Reporting season wrap – week 2 – guidance withdrawn

During the month of August, most ASX listed companies report their earnings for the financial year. It’s an anxious time for both company management and investors. Any unexpected variation in earnings whether it be better or worse than expectations can cause a huge move in share prices. COVID-19 is no exception. It hit markets like a tidal wave shutting down economies and bringing the world to a complete standstill. Despite everyone in lockdown, certain sectors have managed to pull through relatively unscathed, while others were hit hard with falling earnings, slashed dividends, and an uncertain outlook.

The story so far…

As expected, earnings season has been all things COVI-19. The pandemic split the ASX into two: Coronavirus Beneficiaries and Coronavirus Victims.

• Beneficiaries – Mining, consumer discretionary, gold, e-commerce, BNPL, Safety equipment providers, Biomedical companies – Vaccine, Technology.
• Victims – Retail – Travel and Flight related, Bricks and mortar, Landlords, Banks, Oil and Gas, Gambling and Entertainment.

Reporting season is only into the second week, so it is early days. The best performing stock has been Treasury Wine Estates (ASX:TWE) on an improving Chinese trade channel (until this morning’s trading halt at least). Shares have run not only on a good result, but on the back of improving sales. The laggard, AGL Energy (ASX:AGL) falling on the back of lower electricity prices due to COVID-19.

A summary of the reporting season to date is below, with the key being that a Beat or Miss is determined by consensus expectations, not the companies own forecasts.

We will provide commentary on select stocks during reporting season, the first three are as follows:

Altium (ASX:ALU) – Shares were up almost 1% on a quality result. EBITDA rose 13.5% to $64.5m which was a touch above expectations. Revenue up 10.1% to $189m. The only COVID-19 affect was felt by delayed payments and providing an extension of time to pay for some customers. This brought operating cash flow down by 18% to FY 2020 to US$56.5 million. Dividend up 15% to 39c. Highlights of the year include; Record growth of 17% in its subscription base to 51,006 subscribers, 5,000 active users and Altium released Altium Designer 20, making Altium Designer best in class in almost every aspect of PCB design software. Altium’s CEO, Aram Mirkazemi, was happy with the result given the volatile market conditions. He said “Altium achieved a strong performance in fiscal 2020 having exceeded its 50,000 subscriber target and delivered solid revenue growth.” No guidance was provided but Altium remains confident it can gain market dominance with US$500 million in revenue and 100,000 subscribers by 2025.

GWA Group (ASX:GWA) – Shares down 11% in early trade on what looks like an gloomy outlook. In a challenging year with significant uncertainty, the company’s top line was hit by lower construction activity, merchant destocking in the first half, COVID-19 pandemic and lower than expected merchant restocking in the last quarter of the year. Normalised Group EBIT from Continuing Operations was down 8% to $71.8m, Net Profit After Tax for the period was $43.9 million and the final dividend 3.5 cents per share, full-year dividend 11.5 cents. The expected COVID-19 impact will hit Group revenue by $22.2 million and Group EBIT by approximately $8.6 million in FY20. GWA outlook statement didn’t impress either with lead indicators are pointing to a reduction in GWA’s addressable market for FY21, driven predominantly by the residential new build segment. Other sectors are expected to be less pronounced.

BHP Group Ltd (ASX:BHP): It rare that a $9.06 billion profit underwhelms, but consensus targets for BHP Group Ltd (ASX:BHP) underlying profit were 4% higher at $9.42 billion. The result was 1% lower than 2019 with some cost increases and COVID-19 related slowdowns impacting the business. It was also impacted by the devaluation of their Cerro Colorado mine and the cancellation of power contracts in Chile to be replaced with renewable energy generation.  The dividend was cut by 10% to $1.20 per share, but capital returns remain a key focus as the company’s cash flow generation remains strong, free cash flow was $8.1 billion. The strength of BHP is reiterated every time it reports, with profit margins of 53% and some of the lowest cost commodity divisions in the world. For instance, BHPs cost of iron ore production is just $12.63 per tonne, compared to current prices exceeding $100; the unit commands 64% of the business’s earnings. Interestingly, a $1 move in the iron ore price represents $233 million in earnings for BHP. The copper division, which represents 19%, remains strong as global demand for electric vehicles and batteries ensures demand will remain strong for the foreseeable future, BHPs cost of $1.01 compares favourably to current $2.80 prices. Management flagged the decision to exit the production of coal through a potential sale of demerger and highlighted huge efficiencies coming from the rollout of machine learning and automated work sites around the world. Who said mining companies couldn’t be technology leaders?

What to watch for the rest of the week:

• Wednesday – Boral, Brambles, CSL and Tabcorp
• Thursday – ASX, Origin Energy, Qantas, Santos, Wesfarmers

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.