Earnings expectations for Australia’s listed companies are weakening, according to analysts.
Deutsche Bank says earnings growth held up well during financial year 2014 and look like ending about 7% but, on the eve of companies reporting full year results to the ASX, the outlook for the current financial year has already weakened.
“The earnings revision ratio has fallen back to around average levels,” says Deutsche Bank in its Australian Equity Strategy update.
Growth for the current financial year 2015 has already been cut to 6.5% just as the year starts.
This chart shows earnings expectations heading the wrong way:
Leighton Holdings, Australia’s largest contracting group, today reported a 20% fall in first half net profits to $291.3 million from $366.2 million in the first half of 2013.
Deutsche Bank says 63% of industries have seen weakened earnings per share momentum.
“Most of the deteriorating earnings momentum has been driven by the cyclical parts of the market,” Deutsche Bank says.
“The resources and cyclical industrials sectors have recorded significant decreases in their earnings revision ratios from reasonable levels of early 2014.
“Weaker commodity prices are a key reason for the softening in market earnings. The decline in iron ore prices, partly linked to the steam coming out of the Chinese property market, has been particularly tough on resource earnings.”
However, Deutsche Bank analysts believe these companies could potentially surprise the market in the August reporting season:
- Aurizon: Coal volumes are strong, and could surprise with cost control and efficiency programs.
- BHP and Rio Tinto: Expected to surprise the market on lower costs and better cash flow generation that brings down debt. Both companies likely to have brought capex down quicker than targeted.
- Commonwealth Bank: Earnings could surprise from bad debts coming in below consensus expectations.
- Echo Entertainment: Could surprise to the upside given strong domestic top-line growth and good cost control. The top-line growth has been driven by the roll-out of regulatory concessions in Queensland and the re-launch of the loyalty program.
- Federation Centres: Likely to quantify its cost-out program, which could prompt FY15 guidance that is above market.
- James Hardie: Positive Could surprise with better margins and stronger volumes as market share gains continue.
- Orora: Could surprise to the upside given the cost reduction initiatives, new container board mill ramp-up, and growth in the North American Packaging Distribution business.
- Seek: Domestic volumes are growing as the company gains share, and price gains continue. Potential for positive guidance into FY15 as the domestic business continues to cycle.
- Suncorp and IAG: A strong half for domestic insurers, thanks to benign cat costs, narrowing credit spreads and strong reserve releases.
- WorleyParsons: Positive Consensus expectations are towards the lower end of WOR’s guidance range, but could be positively surprised from higher revenues and cost-out progress.
And among those with a negative outlook:
- Amcor: Could disappoint given soft beverage volumes in North America (late and cool summer as well as company’s exposure to CSDs and underperforming customers) and lower Western European tobacco packaging volumes. Recent AUD appreciation will also weigh on earnings.
- Arrium: Lower grade iron ore has been attracting a larger discount in the softer price environment, which could hurt earnings.
- Computershare: Company guidance for FY15 could be below current consensus, due to conservatism and unwillingness to bank on more strong growth in M&A activity.
- Resmed: Revenues are likely to impress the market, but the gross margin could disappoint, as the company may have cut prices more than expected to gain market share.