Materials Analyst/Strategist, Janus Analysis

Gaius King

Materials Analyst/Strategist

Accelerating Tomorrow’s Independent Research

Boost Research

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Equity Bottom-Up

<ul>
<li>Coverage now expanded to 730 mining companies</li>
<li>Retain <a href="https://www.smartkarma.com/entities/4111" target="_blank" data-smartkarma-citation="entities:4111:1">Peel Mining Ltd (PEX AU)</a> as a Speculative Buy</li>
<li>Current drilling infill only</li>
<li>Est. A$4-4.5m cash with capital raising soon</li>
<li>Very solid geological genetic model honing future extensional exploration efforts </li>
<li>Expect maiden Resource computation to commence after next three hole assays released</li>
<li>
<a href="https://www.smartkarma.com/entities/6870" target="_blank" data-smartkarma-citation="entities:6870:1">Aeon Metals Ltd (AML AU)</a>, <a href="https://www.smartkarma.com/entities/27943" target="_blank" data-smartkarma-citation="entities:27943:1">Blackearth Minerals NL (BEM AU)</a>, <a href="https://www.smartkarma.com/entities/4823" target="_blank" data-smartkarma-citation="entities:4823:1">Boss Resources (BOE AU)</a>, <a href="https://www.smartkarma.com/entities/5672" target="_blank" data-smartkarma-citation="entities:5672:1">Centaurus Metals (CTM AU)</a>, <a href="https://www.smartkarma.com/entities/4293" target="_blank" data-smartkarma-citation="entities:4293:1">Catalyst Metals (CYL AU)</a>, <a href="https://www.smartkarma.com/entities/23854" target="_blank" data-smartkarma-citation="entities:23854:1">Amur Minerals (AMC LN)</a>, <a href="https://www.smartkarma.com/entities/24745" target="_blank" data-smartkarma-citation="entities:24745:1">Patagonia Gold (PGD LN)</a>, <a href="https://www.smartkarma.com/entities/9622" target="_blank" data-smartkarma-citation="entities:9622:1">Tyranna Resources (TYX AU)</a>, <a href="https://www.smartkarma.com/entities/1784" target="_blank" data-smartkarma-citation="entities:1784:1">Gladiator Resources (GLA AU)</a>, <a href="https://www.smartkarma.com/entities/12537" target="_blank" data-smartkarma-citation="entities:12537:1">King River Resources (KRR AU)</a>, <a href="https://www.smartkarma.com/entities/19897" target="_blank" data-smartkarma-citation="entities:19897:1">Vango Mining (VAN AU)</a>, <a href="https://www.smartkarma.com/entities/23527" target="_blank" data-smartkarma-citation="entities:23527:1">Hummingbird Resources (HUM LN)</a>, <a href="https://www.smartkarma.com/entities/17861" target="_blank" data-smartkarma-citation="entities:17861:1">Caravel Minerals (CVV AU)</a>, <a href="https://www.smartkarma.com/entities/27876" target="_blank" data-smartkarma-citation="entities:27876:1">Lefroy Exploration Ltd (LEX AU)</a>, <a href="https://www.smartkarma.com/entities/11276" target="_blank" data-smartkarma-citation="entities:11276:1">Millennium Minerals (MOY AU)</a>, <a href="https://www.smartkarma.com/entities/20445" target="_blank" data-smartkarma-citation="entities:20445:1">Northern Minerals (NTU AU)</a>, <a href="https://www.smartkarma.com/entities/5035" target="_blank" data-smartkarma-citation="entities:5035:1">Blackham Resources (BLK AU)</a>, <a href="https://www.smartkarma.com/entities/6148" target="_blank" data-smartkarma-citation="entities:6148:1">Avz Minerals (AVZ AU)</a>, <a href="https://www.smartkarma.com/entities/3572" target="_blank" data-smartkarma-citation="entities:3572:1">Orocobre Ltd (ORE AU)</a>, <a href="https://www.smartkarma.com/entities/23540" target="_blank" data-smartkarma-citation="entities:23540:1">Serabi Gold plc (SRB LN)</a>, <a href="https://www.smartkarma.com/entities/18065" target="_blank" data-smartkarma-citation="entities:18065:1">Paringa Resources (PNL AU)</a>, <a href="https://www.smartkarma.com/entities/16849" target="_blank" data-smartkarma-citation="entities:16849:1">Artemis Resources (ARV AU)</a>, <a href="https://www.smartkarma.com/entities/10093" target="_blank" data-smartkarma-citation="entities:10093">Centrex Metals (CXM AU)</a>, <a href="https://www.smartkarma.com/entities/27987" target="_blank" data-smartkarma-citation="entities:27987">Great Boulder Resources Ltd (GBR AU)</a>, <a href="https://www.smartkarma.com/entities/15163" target="_blank" data-smartkarma-citation="entities:15163">Superior Lake Resources (SUP AU)</a>, <a href="https://www.smartkarma.com/entities/27988" target="_blank" data-smartkarma-citation="entities:27988">Cora Gold Ltd (CORA LN)</a>, <a href="https://www.smartkarma.com/entities/27989" target="_blank" data-smartkarma-citation="entities:27989">European Metals Holdings Ltd (EMH LN)</a>, <a href="https://www.smartkarma.com/entities/27990" target="_blank" data-smartkarma-citation="entities:27990">Savannah Resources PLC (SAV LN)</a> , <a href="https://www.smartkarma.com/entities/27991" target="_blank" data-smartkarma-citation="entities:27991">IronRidge Resources Ltd (IRR LN)</a> 
<div></div>
</li>
</ul>


