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10 stocks that shone in latest profit season

Photo of Elio D'Amato By Elio D'Amato

min read

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The latest corporate reporting season has just ended. As usual the announced results are a case of the good, the bad and the ugly.

The good are the star stocks that have delivered solid earnings results and increased their dividend payouts to their investors; the bad are those that have underperformed market expectations; and the ugly are those companies that have reported losses and have little immediate prospects for earnings recovery.

Beyond the individual earnings stories there were also various macroeconomic factors at play in influencing company results over the most recent full year, and these factors will remain key earnings themes for some time.

These include the

  • impact on results of the lower Australian dollar,
  • effects of low inflation and official interest rates, and
  • negative flow-on to mining, oil and gas stocks of lower commodity and energy prices.

For some companies, these influences have been positive for results, but for others they have eroded revenue and profitability.

Modest earnings growth

Market expectations for the current reporting season were for modest earnings growth amid subdued economic conditions. By and large, that theme has held true. Historic low interest rates and moderate inflation have been positive factors for many companies, with some taking the opportunity to improve the current state of their financial health by improving their net asset position through paying down debt.

In addition, the weakening of the Australian dollar against most currencies, but primarily the US dollar, has provided strong tailwinds for companies with overseas earnings exposures.

Against this, resource, oil and gas companies have struggled in the face of declines in underlying commodity and energy prices.

Riding the lower dollar

For Australian companies with offshore operations, the lower Australian dollar has provided a positive kicker on earnings. Beneficiaries from the lower dollar included software and services company GBST Holdings, UK-based fund manager Henderson Group and biotechnology giant CSL.

It is fair to expect that other companies with substantial overseas exposures, such as hospital operator Ramsay Health Care, customer care and billing service provider Hansen Technologies and travel management solutions provider Corporate Travel Management, will see similar benefits.

It is also worth noting that while the lower currency provided an additional lift when the financials were translated back into Australian dollars, the constant currency numbers (excluding the benefits of a lower dollar) for the companies mentioned were also healthy.

A lower currency has not been a saviour for all. Global manufacturer Ansell was not able to take advantage of the lower dollar as declines in economic conditions in Europe, the Middle East and Africa, as well as weak US, Russian and Brazilian sales dragged down its overall sales performance.

Higher dividend payouts

In the current environment of record low interest rates, the sharemarket has remained a haven for investors hunting for better income returns. Investor demand for stocks paying sustainable, high dividend yields has been strong and more companies have responded to this appetite by announcing higher fully franked payouts.

Another positive theme seen in this reporting season was an increase in the number of companies paying special dividends to shareholders., Suncorp Group and Adelaide Brighton are notables to have paid special dividends.

It has been a good indicator that the managements of various companies have been confident enough to return surplus capital to shareholders.

A dividends caution note

However, a word of warning to investors is that while some companies have increased dividends from the last financial year, the dividends picture could change over the medium term. Some companies are showing caution on their outlook and guidance statements as they attempt to rein in investors’ expectations. The next six-month reporting season is always very tough on companies that fail to meet expectations. 

Income investors should also expect change as different events unfold. The Australian Prudential Regulation Authority (APRA) increasing capital requirements for financial institutions has led Commonwealth Bank of Australia and ANZ to return to the equity market to raise additional capital.

This will most likely see an end to the major banks growing dividends aggressively into the future, as they have successfully done in the past. The banks also have tightened their lending criteria and increased their interest rates on some loans, which will no doubt flow through to the bottom line in the next reporting period.

Investors in the short term have turned against the banks, with all the majors well below the highs they reached around April 2015.

Impact of lower energy and commodity prices

The mining and energy sectors have always been at the weaker side of financial health (as judged by Lincoln), with many companies exposed to excessive levels of financial risk. Continued weakness in global commodity and energy prices have not helped their cause.

In the past 12 months, the oil price, along with iron ore and nickel prices, have fallen sharply. This weakness has transitioned through to reported revenue and earnings, with junior miners and producers being hit the hardest.

Meanwhile, the interim result reported by Rio Tinto saw increased volumes produced and shipped at much reduced prices. As a result, the company flagged reduced capital expenditure from an expected US$7 billion down to US$5.5 billion. Investors should not be surprised to see further softness in the mining and energy sectors, considering the weak outlook for commodity and energy prices.

On a brighter note, the weakness will mean that producers will need to really batten down the hatches by reducing capital expenditure and focusing on cost controls, areas they may have disregarded in the past. These efficiency drives have been noticeable in some of the miners that have already reported, including OZ Minerals Limited and Newcrest.

Mining services-related businesses remain under significant pressure and this will most likely worsen in the next reporting season. Coffey International, Bradken and Mondelphous Group each reported declining revenue growth and earnings per share.

10 stocks that shone

A number of companies have reported strong earnings growth and this demonstrates that there are still many opportunities to invest in companies that not only have a strong track record, but also provide opportunities for future growth.

The table below shows 10 companies that Lincoln rates as either strong growth or income stocks. They include honey packaging company Capilano Honey, medical imaging company Capitol Health, pizza franchiser Domino’s Pizza Enterprises, funds management company Magellan Financial Group, online real estate listing company REA Group and Automotive Holdings Group.

(Editor’s note: It is very important not to take these views as investment recommendations – markets can move rapidly and any decision to invest should take be judged on your own criteria.)

Table 1: Standout stocks from profit season

ASX Code Company Lincoln Financial Health Rating EPSG (earnings per share growth) 1yr% Rev growth 1yr% Share price ($) Market cap ($m) Gross Div.Yield%
CAJ Capitol Health Strong 47.9 24.18 0.67 350.09 2.67
CSL CSL Strong 31.03 26.18 92 42,683.38 1.79
CSZ Capilano Honey Strong 104.22 40.26 17.51 150.54 3.06
DMP Domino’s Pizza Enterprises Strong 35.31 8.85 41.26 3,578.37 1.79
GBT GBST Holdings Strong 49.30 15.96 4.76 316.83 3.15
HGG Henderson Group Strong 47.32 28.16 5.82 3,855.43 3.24
REA REA Group Strong 18.95 19.54 43.96 5,790.18 2.27
SUN Suncorp Group Strong -10.13 -0.35 13.31 17,124.66 8.16
CAR Strong 3.67 32.32 9.8 2,352.80 4.94
AHG Automotive Holdings Group Strong 3.26 11.29 4.32 1,324.26 7.28

Source: Lincoln Indicators
Data as at 21 August, 2015

About the author

Elio D’Amato is CEO of Lincoln. Lincoln is Australia’s leading fundamental analysis research house and fund manager, offering intelligent sharemarket solutions.

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