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Australian FY17 Reporting Season: When Reality Bites
- Pushing up the payout ratio in a falling interest rate environment has been rewarding in the past 6 years. However, this reporting season revealed a list of stocks that couldn’t squeeze more juice out of the lemon. VOC, CWN, ORG, TLS, TRS, SGR, BBN and HVN all succumbed to the pressure of raising payout ratios and disappointed dropping dividends. However, the most alarming concern was that after resetting payout ratios lower in FY17 many of these same stocks guided to a rebound in in FY18. We are not convinced.
- The outlook for Capex has improved, but at this stage it is narrowly based and confined mainly to the Resources, Utilities and Infrastructure sectors. The contractors (CIM, DOW, MND and WOR) guided to an improving outlook. It wasn’t then surprising that the materials stocks (BLD, CSR) also guided to a solid outlook suggesting housing activity will remain elevated for some time yet. We agree with this assessment.
- Operating cash flows have deteriorated, with the cash conversion ratio of the market excluding banks, resources and property falling below 100%. Cash flows are under pressure and this was evident across a multitude of stocks (CWN, LLC, ORI, IPL). However, analysts expect this was a one-off and expect cash conversion ratio to bounce back in FY18 for every ASX100 (ex-resources and Property) stock that suffered a decline in FY17 with the exception of TWE, ALL, ORA, and ABC. This seems optimistic.
- Resource upgrade cycle continues on the back of a combination of improving operating efficiencies and higher commodity prices. Cash is 10% of resource sector assets vs 5% for Industrials and Net Debt: Equity has fallen to 27% vs 48% for Industrials. Energy stocks are beginning to deliver on efficiencies. They are also repaying debt and getting positive operating leverage. Stocks that were upgraded in the sector include: STO, OSH, ORG, WPL, BPT.
- The patchy consumer continues to trade down. LOV and SUL outperformed both bricks and mortar stocks (JBH, HVN, MYR) and specialty retailers such as GXL, BBN and NCK.
- Rising energy costs are cutting into manufacturers margins driving as raft of downgrades (led by BSL). The developers remain optimistic, with SGP, MGR, LLC all guiding for a strong outlook. We expect housing activity to remain solid until the RBA begins to nudge rates higher, possibly around the middle of next year.
Provider
Macro Strategy Advisors Pty Ltd
About us:
- The business is a Proprietary Limited Australian company that is owned and fully operated by Shane Lee from a small office in Sydney’s CBD.
- Shane worked for 17 years in Sydney-based senior research roles (economist, equity strategist and bond strategist) in global and regional investment banks and a domestic commercial bank prior to starting Macro Strategy Advisors. These roles straddled the asset classes making him uniquely positioned to advise multi-asset investors. He worked for the Reserve Bank of Australia (RBA) for 3 years as a housing, commercial property and equity market analyst and a liquidity forecasting specialist. He worked as a structural engineer in Queensland for 10 years prior to his career at the RBA.
Aim of our business:
- To partner with our clients in their aim to maximise returns. We provide timely, independent and thought-provoking research on thematic macro issues that are impacting or could impact financial markets. We aim to produce research that prompts our clients to question their assumptions.
Services:
- A fortnightly research note.
- Regular presentations and data support delivered by understanding our clients interests and investment process.
- We also in work in confidence to investigate, analyse and report on issues at our clients direction. This work is done on a project-by-project basis.
- As an Australian based business, the main focus is analysing how domestic and global issues impact Australian investors. However, our global and domestic insights are also valued by our offshore clients.
Our Edge:
- Our low cost base relative to our competitors allows us to provide a quality product at a reasonable cost.
- We are fully independent and don’t support a banking function or any third party. We have no interests other than providing our clients with the best possible research.
- Our focus is not point forecasting, but providing rigorous analysis and insight. We don’t routinely focus on the top or bottom 10% of likely outcomes to create a headline.
- Shane’s background in engineering has provided clients with unique insights into global infrastructure and domestic housing issues.
Shane Lee
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