Coverage now expanded to 730 mining companies
Retain Peel Mining Ltd (PEX AU) as a Speculative Buy
Current drilling infill only
Est. A$4-4.5m cash with capital raising soon
Very solid geological genetic model honing future extensional exploration efforts 
Expect maiden Resource computation to commence after next three hole assays released

Aeon Metals Ltd (AML AU), Blackearth Minerals NL (BEM AU), Boss Resources (BOE AU), Centaurus Metals (CTM AU), Catalyst Metals (CYL AU), Amur Minerals (AMC LN), Patagonia Gold (PGD LN), Tyranna Resources (TYX AU), Gladiator Resources (GLA AU), King River Resources (KRR AU), Vango Mining (VAN AU), Hummingbird Resources (HUM LN), Caravel Minerals (CVV AU), Lefroy Exploration Ltd (LEX AU), Millennium Minerals (MOY AU), Northern Minerals (NTU AU), Blackham Resources (BLK AU), Avz Minerals (AVZ AU), Orocobre Ltd (ORE AU), Serabi Gold plc (SRB LN), Paringa Resources (PNL AU), Artemis Resources (ARV AU), Centrex Metals (CXM AU), Great Boulder Resources Ltd (GBR AU), Superior Lake Resources (SUP AU), Cora Gold Ltd (CORA LN), European Metals Holdings Ltd (EMH LN), Savannah Resources PLC (SAV LN) , IronRidge Resources Ltd (IRR LN) 




New J. Hutton Exploration Report (Weeks Ending 08/03/19)

