What’s in store for reporting season?

This week, the FY18 interim reporting season gets underway in earnest. Investors are very keen to see harbingers of a second straight year of robust profit growth, after the market (that is, the S&P/ASX 200 stocks) posted 12% profit growth in 2016-17 – the best performance in six years. In FY17, two-thirds of the S&P/ASX 200 companies reported rising profits.

The downside, however, was that full-year FY17 profit growth was significantly boosted by the resources sector, where profits more than doubled. Excluding resources, the market’s earnings growth figure was more like 5%–6%. Weighted for size, investment bank UBS said the median Top 100 Company grew its earnings by 4% in FY17.

The outlook

At the moment, analysts’ consensus forecasts point to about 6%–8% growth in earnings per share (EPS) in 2017-18 – which UBS describes as a “respectable, slightly-above-trend” pace.

According to UBS, “confession season” – the period leading up to reporting season, when companies warn investors about any changes to their previously issued “guidance” on expected earnings – has been relatively benign.

That is not to say there have not been any downgrades – insurance giant QBE, Australian Pharmaceutical Industries (owner of the Priceline pharmacy chain) and Retail Food Group (owner and franchiser of the Donut King, Brumby’s Bakeries, Gloria Jean’s Coffee and Crust Pizza chains, among others) were some of the higher-profile bearers of bad news in the lead-up. But there were also positive upgrades, from the likes of budget jewellery retailer Lovisa (LOV), women’s fashion chain Noni B (NBL), homewares and manchester seller Adairs (ADH), investment management group Pinnacle (PNI), online retail specialist Kogan.com (KGN), organic baby-food producer Bellamy’s (BAL) and biotechnology group Sirtex (SRX) – before it agreed to a $1.6 billion takeover offer from US biotech Varian Medical Systems.

Some early results have been impressive. Treasury Wine Estates (TWE) reported a 37% surge in half-year earnings, to $187.2 million, and lifted its partially franked interim dividend by two cents to 15 cents a share: TWE told the market that it was targeting “accelerated growth” for the next two years and beyond, as it generates more revenue and profits from Asia and the US.

Industrial group GUD Holdings posted a 61% improvement in profit to $28.4 million, and lifted the interim dividend to shareholders by 14% to 24 cents a share, as it emerged strongly from several years of restructuring.

Resources focus

Once again, the resources sector is expected to deliver the bulk of the earnings growth this year: it’s expected to generate most of the outperformance and upgraded forecasts. Potential positive surprises from the sector include BHP, Rio Tinto and Fortescue in iron ore; Iluka in mineral sands; Oz Minerals and Sandfire Resources in copper; Alumina in aluminium; and Western Areas and Independence Group in nickel. Resources’ strength is also likely to flow through to the services companies that work for it.

The resources sector strength will show up in some of the companies reporting full-year earnings for 2017 (the companies that use the calendar year as their financial year). Prime among these is diversified mining giant Rio Tinto (RIO), which generates almost 60% of its earnings from iron ore. Rio Tinto reports on Wednesday.

We’ve already seen Rio Tinto’s production numbers for the year, which saw it ship 330.1 million tonnes of iron ore in 2017, up 1% on year, slightly better than its guidance to the market. In the December 2017 quarter, Rio Tinto lifted its production by 3%. Rio is now the world’s largest iron ore exporter, ahead of rival Australian-London-listed BHP, which exported 307 million tonnes for the year.)

Rio achieved an average iron ore price of about US$64.80 per dry metric tonne, well above the average $US53.60 a tonne it struck in 2016. At its investor seminar in December, Rio said it was producing iron ore at a cash cost of US$13.80 a tonne.

Average thermal coal prices were around US$78 per tonne for 2017, compared to US$66 a tonne in 2016, while Rio Tinto saw hard coking coal prices fall 8% during the year, to US$164 per tonne by the end of the year.

The robust end to the year will play into expectations that Rio will return more cash to shareholders. Last year, the company returned 40% of all the cash it generated to shareholders: that came to US$6.3 billion, in the form of dividends (US$4.2 billion) and share buybacks (US$2.1 billion). The mining giant could extend the already announced US$1.9 billion share buyback for 2018.

