Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Reporting season playbook
Despite the NSW, Victorian and South Australian lockdowns and protests that followed, the Australian share market is hitting record highs, and moving from strength to strength.
Corporates are cashed-up and are poised to deliver a dividends bonanza, starting from the big miners to the banks. Buybacks and special dividends will be a key theme as companies look to offload excess capital gained during last year’s lockdowns.
Last week Morgans released its’Reporting Season Playbook,’ which examines key strategic themes across earnings trends, mergers, lockdown impact, dividend surprise candidates, cost inflation, and resources.
The report highlights the very real concern that widespread lockdowns threaten the economic restart against the recovery in company earnings.
Resources seem to be where the smart investors are focusing their attention, supported by a surging iron ore price, a rebound in demand, supply constraints, and a rise in financial forces. However, Morgans is mindful that the sector is vulnerable to overheating. It has picked BHP (ASX: BHP), Santos (ASX: STO), OZ Minerals (ASX: OZL), Whitehaven Coal (ASX: WHC) and Ramilius Resources (ASX: RMS) as its highest-conviction stocks.
Dividends to play catch up
Morgans says “dividend ‘catch-up’ was a feature of February results after the market’s dividend-[er-share (DPS) figure fell about 30% on aggregate in 2H20. “Upside in the earnings outlook provides scope for boards to again surprise in dividends released, albeit off a higher expectations base, and pending confidence into FY22. We see scope for banks, major miners, insurers and REITS to offer upside surprise for income,” says the broker.
The key surprise and disappointment candidates in their view are:
- Compelling value – TPG Telecom (ASX:TPG), Dalrymple Bay Infrastructure (ASX:DBI)
- Dividend upside – BHP Billiton (ASX:BHP), OZ Minerals (ASX:OZL)
- COVID/Cyclical earnings risk – ResMed (ASX:RMD), Ramsay Healthcare (ASX:RHC), HUB24 (ASX:HUB)
- Counter-consensus calls – BHP Billiton (ASX:BHP), Santos (ASX:STO), TPG Telecom (ASX:TPG), Ramsay Healthcare (ASX:RHC)
Morgans says: “We think investors will benefit from a more tactical approach as the cyclical rotation builds momentum. COVID ‘exit’ stocks in Energy, Transport, Transport Infrastructure and Travel are not surprisingly amongst the last to have recovered from the pandemic.”
The reporting season in February 2021 was one of the best on record, after the number of companies that beat expectations convincingly overtook the number of misses. In fact it was done at a record margin versus recent history. A very low number of large-cap misses was a highlight. The broker expects August again to broadly be a story of stocks outperforming overly fearful expectations.
With valuations well off the recent highs, Morgans thinks there is scope for further upside at the August result. One area it suggests looking out for are positive upgrades to earnings. This reporting season should see quite a few positive earnings surprises as the market kicks off with strong momentum.
- Potential surprise candidates include: Ansell (ASX: ANN), BHP, Amcor (ASX: AMC), Sonic Healthcare (ASX: SHL), Santos.
And finally, Morgans says, “looking forward, 40% of S&P/ASX 200 Industrials are set to report 20%-plus earnings growth. Thus, a broader distribution of growth across the market reinforces our view that strong earnings growth will underpin market performance even in the absence of a further re-rating of valuations.”
With the market entering reporting season with positive earnings and price momentum, corporate returns should surprise on the upside over the next three to six months.
