Earning Season

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GUEST OBSERVER
Each ‘earnings season’ or ‘profit-reporting season’ CommSec tracks all the earnings results of ASX 200 companies to obtain a comprehensive picture of the aggregate health of Corporate Australia.  
Despite some high profile exceptions, companies have generally reported solid results. All but 16 of the 139 companies produced a profit for the year to June. That is, almost 90 per cent of companies made money. Excluding BHP Billiton, aggregate profits lifted by almost 7 per cent.  
Gold, Real Estate Investment Trusts (REITs) and Health Care were some of the strongest sectors in 2015/16 together with companies linked to, or dependent on, home building.  
A record 92 per cent of full-year reporting companies elected to pay a dividend.
The Profit Reporting Season 
There is no doubt that the past year has been challenging for many companies. But that isn’t anything new. Australian companies have been living with the new realities of ‘disruption’, increased competition and low inflation for a few years now. The important point is that Australian companies continue to respond positively to the challenges. Almost 140 of Australia’s biggest companies reported full year results, and all but 16 have recorded a profit. Strip out BHP Billiton and aggregate profits are up by around 7 per cent compared with a year earlier. 
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In typical sporting parlance, it was a year of two halves. In the second half of 2015, unemployment fell, retail spending rose and the Aussie dollar eased  all serving to boost bottom-line profits. But over 2016, the dollar drifted up, the job market stalled and retail spending flattened. You can blame “Brexit” or the long election campaign, but operating conditions for companies became tougher.  
Assessing all the profit results of the major listed companies provides great insights into the health of Corporate Australia and thus the health of the economy. We are less interested in whether companies met or exceeded analyst forecasts. That says more about company guidance, the forecasting abilities of analysts and the number  of analysts providing forecasts for company earnings (in many cases just one broker ‘covers’ a stock).
The good news is that companies are making money; cash levels remain high; and companies remain super-keen to pay dividends to shareholders.  
Overall, though it is clear that Aussie companies have had to work hard in lifting revenues, they continue to achieve success in restraining costs. Low wage growth and weaker input costs such as energy assisted companies in boosting bottom-line profits. Aggregate cash levels haven’t budged much from the last reporting period in December. But as noted, companies are enthusiastic as they have ever been in paying out dividends.  
And while it has been hard work to lift revenues, Treasury Wine Estates (TWE) has shown what can be done with a re-assessment of strategy. TWE now employs a high margin strategy and it was successful in lifting revenues 19 per cent in the last financial year.  
And on the costs side, Fortescue Metals (FMG) has shown the benefits of its focus on cutting iron ore cash costs, slashing expenses by 31 per cent over 2015/16. Fortescue noted that C1 costs had been cut by 43 per cent over the financial year. And Qantas also trimmed costs by 1.4 per cent while lifting revenues by 2.4 per cent, boosting bottom-line profits. Underlying fuel costs fell by 17 per cent in 2015/16 with underlying non-fuel expenses down by 5 per cent.  
BlueScope Steel was another stand-out, continuing its amazing recovery, with profits more than doubling on the back of strategic decisions and improving industry fundamentals.  
It is wrong to say that resources companies had a poor 2015/16. Gold producers as a group actually reported a 4.4 per cent lift in profits. Demand for gold has remained firm while the gold price in Australian dollar terms flirted with record highs on a number of occasions in 2015/16. Earnings weakness was concentrated in the Diversified Metals &amp; Mining sector.  
Arguably the best performing sector in 2015/16 was Real Estate Investment Trusts – REITs or property trusts. The fundamental assets such as shops, industrial premises and offices have remained in firm demand with investors increasingly on the look-out for higher yields.  
Other solid-performing industry sectors include Health Care, Packaged Food, Broadcasting, Asset Management and Casinos &amp; Gaming. Companies linked to, or dependent on, home building and purchase also did well.  
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The Details: Full-year earnings
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CommSec has analysed all results from ASX 200 companies. Traditionally brokers or analysts focus on smaller subsets of results. And some merely focus on just whether companies have met or fallen short of “market expectations”.