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

<ul>
<li>
Giving Back Reporting Season Gains. In our view, reporting season was relatively solid, with 8% EPS growth achieved in FY18 and another 8% forecast for FY19.  The market rallied through reporting season, but gave up all of these gains through September, with the return on the ASX 200 falling by 1.4%.  Growth stocks that drove the market higher during reporting season reversed course.  Stocks such as CSL, COH, APT, TWE, and ALL lost ground.</li>
<li>
Hitting Valuation Ceilings. Healthcare (-7.8%), Consumer Discretionary (-4.6%), and Industrials (-3.1%) were the weakest sectors during the month, but also the most expensive coming out of reporting season.  Telcos (5.6%) and Materials (4.6%) rallied, despite a large number of downgrades to support the broader index. </li>
<li>
Financials Under Pressure. The Financial sector fell by 2.9% and the Interim Report from the Banking Royal Commission was released on the last trading day.  Bank stocks rallied by around 1.3% following the release of the Report, probably because it provided no recommendations and merely summarised the proceedings of the Commission.  However, the Report provided a scathing assessment of Bank lending practices and was critical of the Wealth Managers.  We still think it’s too early to assess the fallout from the Royal Commission until the Final Report is released on 1 February.  Stay underweight Banks and Wealth Managers (ILF and PPT) until there is more clarity.</li>
<li>
The sell-off caused declines in short-positioning. Despite a better-than-expected FY18 result, JBH is now the most shorted stock in the ASX 200.  Lithium plays ORE and GXY are also heavily shorted along with the Bricks-and-Mortar retailers.  NXT, SDA and NEC saw the largest increase in short positions.  The largest declines were in SYR, SFR and NSR.</li>
<li>
Underperformance provides a little more valuation support. The market weakness brought some valuation relief with the 12-month forward PE ratio for the ASX 200 declining to 15.4pts from 15.9pts at the start of the month. The Healthcare, Industrials and Telcos are expensive, while Energy is cheap.  Healthcare, Materials and IT saw PE declines.</li>
<li>
Domestic Economy Tracking In-Line with Our Expectations. GDP rose by 0.9% in Q2 and 3.4% during FY18.  The lift was driven by stronger consumer and Government spending.  The orderly correction in housing continued, with Q2 house prices falling by 0.7% and we expect this to continue without disrupting the broader economy.  Political instability in Canberra pushed NAB business confidence lower, but business conditions remained well supported.  Meanwhile, the labour market added 44k jobs in August.  The yield remains steep and supportive of future growth, while there are no interest rate rises priced for the RBA over the next 12 months. </li>
</ul>



Giving Back Reporting Season Gains. In our view, reporting season was relatively solid, with 8% EPS growth achieved in FY18 and another 8% forecast for FY19.  The market rallied through reporting season, but gave up all of these gains through September, with the return on the ASX 200 falling by 1.4%.  Growth stocks that drove the market higher during reporting season reversed course.  Stocks such as CSL, COH, APT, TWE, and ALL lost ground.

Hitting Valuation Ceilings. Healthcare (-7.8%), Consumer Discretionary (-4.6%), and Industrials (-3.1%) were the weakest sectors during the month, but also the most expensive coming out of reporting season.  Telcos (5.6%) and Materials (4.6%) rallied, despite a large number of downgrades to support the broader index. 

Financials Under Pressure. The Financial sector fell by 2.9% and the Interim Report from the Banking Royal Commission was released on the last trading day.  Bank stocks rallied by around 1.3% following the release of the Report, probably because it provided no recommendations and merely summarised the proceedings of the Commission.  However, the Report provided a scathing assessment of Bank lending practices and was critical of the Wealth Managers.  We still think it’s too early to assess the fallout from the Royal Commission until the Final Report is released on 1 February.  Stay underweight Banks and Wealth Managers (ILF and PPT) until there is more clarity.

The sell-off caused declines in short-positioning. Despite a better-than-expected FY18 result, JBH is now the most shorted stock in the ASX 200.  Lithium plays ORE and GXY are also heavily shorted along with the Bricks-and-Mortar retailers.  NXT, SDA and NEC saw the largest increase in short positions.  The largest declines were in SYR, SFR and NSR.

Underperformance provides a little more valuation support. The market weakness brought some valuation relief with the 12-month forward PE ratio for the ASX 200 declining to 15.4pts from 15.9pts at the start of the month. The Healthcare, Industrials and Telcos are expensive, while Energy is cheap.  Healthcare, Materials and IT saw PE declines.

Domestic Economy Tracking In-Line with Our Expectations. GDP rose by 0.9% in Q2 and 3.4% during FY18.  The lift was driven by stronger consumer and Government spending.  The orderly correction in housing continued, with Q2 house prices falling by 0.7% and we expect this to continue without disrupting the broader economy.  Political instability in Canberra pushed NAB business confidence lower, but business conditions remained well supported.  Meanwhile, the labour market added 44k jobs in August.  The yield remains steep and supportive of future growth, while there are no interest rate rises priced for the RBA over the next 12 months. 


