Our Market Update in July< highlighted our view that Australian equity valuations were full considering lowered earnings expectations ahead of reporting season. Reflective of the somewhat benign domestic economic environment, profit results generally met downgraded expectations (average FY16 earnings growth for the market ex-resources was -3.4%) with only a handful of disappointments.
Pleasingly, balance sheets remain in reasonable shape thanks to increased cash flows driven by lower investment, allowing debt to be repaid. While dividends grew, their growth slowed as payout ratios are now elevated (see below). We believe this will likely see slower growth in dividends going forward.
An area of great focus was management commentary, where we noted a lack of confidence in outlook statements for the year ahead. We feel current valuations for non-Financial, Resource & Utility companies of about 20x earnings do not accurately reflect an outlook of 4% to 5% earnings growth.
Source: Evans & Partners
Banks’ results and trading updates broadly came in as expected. Competitive and regulatory pressures are impacting. Contrary to the media’s rhetoric, margins are being squeezed with mortgage repricing unable to fully offset the impact of increased funding costs. Increased capital requirements from regulators dampened earnings and dividend per share growth and we expect this to remain a feature for the next few years.
Despite media headlines, competition amongst the supermarket chains has not intensified, it has always been fierce. While Woolworths’ disastrous foray into hardware is coming to a close, the company’s 5 year turnaround of its supermarkets is only just beginning. Despite some early positive data in their result, we believe it will be some time before a sustainable growth path becomes entrenched.