What to watch out for as we head into reporting season

The ‘confessional’ season is nearing its close, when Australian listed companies want to clear the decks of any earnings disappointments which might be coming down the path in the upcoming reporting season.

Apart from retail however, the probability of a negative surprise now is low. With that in mind, all eyes are on the discretionary consumer sector and whether they will make a late lunge for the naughty corner, following names like Super Retail, TradeMe and the Reject Shop which have announced lower profit guidances in recent weeks (‘external factors as opposed to any deterioration in internal execution’ – Super Retail).

As we enter the full year reporting season investors may want to be careful when considering headline profit numbers generally.

They may want to delve into the detail of the results, with the mediocre economic conditions, nothwithstanding the looseness of monetary policy, leading the company accountants to maximise their bottom line numbers by interrogating all aspects of the tax law, as well as minimising their interest costs.

Look for lower tax and interest costs as companies stretch to targets and concentrate on cash produced (EBITDA).

Last Week

A strong rally in equities this week with markets heading 1.5% higher. Small- and mid-caps topped the return charts, climbing 2.1% and 1.9% respectively.

In economic news, we saw another hold on the RBA cash rate as Glenn Stevens and co. repeated their usual rhetoric of slower (growth) for longer. The obligatory reference to currency remains with policymakers resolute in trying talk down the local dollar.

The Australian-US exchange rate did fall a couple of cents to USD$0.93 though time will tell if this downdraft has more legs than all the instances before.

In the meantime the RBA continues to push on with lower interest rates as a means to drive growth. While results thus far have been positive, the Board recognises the increasing likelihood of speculation amid what is an environment of easy credit.

Anecdotally we need only look to the banks for warning signs with major lenders aggressively falling over each other to secure the next batch of mortgagees.

Over in resources, a strong outcome in Chinese PMI saw iron ore rebound to US$96/t from its high eighties trough. The data print’s influence on lower metallic grades were less effective however as discounts to the 62.5% benchmark continued to widen beyond historic levels.

Stock News

Aurizon (+1%) and Baosteel formally secured their takeover of Aquila Resources. The consortium bid was deemed to be superior to the all-scrip offer from Mineral Resources (+3%), which will now concede their blocking stake at the price of $3.40.

Mineral Resources originally purchased their position at $3.75 and while the defensive manoeuvre will cost them $20 million.

BHP (+3%) are close to offloading Nickel West, a sale that does little for the balance sheet but a lot in promoting investor confidence. BHP is in a phase of rationalisation and it’s good to see it carry out non-core divestments as promised.

Woodside (+1%) gained exploration permits in Morocco. Partnering with a junior independent, the development marks Woodside’s first step in restoring growth, following their decision last month to terminate Leviathan.

In addition to replenishing reserves the project reflects a new leaf in strategy as the company recently revealed that they would rotate away from ventures involving global-tier energy associates.

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The views expressed in this article are the author’s alone. They should not be otherwise attributed. BT Investment Management may hold securities mentioned. This is general investment information and does not take into account your objectives, financial situation or needs. Before acting on the information or advice, you should consider the appropriateness of the information or advice in relation to your objectives, financial situation or needs.

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