Goldman Sachs wasn’t impressed with the latest ASX200 company reporting season.
Analysts Matthew Ross, Bill Zu and Jie Ma called the results “one of the weakest statistically in our 22-year data set”.
The trio said that downgrades to earnings per share (EPS) estimates outnumbered upgrades by a ratio of 2:1, above the historical multiple of 1.6 times.
And of the 15 best performing stocks, the average EPS upgrade for the 2018 financial year was only 1.8%. Even then, “the vast majority of names that performed strongly post-results were situations where the market was too bearish heading into earnings”.
Despite a notable dividend cut from Telstra, the Goldman team said that ASX200 companies were still more than happy to return money to shareholders, with the amount of cash spent on dividends 10% higher than the decade average:
“Over 10-years, dividends are 43% higher, while capex is 5% lower and free cash ﬂow margins are at record levels,” the analysts said.
Citing that reduced capital expenditure figure, Goldman said that the average age of fixed assets held by industrials companies is now 2.5 years higher than in 2009.
The industrials sector makes up around 8% of the ASX200 by market capitalisation, and includes companies such as Qantas and Transurban.
Goldman said that under-utilisation had delayed the need for capital ugrades, which has led to record free cash flow for non-financial companies.
But the analysts warned of headwinds to growth as companies are forced to either replace old machinery or incur higher operating costs from using old equipment.
So while companies used the latest reporting season to upgrade their forecasts for capital expenditure, the Goldman team questioned the potential return from those investments.
They noted that guidance for capex increased by $3 billion, but suggested it would take a whopping $125 billion to restore the quality of the market’s asset base back to 2009 levels.
“A number of investment initiatives announced during results appear aimed at defending existing positions or offsetting rising cost bases, suggesting incremental returns will be below the markets current return on invested capital (ROIC),” they said.
The analysts also said that in recent years, ASX200 companies have gotten creative in thinking of ways to boost earnings growth.
That includes $250 billion worth of once-off charges since 2009, which on average is 30% of net profits per year. That fell to 9% this year, which suggests that companies have less “wiggle room” to adjust their performance metrics.
While one-off write-downs don’t affect underlying cash-flow, the analysts said they allow companies to artificially boost their future profits by reducing annual depreciation expenses.
And if companies make the same profit off a lower asset base post-writedown, it allows management to inflate return on assets even if profit doesn’t change.
Add it all up, and it’s clear that the Goldman equities team has adopted a bearish outlook for the 2018 financial year.
There’s no doubt that right now, Australian stocks are struggling to gain traction with investors.
At its current level below 5,700, the ASX is beneath the level that it started the year at and has so far underperformed its global peers.
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