Aussie Equities Month in Review (Sept 2018)

<ul>
<li>
Reporting Season Performance. Our recently published Earnings Season Wrap highlighted concerns about the number of downgrades to FY19 earnings during the reporting period, particularly in Mining, Financials and Consumer Discretionary.  However, despite the number of analysts downgrading earnings, the magnitude (-0.1%pts) was modest relative to the long-run average during August (-0.6%pts).  Analysts still expect a solid 6.6% increase in EPS during FY19.  In FY20, EPS growth is expected to accelerate to 8.8%.</li>
<li>
Taking a Leap of Faith.ALU, WEB, SKI, SGP, CHC and SWM have seen not only strong increases in consensus EPS growth forecasts, but the strong net number of upgrades add a further layer of conviction to the outlook for these stocks.  All of these stocks saw improvements in earnings quality during the half, but only SKI made the top 20 stocks with the largest improvement in earnings quality over the past 4 years.  SGP decline saw a decline in earnings quality during the half and this raises questions about analysts’ enthusiasm.</li>
<li>
Clearing the Decks with Conviction. The strongest downgrade conviction appears to be in SDA, WOW, SGM, PRY, VOC, ABP, CGC, WBC, GEM, AHG, NAN, RHC and AMC given they are at the bottom of the list of net upgrades and the bottom of the list for EPS growth revisions.  WOW, SDA, SGM, RHC all saw declines in earnings quality that supported the strong conviction around downgrades.  </li>
<li>
The downgrades to ABP, GEM, CGC, and AHG all occurred against an improvement in earnings quality that could suggest these stocks have been marked down too far. In particular, we estimate that both PRY andVOC saw a strong positive shift in earnings quality during reporting season.  NAN has a good longer-term track record for earnings quality and an improvement in earnings quality during reporting season, but this doesn’t appear to be supporting the share price against the downgrade headwinds.</li>
<li>
NCM saw cuts to earnings growth at the start of year translate into improving earnings growth during reporting season. However, downgrades still outpace upgrades and this suggests little conviction in the outlook.  The stock also</li>
<li>
A relatively thin base has emerged in the key sectors. Downgrade momentum seems to still be entrenched in Banks and it is too early to move back into the sector, despite attractive valuations.  The downgrades in Mining have been broad, but the large diversified miners have thrived.  Copper plays such as ILU and SFR and Lithium miners MINSYR and ORE have been hard hit and there is a lot of conviction about the downside risks to SGM.  Overall, we think the index can rally back, but this relies upon global growth remaining resilient to the trade war.  There is probably limited downside for the Banks, given the low hurdle to jump to beat earnings.</li>
</ul>



Reporting Season Performance. Our recently published Earnings Season Wrap highlighted concerns about the number of downgrades to FY19 earnings during the reporting period, particularly in Mining, Financials and Consumer Discretionary.  However, despite the number of analysts downgrading earnings, the magnitude (-0.1%pts) was modest relative to the long-run average during August (-0.6%pts).  Analysts still expect a solid 6.6% increase in EPS during FY19.  In FY20, EPS growth is expected to accelerate to 8.8%.

Taking a Leap of Faith.ALU, WEB, SKI, SGP, CHC and SWM have seen not only strong increases in consensus EPS growth forecasts, but the strong net number of upgrades add a further layer of conviction to the outlook for these stocks.  All of these stocks saw improvements in earnings quality during the half, but only SKI made the top 20 stocks with the largest improvement in earnings quality over the past 4 years.  SGP decline saw a decline in earnings quality during the half and this raises questions about analysts’ enthusiasm.