On the back of generally higher commodity prices, Rio Tinto will bring out a fairly impressive earnings result, with a net profit of about US$5.1 billion expected, up from US$4.6 billion in 2016, and underlying earnings of about US$8.6 billion. According to FN Arena, analysts’ consensus expects Rio to report earnings per share (EPS) of 493.3 US cents for 2017, up 92% on 2016, and pay a full-year fully franked dividend of 297 US cents, up 75% on the 170 US cents paid in 2016.

A number of other resources heavyweights also report full-year 2017 (calendar year) earnings this month, including copper and gold miner Oz Minerals (OZL). Last month, Oz lifted its copper production guidance for 2018 and 2019, flowing from the significant upgrade to the resource base at its Prominent Hill operation in South Australia, which it announced late last year. Oz originally expected to produce 90,000 tonnes–100,000 tonnes of copper in each of 2018 and 2019, but now expects 100,000 tonnes–110,000 tonnes in 2018 and 95,000 tonnes–105,000 tonnes.

Analysts’ consensus expects Oz to more than double EPS from 2017, from 35.7 cents in 2016 to 74.5 cents, but to lower its fully franked dividend by 15%, from 20 cents to 17 cents.

Alumina (aluminium oxide) producer Alumina (AWC) is also poised to deliver a strong full-year result. Alumina owns a 40% interest in the Alcoa World Alumina and Chemicals (AWAC) joint venture with Alcoa Corporation of the US. The spot alumina price touched a 9-year high late in 2017, and despite it coming off the boil, AWC’s operating margins will be robust. Analysts’ consensus sees Alumina returning to profit with EPS of 13 US cents in 2017, a turnaround from the 1.4-cent loss per share in 2016, and a 2017 fully franked dividend almost double that of 2016, at 11.8 cents. At the current AWC share price ($2.39) and exchange rate (AWC reports in US$), that places AWC on a 2017 expected dividend yield of 6.2%, fully franked, with 7.8% the current expected yield for 2018. Although analysts regard AWC as fully priced – with a consensus target price of $2.35 – it has definite medium-term appeal as a yield stock for Australian investors.

Petrol power

Some of Australia’s petroleum majors will also be prominent with full-year results.

On FN Arena’s collation, analysts’ consensus expects Woodside Petroleum (WPL) to report earnings per share (EPS) of 120.1 US cents for 2017, up 15.5% on 2016, and pay a full-year fully franked dividend of 95.8 US cents, up 15% on the 83 US cents paid in 2016.

Analysts expect the Papua New Guinea-focused Oil Search (OSH) to more than triple EPS in 2017, from 5.9 US cents in 2016 to 19.1 US cents, but see its full-year unfranked dividend falling by 16%, to 8.4 US cents. Oil Search posted record production for 2017, spurred by continuing outperformance by its Papua New Guinea liquefied natural gas (PNGLNG) project, and indicated that this level could be sustained in 2018.

Santos (STO) is projected on analysts’ consensus to earn 12.1 US cents a share in 2017 – compared to a loss of 58.2 US cents a year ago. But the company is not expected to pay a dividend: its last dividend was in 2015.

Financials fizzle

Insurance heavyweight QBE Insurance is also reporting full-year results, and after an earnings downgrade in January, it is heading for a loss: analysts’ consensus expects a loss of 18.3 US cents a share – a huge slide from the 61.6 cents a share that QBE earned in 2016 – and a more than 50% cut to the full-year dividend, to 24 US cents (22 cents of that has already been paid.) QBE’s dividend will be about 42% franked.

Another full-year reporter is property giant Westfield (WFD), which may be a swansong after the US$24.7 billion ($30.5 billion) takeover plan by French group Unibail-Rodamco was announced in December. Analysts’ consensus sees Westfield more than doubling EPS, from 16 US cents in 2016 to 32.5 cents, and lifting its unfranked dividend from 25.1 cents to 25.5 cents.

Financial services group AMP also reports full-year results, on Thursday, and analysts are looking for a surge back to profitability after 2016’s net loss of $344 million. AMP is expected to report net profit of about $443 million: on an EPS basis, analysts expect EPS of 33.6 cents (compared to a loss of 11.7 cents a share in 2016) and a boost of 0.7 cents to the full-year dividend, to 28.7 cents.