August is a big month on the local financial calendar because that’s when most ASX companies report their full-year results. According to many commentators, this year’s numbers were at best mixed and at worst raise questions about share price valuations and future growth prospects.
Yet that’s not what our database suggests.
Wren Advisers has been collecting statistics on company profits since 1998 and we now have a sample of 219 for the period ending 30 June 2016. On nearly every financial and valuation yardstick, the striking feature is not how bad the news is but but how good. Sales, earnings, profit margins and dividends are all decisively higher than FY15 and certainly don’t paint a gloomy picture of trading conditions, at least for domestically-focused companies.
So what were the key messages from the latest results?
1. Consumers are still spending
Although many companies stated that the business environment remains challenging, revenue across our sample companies was up 8.1% on last year. That’s a stunning rise given that the inflation rate is just 1.0% and is the best outcome since 2011. Among the better performing consumer stocks were Nick Scali (NCK), Webjet (WEB), Harvey Norman (HVN), Fantastic Holdings (FAN), JB Hi-Fi (JBH) and Super Retail Group (SUL) which all reported stronger-than-average sales growth and were duly rewarded by share investors.
2. Earnings per share were generally better than expected
Median earnings per share (EPS) growth for the companies in our sample was 7.3%, nowhere near the single-digit declines that some brokers were forecasting. Although the FY16 increase is lower than the previous two reporting seasons, it is comfortably above the fifteen-year average growth rate of 6.4%.
Needless to say, the news was not uniformly good and median profits in the mining sector were down 89% on last year. But many mid-sized industrials delivered stellar growth. Stocks like Nick Scali (NCK), Treasury Wine Estates (TWE), BlueScope Steel (BSL), Corporate Travel Management (CTD), Bellamy’s Australia (BAL), Greencross (GXL) and Qantas Airways (QAN) all generated EPS growth of more than 50% during FY16.
3. There was only muted applause on the stock market
Despite the generally positive profit announcements, investors reacted cautiously with 48% of companies getting a share price boost on the day of their results and 46% seeing their share price fall.
Among the biggest share price winners were Webjet (WEB) +20.5%, Ansell (ANN) +17.7%, MaxiTrans (MXI) +17.4%, Nick Scali (NCK) +15.0%, Sirtex Medical (SRX) +12.0%, Treasury Wine Estates (TWE) +11.5% and JB Hi-Fi (JBH) +9.9%.
4. Small and mid-cap stocks outperformed large-caps on most criteria
On nearly every metric, small and mid-sized companies delivered better news than the 20 largest stocks that reported in August.
| Performance of Top 20 Companies vs Mid-Small Cap Companies | ||
|---|---|---|
| Measured by: | Large | Mid-small |
| Sales growth (%) | -0.6 | 9.0 |
| Net profit (%) | -8.4 | 14.5 |
| EPS growth (%) | -8.1 | 9.8 |
| Net profit margin (%) | 10.3 | 10.0 |
| Median P/E ratio (x) | 19.7 | 10.3 |
| No. of loss makers (%) | 10.0 | 15.6 |
| No. lifted dividend (%) | 40.0 | 52.8 |
| Source: Wren Advisers | ||
5. Property trusts are delivering
Another notable trend is how well property trusts (REITs) are doing in this low interest rate environment. On an operating earnings per security basis, the best performers were APN Property Group (APD) +13.4%, SCA Property Group (SCP) +13.0%, Stockland (SGP) +11.1%, Charter Hall Group (CHC) +10.5%, Arena REIT (ARF) 8.8% and Goodman Group (GMG) +7.8%.
6. Gold stocks are swimming in cash
Although resources stocks have struggled during the past twelve months, the gold sector produced some eye-catching exceptions. For example, Northern Star Resources (NST) has $326 million of cash, no debt, a return on equity of 39% and posted a full-year profit increase of 65%. OceanaGold (OGC), Evolution Mining (EVN), Ramelius Resources (RMS), Resolute Mining (RSG) and Regis Resources (RRL) are also doing well.
7. Companies could be over-reaching to pay dividends
A record 51.8% of our sample companies lifted their dividend during FY16, the highest percentage since we first started compiling this data in 2007. The median dividend was 4.1% which is a healthy margin above prevailing cash rates.
While this will please many investors, the not-so-good news is that around 45% of dividend-paying companies increased their dividend by more than their FY16 earnings growth. This is obviously not sustainable in the long-term.
GENERAL ADVICE WARNING: Wren Advisers Pty Ltd has not taken into account your particular objectives, financial situation or needs when preparing this publication. It is therefore not financial product advice and may not be applicable to your circumstances. You should consider your circumstances and consult with a qualified adviser before making any investment decision.