The End of Earning Downgrade?

by Raymond Chan

The end of earnings downgrade?
We have a reasonable reporting season with over 70% of companies reported higher profit. While there were plenty of companies meeting or exceeding market expectation, the expectation was trimmed going into the reporting seasons.
Back in August reporting season, the market was expecting +6.2% earning growth for 2015. However, this was followed by big earning downgrades between October and December. The 2015 earning growth was then slashed down from +6.2% to 0%, which explained a sharp 6% fall in ASX 200 from 5,500 to 5,122 between October and December.
Why such a dramatic downgrade? Latte with Ray thought it was due to the concerns of economic slowdown in Australia. As you know, by Jan 2015, Australian Yield Curve did turn from positive into negative. By definition, a sustained period of yield curve being negative signaling higher risk of recessions. Fortunately, by early Feb, the RBA decided to cut the office rate from 2.5% to 2.25%. This immediately pushed the yield curve back to NORMAL.
While the yield curve is now back in normal, we have yet to see the end of earning downgrades. As of today, the 2015 earning growth is down to -0.5% but the magnitude of downgrade is far less than back in October. In absence of earning upgrades, the stock market is running higher on (1) lower bond yield (interest rate) and (2) PE expansion. If ASX 200 is to break the 6,000 marks, we need to see consensus upgrade soon.
What caught our eyes during the Reporting Seasons?
MQG … one of the best results (trading updates) for this reporting seasons. MQG’s 3Q15 update highlights ongoing momentum across the Group, particularly as capital markets businesses benefit from improved trading conditions. We still see upside risks to FY15 growth guidance of 10-20%, with this momentum likely to flow into FY16, in our view, supported by the current low interest rate environment. Happy to maintain our overweight.
Heathscope (HSO) … 1H15 underlying results were solid and in line, underpinned by strong divisional performances in the core Hospital division and International Pathology, with ongoing operating efficiencies helping to expand margins and drive strong cash conversion. We continue to view HSO as a core holding, with the outlook reaffirmed and further upside expected as additional capacity comes on line and efficiencies realised.
IPH - Asia was the standout of its first result as a listed company driving group EBITDA up 26% on the pcp. With (1) likely acquisitions around the corner (next 6 to 12 months), (2) FX tailwinds and (3) probable index inclusion we believe there are numerous catalysts to drive IPH’s share price in the near term.
QBE- FY14 insurance margin missed guidance due to a larger-than-expected negative discount rate movement. However, the result showed further signs of a turn-around, with no adverse claims development and a strengthened balance sheet. While FY15 guidance is below our expectation, it appears based on relatively conservative assumptions.
BHP -1H15 underlying earnings of US$5.4b were around 10% above our and Bloomberg consensus estimates. The decrease in capex to US$6.4b in 1H15 compared to US$7.9b in 1H14 was accompanied by a reduction in gearing to 22.4%, from 23.9% at 31 December 2013. A dividend of US$0.62 is 5% greater than the pcp and we expect was broadly in line with market expectations. A big cut in capex will mean surplus cashflow. 


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