Two-Thirds of Australian Companies Miss Annual Sales Targets

(Bloomberg) -- A subdued domestic economy and increasing risks from an uncertain global outlook have prompted Australian companies to take a cautious view of the year ahead.

With an economy that even Australian Prime Minister Scott Morrison conceded on Monday is “soft,” new tariffs from the U.S. taking effect on around $110 billion of Chinese imports earlier this week and Brexit looming at the end of next month, not a lot of companies are optimistic about their future.

“It’s a difficult time for corporate Australia,” said Matt Sherwood, Perpetual’s head of investment strategy in the multi-asset team. “There’s not a lot of revenue growth out there because the economy is soft and the global picture is quite clouded at the moment.”

Sales estimates were missed by 65% of the 134 companies that reported annual earnings in August, with technology the only sector to have more positive surprises than negative, according to data compiled by Bloomberg.

S&P/ASX 200 companies are expected to report net income growth in line with Asian peers over the next year, according to data compiled by Bloomberg based on forward 12-month earnings. Growth is then seen slowing to 1.7% the following year, compared with almost 14% for the MSCI Asia Pacific Index, the data shows.

“The one thematic out of this season was that there wasn’t a lot of revenue beats,” Sherwood said. “It may not be an environment that can actually deliver margin expansion.”

Still, some analysts see scope for the Australian market to move higher in the near-term as investors embrace an economy that has avoided recession for 28 consecutive years. Sectors with an offshore focus are viewed as attractive with the Australian dollar trading near its lowest in a decade.

“I like energy, I like healthcare, I like materials,” Dale Gillham, chief analyst at Wealth Within, said on Bloomberg TV on Aug. 30. “I think the next 12 months to 2-3 years on the Australian market is very, very exciting.”

Australia may also get further potential stimulus from the government and central bank which will limit its downside, Morgan Stanley equity strategist Chris Nicol wrote in an Aug. 28 note, forecasting the index to trade around 6,400.

The benchmark index is the highest-yielding developed market in Asia, which makes stocks an attractive prospect for domestic players. Dividends were a key surprise from the earnings season with 36% of large cap companies beating payout expectations, UBS analysts wrote in a Sept. 2 note.

“It is difficult as an Australian investor not to be in Australian equities given the benefits of franking and the dividend yields,” AMP Capital Senior Economist Diana Mousina said Sept. 3.

Potential concerns

China

• Blackmores: Sees challenging trading in China channels in 1H FY20
• Cleanaway: China policy changes have led to higher sorting costs, variable pricing which may impact earnings
• BHP: Warns China economy to slow modestly through rest of 2019
• A2 Milk: Shares slump on concerns earnings growth will slow in China
• Sims: Long-term growth attractive although trade war may impact activity
• Bellamy’s: Defers revenue target beyond FY21 as it waits for China registration process

Brexit

• From Pallets to Planes, Brexit Looms Over Australian Earnings
• Ansell: Seeing signs of a slowdown in Eurozone, Americas adding to uncertainty in FY20; growth targets assume no Brexit shock
• McMillan Shakespeare: To review U.K. business, which is putting pressure on margins and yields
• Brambles: Volatile trading, political instability hurting growth in U.K., Germany and France
• Corporate Travel: Lower end of target assumes Brexit, China trade war and Hong Kong demonstrations continue to year end
• Flight Centre: Continuing to monitor impacts of events including Brexit, H.K. protests
• Reliance Worldwide: Brexit a significant risk for FY20, along with material costs

Domestic

• Commonwealth Bank: RBA rate cuts in June, July to lower NIM by 4bps; reviewing capital management plans
• REA Group: Australia 1H FY20 real estate listings seen lower vs year ago
• JB Hi-Fi: Sees FY20 sales in line with analyst expectations
• Challenger: Domestic sales likely to face challenging operating conditions in FY20
• Bendigo Bank: Targeting lower cost base amid fickle sentiment, slow but steady growth in business conditions
• National Australia Bank: Sees more provisions in 2H; NIM up in 3Q amid lower wholesale costs
• Super Retail: Trading conditions subdued in early FY20
• Domain: Listing volumes weak, new listings down 20% in July
• NIB Holdings: Sees margins narrowing amid weak consumer discretionary spending
• Seven West: Looking for potential M&A given expected ad market decline in FY20
• Seek: ‘‘Volatile’’ economic conditions may impact near-term results
• Domino’s Pizza: Margin compression in ANZ hurt earnings, store opening target not met
• Medibank Private: Sees flat health insurance market volumes in FY20
• Nine Entertainment: Free-to-air revenue seen down in 1Q, recovering in 2Q; FY20 earnings growth seen matching FY19
• Origin Energy: Expects lower earnings from energy markets unit on electricity
• Costa: Trading remains challenging; mushroom pricing lower than expected
• Viva Energy: Retail fuel margins lower than average early 2H amid more competition, oil price volatility, weaker AUD
• Boral: Expect downward pressure on earnings in Australia as slowdown in residential won’t be offset by infrastructure pick up
• Inghams: Australian margins negatively hit by higher input costs; feed costs near record highs
• Caltex: Economic weakness, soft retail fuel margins impact result
• Virgin Australia: Cutting jobs, starting review of fleet and routes

Silver lining

• Rio Tinto: Announced special dividend worth $1 billion, affirmed 2019 production targets
• AMP: Plans to raise capital, sell life unit in revised deal
• Treasury Wine: Expects momentum for U.S. wine brands in China to pick up once trade relationship improves
• AGL Energy: Plans to buy back up to 5% issued shares
• Aurizon: Plans on-market share buyback up to A$300m
• Magellan: Seeking money from holders to launch new high conviction fund
• Qantas: Plans to increase international capacity; domestic flat to slightly down
• Coles: Plans special div.; fuel growth encouraging
• Star Entertainment: Domestic revenue improved in early FY20
• Fortescue: Record annual payout as iron ore prices surge
• Macquarie: Plans to raise A$1b to fund investments; expects 1H result +10% y/y
• Link Administration: Plans on-market buyback up to 10% shares; operating cash flow improved in 2H FY19

--With assistance from Sybilla Gross, Fox Hu and Matthew Burgess.

To contact the reporter on this story: Tim Smith in Sydney at tsmith58@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Rebecca Jones, Kurt Schussler

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