Get set for earnings season – Rio reports this week

Financial journalist and commentator on 3AW and Sky Business
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Earnings season officially kicks off today, but already we have seen some early birds reporting. And in that handful of gun-jumpers we can see some of the trends expected to hold true through the season.

The first is that investors are at least as interested in the outlook statements as they are in the actual profit number reported. Optimism – realistic optimism – will be rewarded, but pessimism is on the nose with investors.

CIMIC Group (the new name for Leighton) was one of the first stocks to report, and its interim (half-year) result was strong, following a major business restructuring and transformation program put in motion by its new management team. CIMIC has seen costs and gearing reduced, and the company re-positioned to deliver more sustainable profits and cash flows. While the company reported a 12% fall in interim net profit to $257 million, and cut its interim dividend by 11 cents (19%) to 57 cents, the market digested the fact that the profit fall followed the sale of some businesses, and was heartened by the news that CIMIC’s pipeline of upcoming work has swelled by $7 billion to $28.5 billion worth of tenders. The company confirmed its net profit guidance of $450 million–$520 million for the calendar year, but added the rider, “subject to market conditions.” CIMIC shares lost 3% on the announcement, but quickly regained that loss.

In contrast, education provider Navitas lifted full-year net profit by 39%, to $72.1 million, on the back of a 12% lift in revenue, to $980.3 million, and paid an unchanged dividend, at 19.5 cents. But the market was unimpressed with the tepid outlook statement: Navitas said earnings in FY16 would remain “broadly in line” with 2015. The shares slipped 13.4% on the back of that cautious view.

Industrial conglomerate GUD – best known for its Sunbeam kitchen appliances – put in an early bid to be seen as one of the better performers of the season, following up a stellar interim report in February with an 88% jump in net profit to $33.2 million. Surging Sunbeam earnings drove the result, but GUD, which also makes Oates cleaning products, industrial and commercial storage equipment, engine filters and Davey water pumps and locks, said all its businesses showed higher sales in the second half of the financial year. GUD lifted its FY15 dividend by 17%, to 42 cents, but what the market really liked was the outlook statement – GUD said it expected “a further substantial uplift in financial performance in FY16.” The shares surged 11% on the result.

Similarly, one of Australia’s global medical device leaders, sleep-breathing device maker ResMed, reported an 8% lift in full-year revenue to $US1.7 billion, and a 2% rise in net profit, to $US352.9 million ($483.8 million). But investors were most interested in the healthy take-up of ResMed’s latest-generation ventilation machines, which were launched in late 2014, and the 6.4% jump in the share price was mainly attributed to that. ResMed is rebuilding trust on the market after a shock failure in a phase III clinical trial in May stripped 18% from the share price.

The first of the market’s heavyweights reports this week, when we see the half-year result from diversified mining giant Rio Tinto. While Rio Tinto is a diversified miner, the iron ore business drives both the top and bottom line, accounting for nearly half of RIO’s revenue and more than two-thirds of underlying earnings, and the market has well and truly factored-in that iron ore and coal prices are significantly lower than last year.

This will bring Rio’s profit down, and analysts are expecting a fall of more than 50%. Rio reported strong-second quarter production results, with a 7% lift in iron ore production from the previous quarter and a 12% boost to shipments. For the first-half, Rio’s iron ore production was up 11% on the 2014 interim, while shipments were up 8%.

The market will focus most on the dividend. When it released its FY14 results in February, RIO announced a new shareholder payment policy. In an overall weak commodity market environment, the full-year dividend was increased by 12% to $US2.15 (96 cents interim and $1.19 final) and a $US2 billion share buyback program was announced. In line with the company’s goal to maintain or increase the dividend, analysts expect on consensus a 10 US-cent lift in the FY15 interim dividend. The dividend is safe from the falling net profit figure: in 2014 RIO reported $US14.3 billion of net cash flow (after interest payments and taxes), although weaker commodity prices will erode that figure this year. The market would not welcome any shortfall on Rio’s expected dividend lift.

Switzer Super Report will be giving readers a heads-up on expected results during the season, using the consensus earnings estimates of analysts. Here is a round-up of the expected results this week, which is a light week. Unless otherwise stated, consensus expectations are those collated by FN Arena.

Tuesday 4 August

Credit Corp Group (CCP)
Full-year

Consensus earnings per share (EPS): 81 cents, +7.4%
Consensus dividend per share (DPS): 41 cents, +2.5%

Suncorp Group (SUN)
Full-year

Consensus earnings per share (EPS): 87.8 cents, +53.8%
Consensus dividend per share (DPS): 87.5 cents, +16.7%

Transurban (TCL)
Full-year

Consensus earnings per share (EPS): 16.3 cents, –10.9%
Consensus dividend per share (DPS): 39.9 cents, +14%

Wednesday 5 August

Bunnings Warehouse Property Trust (BWP)
Full-year

Consensus earnings per share (EPS): 18.3 cents, –24.7%
Consensus dividend per share (DPS): 15.8 cents, +7.5%

Cochlear (COH)
Full-year

Consensus earnings per share (EPS): 275.2 cents, +67.2%
Consensus dividend per share (DPS): 192.4 cents, –24.2%

Mobile Embrace (MBE)
Full-year

Consensus earnings per share (EPS): 1 cent, +35.1%
Consensus dividend per share (DPS): nil
(Estimates collated by Thomson Reuters)

Thursday 6 August

Rio Tinto (RIO)
Interim

Consensus interim underlying earnings: $US2,436 million, –52.4%
Consensus dividend per share (DPS): $US1.06, +10.4%
(Estimates collated by Vuma Financial)

Downer (DOW)
Full-year

Consensus earnings per share (EPS): 46.5 cents, –3.7%
Consensus dividend per share (DPS): 25.3 cents, +10%

Friday 7 August

REA Group
Full-year

Consensus earnings per share (EPS): 144.4 cents, +27%
Consensus dividend per share (DPS): 70.8 cents, +24.2%

Virgin Australia (VAH)
Full-year

Consensus earnings per share (EPS): loss of 1.8 cents, compared to FY14 loss of 11.4 cents
Consensus dividend per share (DPS): nil

FlexiGroup (FXL)
Full-year

Consensus earnings per share (EPS): 29.7 cents, +56.3%
Consensus dividend per share (DPS): 17.7 cents, +7.3%

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