Clearing the Decks with Conviction. The strongest downgrade conviction appears to be in SDA, WOW, SGM, PRY, VOC, ABP, CGC, WBC, GEM, AHG, NAN, RHC and AMC given they are at the bottom of the list of net upgrades and the bottom of the list for EPS growth revisions.  WOW, SDA, SGM, RHC all saw declines in earnings quality that supported the strong conviction around downgrades.  

The downgrades to ABP, GEM, CGC, and AHG all occurred against an improvement in earnings quality that could suggest these stocks have been marked down too far. In particular, we estimate that both PRY andVOC saw a strong positive shift in earnings quality during reporting season.  NAN has a good longer-term track record for earnings quality and an improvement in earnings quality during reporting season, but this doesn’t appear to be supporting the share price against the downgrade headwinds.

NCM saw cuts to earnings growth at the start of year translate into improving earnings growth during reporting season. However, downgrades still outpace upgrades and this suggests little conviction in the outlook.  The stock also

A relatively thin base has emerged in the key sectors. Downgrade momentum seems to still be entrenched in Banks and it is too early to move back into the sector, despite attractive valuations.  The downgrades in Mining have been broad, but the large diversified miners have thrived.  Copper plays such as ILU and SFR and Lithium miners MINSYR and ORE have been hard hit and there is a lot of conviction about the downside risks to SGM.  Overall, we think the index can rally back, but this relies upon global growth remaining resilient to the trade war.  There is probably limited downside for the Banks, given the low hurdle to jump to beat earnings.


Putting Aussie Earnings Conviction to the Test

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<ul>
<li>
<a href="https://www.smartkarma.com/entities/27434" target="_blank" data-smartkarma-citation="entities:27434:1">Livent (LTHM US)</a> ("Livent Corp") is a profitable company that produces lithium.  <a href="https://www.smartkarma.com/entities/11135" target="_blank" data-smartkarma-citation="entities:11135:1">Fmc Corp (FMC US)</a> will be spinning off its lithium business (Livent) through this IPO in the US. Livent is planning to raise about US$100 million in an IPO to be completed in the next few weeks. </li>
<li>Despite some negative sentiment on the lithium-related stocks in recent months, there will likely be a solid interest in the Livent IPO mainly due to three major factors: 1) It is one of the few large scale, global lithium producing companies with positive EBITDA and earnings. 2) Livent is a pure-play, global, leading company in the lithium production. 3) Most of its major competitors are also non-North American based companies and investors typically place some discount on these Chinese/non-North American based companies partly due to corporate governance risks.</li>
<li>Livent Corp's main products include lithium hydroxide, butyllithium, and high purity lithium metal. Its lithium related products are used in a wide variety of applications including in the electric vehicle (EV) lithium-ion batteries. 
</li>
<li>
Production capacity ramp-up - The company had an annual production capacity of 18.5 kMT of lithium hydroxide at the end of 2017 and it plans to increase this production capacity to 55 kMT at end of 2025, representing a CAGR of 14.6% during this period. By end of 2019, the company plans to increase its production of annual lithium hydroxide to 30 kMT. </li>
<li>
Competition - It is estimated that the global supply of lithium compounds was 270 kMT in 2017. Six producers including Livent, Albemarle Corp, Sociedad Quimica y Minera, Tianqi Lithium Corporation, Jiangxi Ganfeng Lithium Co. Ltd., and Orocobre Limited represented 86% of total lithium compounds supply in 2017. </li>
<li>
Strong sales and profit growth - The company's sales increased 32% YoY to US$347.4 million in 2017 and its sales increased even faster at 51% YoY to US$210.7 million in 1H18. Capitalizing on the company's economies of scale, its operating margin improved from 22.3% in 2016 to 29.2% in 2017. Its operating margin increased even further from 24.9% in 1H17 to 39.7% in 1H18.  </li>
<li>
Reduced valuation expectations - Back in February 2018, the company was planning to sell of around 15% of its lithium business trying to raise about US$500 million, which would put a value of more than US$3.0 billion. However, a lot has changed in the past six months and investors are likely to place much lower valuations for Livent Corp in the coming weeks. </li>
</ul>



