the final price won’t move the dial for what is now a multibillion-dollar cash box with an Australian building products business attached. The $7.40 a share offer from Stokes’ Seven Group expired last week and its 69.6 per cent stake ensures the remaining investors are now subject to the billionaire’s agenda.

Seven Group Holdings chairman Kerry Stokes is a happy man after his strategy to snare Boral succeeded.

Seven Group Holdings chairman Kerry Stokes is a happy man after his strategy to snare Boral succeeded.Credit:Alex Ellinghausen

Meanwhile, online property conveyancer PEXA deserves some of the spotlight this month as well, if for no other reason than the fact that this will be the first time its management will front investors since its tepid float in July. It was the biggest IPO in years, based on both its $3 billion valuation and the cash raised from fresh investors, but the stock has consistently traded below its $17.13 IPO price.

Given that it only floated last month, the real interest is in how PEXA chief executive Glenn King sells the expansion opportunities.

It will need a compelling story to justify the high earnings multiple which yielded a $3 billion valuation on revenue which is expected to reach $218 million for the financial year just ended. This is a business that has limited room to grow locally given it already controls 80 per cent of the online conveyancing market in Australia.

Investors will also be focused on the near-term outlook of another recent market debutant, grocery giant Woolworths’ pubs and pokies spin-off Endeavour. Having now started life as an independent entity, the upside of the viral effects of home liquor sales for Endeavour is being drowned out by the closure of the rivers of gold provided by the thousands of poker machines it owns.

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“While we are attracted to the retail business, the near-term outlook for hotels remains highly uncertain and at risk of further COVID-related lockdowns,” says Morgans analyst Alex Lu.

However, upbeat commentary on its expansion plans could be the “X-factor” for the $11 billion group.

Endeavour’s recent pub acquisition, the $40 million Terrey Hills Tavern in Sydney’s northern beaches – with 20 poker machine licences – could be an indicator of how aggressive the company can be on the pokies front now that it is freed of the ESG (environmental social and governance) concerns of family-friendly Woolies.

But the award for the most compelling result of the season would no doubt go to the James Packer-blighted Crown Resorts.

The actual results will be a sideshow to the existential issues facing the company.

Will executive chairman Helen Coonan survive the weeks before the casino operator reports its full year results? What will its new chief executive Steve McCann have to say about the possibility of a Crown breakup, or losing its casino licence in Melbourne, or whether the $61 million tax rort payment will be anywhere near adequate?

The only certainty is that Packer will be hearing the answers the same time as every other Crown shareholder, for a change.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.

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