Brokers are finding the profit results pretty disappointing. The downgrades were not enough, it seems. The two speed economy is showing up in the earnings forecasts. And with resources no self evident safehaven, finding value is not easy. Macquarie has this to say:
This week has seen a lift in the DecHY11 growth forecast following some better than expected profit results. The overall market’s Dec HY11 EPSg forecast now stands at -2.8% (vs.-4% pre reporting season forecast), with the Dec HY11 respective sector EPSg forecasts all now showing a slight lift against the pre reporting season expectation, with Banks the notable exception.
Again we would emphasise that disappointing profit results this reporting period, given the significant and broadly spread downgrades that had already occurred across the months leading to this season analysis, would have been nothing short of alarming.
The problem is in margins. Revenue growth has been solid at (+4.8% pcp) but companies are dealing with cost pressures. According to Goldman, EBITDA fell to -1.7% on pcp despite solid outcomes from Wesfarmers and Brambles. Goldman says:
This is the second consecutive half of negative EBITDA growth and reflects ongoing margin contraction (-73 bp vs. pcp across the sample). We attribute this to increasing structural headwinds companies have had to navigate over the last 12 months (currency, weak consumer and housing markets). Margins are now only slightly ahead of GFC lows. D&A and interest costs rise, partially offset by a lower tax rate D&A increased 5% on pcp but remains at ~3% as a proportion of sales (vs. historical average ~4.5%); a result of the reduced capex spend we saw through the 2008 downturn. Net interest costs rose for the first time since 2009 (+10% on pcp), albeit off a low base (~25% below 2008 peak) as companies rediscover gearing. The average effective tax rate decreased ~68 bp to 26.7%.
Goldman estimates that the margin contraction, combined with higher interest costs has resulted in after tax profits declining 5.2% on pcp (second consecutive 6 month decline on pcp) reinforcing the current difficult operating environment facing companies. Dividends (-4% on pcp) tracked profits down with payout ratios remaining broadly flat. Steel and the consumer have been particularly hit.
As ever, it is the next profits that matter and the extent to which the downgrades have been priced in. Macquarie says this:
While the profit results for 1H12 are critical check points for investors, as again we highlighted in our pre reporting season research, the critical issue for investors to note was not the HY results, but rather the revision trend for 2H12 forecasts post these results. It is therefore most notable that despite the slight upgrades to the DecHY12 EPSg forecasts, the Jun HY12 EPSg forecast for the market and all sectors (again notably excepting banks), have been downgraded. Indeed the net effect of these changes are that the FY12 EPS forecast for the market and all sectors are lower today than the pre reporting season forecast AND are lower at this week’s end compared with the forecasts as they stood at last week’s end.
Plenty of gloom. The question is when is it overdone?