Livent (LTHM US) ("Livent Corp") is a profitable company that produces lithium.  Fmc Corp (FMC US) will be spinning off its lithium business (Livent) through this IPO in the US. Livent is planning to raise about US$100 million in an IPO to be completed in the next few weeks. 
Despite some negative sentiment on the lithium-related stocks in recent months, there will likely be a solid interest in the Livent IPO mainly due to three major factors: 1) It is one of the few large scale, global lithium producing companies with positive EBITDA and earnings. 2) Livent is a pure-play, global, leading company in the lithium production. 3) Most of its major competitors are also non-North American based companies and investors typically place some discount on these Chinese/non-North American based companies partly due to corporate governance risks.
Livent Corp's main products include lithium hydroxide, butyllithium, and high purity lithium metal. Its lithium related products are used in a wide variety of applications including in the electric vehicle (EV) lithium-ion batteries. 


Production capacity ramp-up - The company had an annual production capacity of 18.5 kMT of lithium hydroxide at the end of 2017 and it plans to increase this production capacity to 55 kMT at end of 2025, representing a CAGR of 14.6% during this period. By end of 2019, the company plans to increase its production of annual lithium hydroxide to 30 kMT. 

Competition - It is estimated that the global supply of lithium compounds was 270 kMT in 2017. Six producers including Livent, Albemarle Corp, Sociedad Quimica y Minera, Tianqi Lithium Corporation, Jiangxi Ganfeng Lithium Co. Ltd., and Orocobre Limited represented 86% of total lithium compounds supply in 2017. 

Strong sales and profit growth - The company's sales increased 32% YoY to US$347.4 million in 2017 and its sales increased even faster at 51% YoY to US$210.7 million in 1H18. Capitalizing on the company's economies of scale, its operating margin improved from 22.3% in 2016 to 29.2% in 2017. Its operating margin increased even further from 24.9% in 1H17 to 39.7% in 1H18.  

Reduced valuation expectations - Back in February 2018, the company was planning to sell of around 15% of its lithium business trying to raise about US$500 million, which would put a value of more than US$3.0 billion. However, a lot has changed in the past six months and investors are likely to place much lower valuations for Livent Corp in the coming weeks. 


Livent IPO Preview (Part 1): A Profitable Company that Produces Lithium

<ul>
<li>
Solid Earnings Momentum Hits a Brick Wall. It’s still early days, with only 40% of stocks reporting during the first 2 weeks of reporting season, but cracks are beginning to appear in the earnings outlook.  FY18 expectations have been mostly met with a slight skew towards upside surprise in results.  However, FY19 earnings are under downward pressure led by the Resources, Financials and Consumer Discretionary.  </li>
<li>
Downgrades following Reporting: WES, TLS, RIO, ORG, SUN, AGL, QBE, AZJ, CWN, DXS, SHL, TAH, VCX, DMP, SEK, IOF, LNK, MFG, NXT, ORA, NVT, PGH, SKC have all seen analysts cut 12-month forward earning growth by more than 3% during reporting season even though the market has responded reasonably positive to these stocks. COH guided to lower FY earnings growth than the market expected and ECX downgraded FY18 earnings during the first week of reporting season.</li>
<li>
Front Running Reporting: ABP, FMG, SAR, NCM, TGR, BPT, AAD are all due to report during the next few weeks and have seen 12-month forward earnings downgraded by analysts.  These stocks are at risk of seeing a drop in FY19 guidance when they report even if there is a surprise in FY18. </li>
<li>
Downgrades for stocks not reporting: AWC, ILU, RWC, SFR, SIG, SIQ, SDA, XRO, WSA, FBU, XRO, DOW, IGO, RRL, BAL, AHY, DHG, GXY, ORE, IFN, NAN have all seen 12-month forward EPS growth downgraded in the past 2 weeks.</li>
<li>
Cost management Rather than Revenue Growth Driving Earnings: Cost pressures are well contained limited to stocks exposed to higher electricity costs and those in the aged care industry (labour).  Indeed, the beats on EPS (63%) are exceeding the beats on revenue.  The Banks are managing cost pressures in short-term funding markets by raising mortgage rates on interest-only and investor mortgages to satisfy the regulator.  Savers are also covering cost increases after seeing deposit rates trimmed.</li>
<li>
Capex for Offence and Defence. Growth stocks such as CSL, TWE and RMD are investing to deliver in long-term growth and the market is giving it a tick of approval to this strategy.  We hold CSL, TWE and COH in our portfolio and will stay for the ride even though valuation pressures are rising.  TLS and CBA are investing to shore-up earnings, leaving little room for near-to-medium-term earnings surprise; but valuations seem cheap. </li>
<li>
Holding Steady with our View. Despite the lift in downgrades, we will not make changes to our portfolio until reporting season is complete.  We’re disappointed in the downgrades to Materials, given our overweight position in Resources.  The strength in key commodities and weakness in the Australian dollar are diving strong FY18 results, but analysts seem to think the cycle has peaked.  </li>
</ul>