Overall, 139 companies from the S&amp;P/ASX 200 reported profits for the year to June. Including all companies, profits fell 16.8 per cent over the year to $30.4 billion. But a significant distortion is imparted into the results from BHP Billiton. The mining heavyweight swung from a profit of US$1,910 million to a loss of US$6,385 million. To include BHP Billiton in the aggregate results would present an incorrect picture of the earnings season.  
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Some of the key results:
Excluding BHP Billiton, aggregate profits rose by 6.8 per cent to $36.8 billion.  
Average earnings per share rose by 1.4 per cent (ex BHP Billion, up 3.9 per cent).  
Aggregate sales were up by 3.2 per cent over the year; aggregate costs/expenses were also up 3.2 per cent.  
All but 16 companies recorded a profit for the year to June: that is, 88.5 per cent of companies recorded a profit.  
63.3 per cent of companies increased profit over the year; above the long-term average near 60 per cent.  
Aggregate cash holdings rose by 0.7 per cent to $74.2 billion.  
Adding in the 28 companies reporting half-year earnings, cash levels were up by 2.5 per cent on end  December levels.  
Aggregate dividends rose by 6.0 per cent over the year.  
 92.1 per cent of companies (128 of 139 companies) paid a dividend.  
Of companies paying a dividend, 65.6 per cent lifted dividends; 16.4 per cent maintained dividends; and 18.0 per cent of companies cut dividends.  
The Details: Half-year earnings results  
CommSec has tracked 28 companies from the ASX200 that reported earnings for the half-year to June. All but three reported a profit. That is, 89.3 per cent of companies reported a profit.  
The gap between profit and loss was closer: 57.1 per cent reported a profit.  
Cash levels fell 24.3 per cent from June 2015 to June 2016 to $24.8 billion.  
92.9 per cent of companies (26 of 28 companies) paid a dividend.  
Of companies paying a dividend, 53.8 per cent lifted dividends; 19.2 per cent maintained dividends; and 27 per cent cut dividends.  What are the implications for interest rates and investors?  
The Aussie sharemarket is slightly overvalued at present with a price-earnings ratio sitting closer to 17, above the longer-term average of 15.7. But the latest earnings results represent a tick for the sharemarket. And with the economy in decent shape, share prices have scope to track profits higher – particularly in light of the super-low interest rate environment.  
We see no need to change our long-held forecasts. We currently expect the All Ordinaries to be between 5,500- 5,700 points by end-2016 (ASX 200 probably 100 points lower) with the index lifting to 5,700-5,900 by mid-2017.  
As always, the focus of investors should be on total returns from shares, not just share prices. Global factors (that is, the US election and US interest rate hikes) may act to constrain domestic share prices in the short-term, but fundamentally Aussie companies are in good shape, making money and choosing to pay dividends. Indeed most  of the major listed companies have decided to lift or maintain dividends. The current dividend yield is around 4.2 per cent.
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<div class="column">Total returns on the Australian sharemarket – as measured by the All Ordinaries Accumulation index (XAOAI, dividends plus share price changes) – hit record highs on August 24 at 51,934 points. Currently total returns on Australian shares are up 7.4 per cent on a year ago. We expect total returns over the next 12 months to record annual growth of between 7-12 per cent. Companies have been cagey about providing guidance for the next six months. And that is understandable. Most are being challenged by the low inflation/low interest rate environment and looking at options for growth. And these options differ. Gold companies are looking to invest and expand. Industrial companies such as SEEK are looking at “aggressive” reinvestment in the business and potential acquisitions. Domino’s Pizza is looking to push the envelope further by focusing on completing deliveries in 10 minutes.
In other words, many see the best form of defence being attack. And that makes sense. Fewer companies can exercise price leadership, and competition is now very much global for many industries. The key for companies is to find a point of difference from competitors and one that customers truly value. The low inflation/low interest rate environment looks to be around for some time to come. 
Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>. Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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