UBS: Worst profit season since GFC

UBS is not happy:

Reporting season was soft, with more misses than beats…

Reporting season is now over. FY19 results were generally weak, with the beat-to-miss ratio at 0.8 (well below average). Guidance was also very soft, with the upgrade-to-
downgrade ratio coming in at 0.6, the worst in five years. However, the typical stock’s price bounced after reporting, despite materially negative FY20E earnings revisions to more than half of the ASX 100 (42% in net terms).

…and broad-based weakness in FY20E EPS revisions

ASX 100 FY20 EPS was revised down by 2.5% to a growth rate of 6.3% in reporting season (albeit still greater than the 1.3% growth in FY19). There was broad-based weakness, with Industrials ex-Financials FY20E EPS revised down 2.4% to a growth rate of +8.4%, Resources revised down 4.2% to a growth rate of +9.2%, and Financials revised down 1.7% to a growth rate of +3.7%. However, we think consensus estimates for the Financials remain too optimistic, and if ex-Financials EPS is revised down modestly, actual EPS growth could come in at just c.3% in FY20E (Figure 11). Nonetheless, ultra-low rates are overshadowing lacklustre growth by supporting PEs.

Weeoo, weeoo, weeoo. Via the Pascometer:

Years of begrudging wage rises and screwing the last few cents out of suppliers have come back to bite corporate Australia where it hurts: On the bottom line.

The ASX reporting season that finished on Friday showed the financial year to be the worst since the GFC.

Even with a booming resources sector and strong healthcare stocks, the impact of six years of real take-home wages going backwards has caught up with company profits.

It has been par for the course for management to gain a share price sugar hit – and executive bonuses – by announcing a new round of cost-cutting and holding down wages.

The story of 2018-19, though, is that the short-sighted formula ends up strangling consumption growth and, consequently, profit growth.

The reporting season scorecard kept by AMP Capital chief economist Shane Oliver shows the biggest percentage of companies reporting profit falls in the June half in a decade.

Of ASX-listed companies with a June 30 balance date, 42 per cent reported a worse result than the previous corresponding period – the highest such rate since 2009.

The 58 per cent of companies reporting higher profits compares with 77 per cent at the same time last year.

And, outside resources and healthcare, the companies that did manage a higher profit didn’t do so by much.

Combining the June and December halves for the financial year total also gives the worst result since 2008-09 – another factor that will be reflected in Wednesday’s national accounts.

The weaker profits have inevitably flowed on to dividends. Dr Oliver reports only 49 per cent of companies have increased their dividends, well below the longer-term norm of 62 per cent.

“And 28 per cent of companies have cut their dividends, which is the most in the last seven years, suggesting greater caution,” he says.

There were some spectacular individual company dividend increases, notably in the resources sector, but falling commodity prices raise questions about their sustainability.

Symptomatic of the gap between the successful big resources companies and the rest of the economy, though, was BHP reporting a fat profit and dividend increase, but also boasting about how it had cut costs by 50 per cent.

In part, that means the good resources times are not trickling down to contractors and workers the way they used to.

What did you think would happen when you campaigned for endless floods of cheap foreign labour, Pascometer?