Solid Earnings Momentum Hits a Brick Wall. It’s still early days, with only 40% of stocks reporting during the first 2 weeks of reporting season, but cracks are beginning to appear in the earnings outlook.  FY18 expectations have been mostly met with a slight skew towards upside surprise in results.  However, FY19 earnings are under downward pressure led by the Resources, Financials and Consumer Discretionary.  

Downgrades following Reporting: WES, TLS, RIO, ORG, SUN, AGL, QBE, AZJ, CWN, DXS, SHL, TAH, VCX, DMP, SEK, IOF, LNK, MFG, NXT, ORA, NVT, PGH, SKC have all seen analysts cut 12-month forward earning growth by more than 3% during reporting season even though the market has responded reasonably positive to these stocks. COH guided to lower FY earnings growth than the market expected and ECX downgraded FY18 earnings during the first week of reporting season.

Front Running Reporting: ABP, FMG, SAR, NCM, TGR, BPT, AAD are all due to report during the next few weeks and have seen 12-month forward earnings downgraded by analysts.  These stocks are at risk of seeing a drop in FY19 guidance when they report even if there is a surprise in FY18. 

Downgrades for stocks not reporting: AWC, ILU, RWC, SFR, SIG, SIQ, SDA, XRO, WSA, FBU, XRO, DOW, IGO, RRL, BAL, AHY, DHG, GXY, ORE, IFN, NAN have all seen 12-month forward EPS growth downgraded in the past 2 weeks.

Cost management Rather than Revenue Growth Driving Earnings: Cost pressures are well contained limited to stocks exposed to higher electricity costs and those in the aged care industry (labour).  Indeed, the beats on EPS (63%) are exceeding the beats on revenue.  The Banks are managing cost pressures in short-term funding markets by raising mortgage rates on interest-only and investor mortgages to satisfy the regulator.  Savers are also covering cost increases after seeing deposit rates trimmed.

Capex for Offence and Defence. Growth stocks such as CSL, TWE and RMD are investing to deliver in long-term growth and the market is giving it a tick of approval to this strategy.  We hold CSL, TWE and COH in our portfolio and will stay for the ride even though valuation pressures are rising.  TLS and CBA are investing to shore-up earnings, leaving little room for near-to-medium-term earnings surprise; but valuations seem cheap. 

Holding Steady with our View. Despite the lift in downgrades, we will not make changes to our portfolio until reporting season is complete.  We’re disappointed in the downgrades to Materials, given our overweight position in Resources.  The strength in key commodities and weakness in the Australian dollar are diving strong FY18 results, but analysts seem to think the cycle has peaked.  


Aussie Reporting Season Update: Cracks in the Mirror

Australia

Allkem Limited operates as a specialty lithium chemicals company. The Company's portfolio includes lithium brine and borax operations in Argentina, a hard-rock lithium operation in Australia and a lithium hydroxide conversion facility in Japan.

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Allkem Ltd (AKE AU)

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