Reporting season: Not as bad as it looks
ASX 200 earnings expectations have fallen 22% over the past six months. In addition to large declines in earnings in FY20 in reaction to the COVID-19 economic downturn, analysts are forecasting a very slow 3-4 year recovery to pre-COVID-19 levels. In this note we argue that this is unduly negative.
Themes from the FY20 reporting season included:
- Flat top-line growth: top 20 revenue growth was positive, up 1.0% YoY, with consumer-related businesses resilient, but energy, property and infrastructure hit by COVID-19 restrictions.
- Large provisioning: dominated by major bank collective provisions of $6.3 billion, companies made conservative provisions against potential credit losses and other costs from COVID-19. Excluding the bank provisions, a 15% profit decline for the Top 20 shrinks to -6% YoY.
- Capital preservation: $33 billion in capital raisings (just ~20% of GFC levels), 18% dividend cuts and credit-line drawdowns protected balance sheets. We estimate 80-90% of credit drawdowns have already been repaid. Many companies are now under-geared and set for growth.
- Current business commentary generally positive: led by the hard goods retailers, current activity commentary was generally positive. That said, given heightened uncertainty, management rarely gave FY21 guidance.
Consistent with current commentary, consumer indicators are generally positive, whilst housing is troughing and finance indicators have stabilised. Business indicators are the laggard, still below pre-COVID-19 levels.
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