Corporate Australia is in good shape

Based on the actual financial performance of the 170 companies in the S&P ASX200 Index that reported either half-year or full-year results, the most recent reporting season clearly showed that corporate Australia is in good shape.

Major highlights

• an above average number of companies increased profit over the year
• almost 90% of companies declared a dividend which in aggregate rose 6.7% over the year
• cash levels rose by 11% to over $110bn, notwithstanding the higher returns to shareholders.

Results exceeded expectations

Turning to the results relative to consensus expectations, on balance it was better than expected. Aggregate consensus FY17 EPS forecasts continued to trend higher. The largest companies drove the bulk of the earnings improvement, and while the resource companies delivered the greatest positive revisions, importantly, even excluding these companies consensus earnings, expectations were upgraded marginally, as forecasts for industrial companies proved more resilient than recent reporting seasons.

ASX 200 FY17 EPS upgrades/downgrades

 

ASX 200 ex-Resources FY17 EPS upgrades/downgrades

 

Other review highlights

• A higher proportion of companies beat earnings expectations than revenue expectations, as solid cost control remained an ongoing theme
• While the majority of Resource companies beat expectations resulting in upgrades to FY17 estimates, there has been little follow-through into FY18. Capital management was better than expected, with further initiatives likely. However, significant M&A activity is unlikely near-term
• Banks surprised positively in terms of bad debt charges and loan repricing, while costs were well-controlled. The forecast earnings growth of 3-4% appears reasonable, with upgrades post reporting season enjoyed for the first time since 2014
• The stronger A$ has not yet negatively impacted on translation of earnings for the international Industrial companies. However, the growth divergence between domestic and international companies is narrowing, as offshore growth slows and domestic growth accelerates. While total dividends in dollar terms were maintained, this was achieved via a lift to the aggregate payout ratio, which increased to almost 80%
• Guidance around capital expenditure was relatively conservative, which will help boost free cash flow generation.

Continued growth & strong balance sheets

Share markets will always face hurdles, but as the recent reporting season illustrates, Australian companies continue to grow profits and have strong balance sheets which provides flexibility to pay solid dividends, engage in share buy backs or deploy capital, when opportunities with good returns are presented.

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