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Miners in focus this ASX earnings season

Miners in focus this ASX earnings season

Mining and energy companies are in the spotlight this profit reporting season amid higher commodity prices, which could help support dividend payouts.

The latest Australian share market earnings season has started, with hundreds of listed companies scheduled to release their financial results over the coming weeks.

An earnings season is the time when investors obtain not just corporate results, but also company commentaries on their business outlook. The market can react to new data, reports and insights.

This February reporting season, covering results for the six months to 31 December 2016, comes after global macroeconomic and geopolitical developments since mid-2016, including the UK's vote to leave the European Union (Brexit), the election of President Donald Trump in the US, and a rebound in some commodity prices.

Resources comeback

Gains in the prices of iron ore, coal and oil since the last reporting season could boost results at a number of companies listed on the ASX.

For the period from 1 July 2016 to 31 December 2016, iron ore jumped 42%, while coal gained 55%, according to Bloomberg data. Brent oil futures and WTI crude – two key benchmarks of oil prices – advanced 14% and 11% respectively during the same period.

The rally in commodity prices propelled ASX 200 materials stocks to be the best-performing sector in the second half of 2016 with a 22% gain, compared to a 19% loss in the same period in 2015.

Other heavyweight sectors also fared better, with financials advancing 13% in the six months to 31 December (versus 1.1% decline in the prior corresponding period), energy climbing 10% (down 27% previously) and consumer staples rising 8.8% (up 4.6% previously).

As a result, the overall S&P/ASX 200 index was up 8.3% in the final six months of 2016, compared with a 3% decline in the same period in 2015.

“The big positive this reporting season will be the big kick to resource earnings from the recovery in commodity prices, which will flow through to cash flows, debt reduction and dividends,” said Julian Beaumont, investment director at Bennelong Australian Equity Partners.

Mining services

Despite the price moves for commodities and the possible effects on earnings, it remains “a little bit premature” for the resource servicing industry to reap the benefits of higher commodity prices, according to Romano Sala Tenna, portfolio manager at Perth-based Katana Asset Management.

That’s because of the cyclical nature of the mining sector, which has seen a decline in capital expenditure in recent years compared to the heights during the mining boom.

“This is still going to be a challenging reporting period for most mining services companies but I do think in the coming 12 months, we may see the first greenshoots in that sector,” he said.

“Overall, we are seeing a mildly positive reporting season,” he added.

Different fates for retailers

In the retail space, Sala Tenna said results might be “a mixed bag”, as company-specific circumstances mean some retailers are expected to deliver stronger results while some might be struggling.

The impact of technology may put pressure on Australian consumer discretionary retailers going forward, with offshore retail conglomerates such as Amazon heading into the Australian market soon, Sala Tenna pointed out.

“It won’t impact the current reporting season, but in the coming 12 to 24 months, we are likely to see the impact of the arrival of a number of the large technology conglomerates,” he said.

Beaumont said some of the local cyclical stocks have been bid up on the prospects of generally stronger economic growth, and “it will be interesting to see whether this actually comes through”.

“While the commodity companies’ earnings are well supported, it’s more the domestic cyclicals that could prove there isn’t the growth hoped. Some consumer stocks, including retailers, may well struggle," Beaumont said.

“However, this will be stock specific, and depend on what markets they are facing."

Telcos and healthcare

Telecommunication services and healthcare providers were the two worst performers among ASX 200 sectors in the second half of 2016, down 13% and 7.3% respectively.

CommSec highlights various issues facing these sectors in its earnings season preview.

Dividend prospects

Overall earnings growth, “underpinned by the kick in resource earnings from stronger commodity prices”, will likely support dividends, Beaumont said.

Meanwhile, Sala Tenna said it’s going to be difficult to see meaningful dividend growth among ASX 200 companies because their payout ratios are already at historically high levels.

“I don’t expect them to decline from here but I can’t see strong dividend growth like we’ve seen in past periods. I think most companies will aim to maintain their dividends,” he said.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. The inclusion of companies in this article does not constitute a recommendation and it’s vital to remember that the value of shares in any company can fall as well as rise, which means you could lose money by investing in them. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. Neither Commonwealth Securities Limited nor members of the CBA Group accept any liability for losses or damage arising from any reliance on external companies and their products, services and material. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.