Reporting season optimism undented by local COVID resurgence

Against a rather dismal backdrop where 60% of the Australian population is in lockdown, the fiscal 2021 reporting season should provide a welcome boost.

Overall earnings will still be very strong, though, in some pockets where companies are more vulnerable to the pandemic, the outlook will be tempered. But mining should be a particularly strong performer alongside banks and some other cyclicals that have ridden the COVID recovery.

There are a few other key points underlying our enthusiasm this reporting season, including:

• persistently low interest rates,
• the robust iron ore price and
• the less contrite “confession season” we saw in the build-up.

In the following wire, I give further insights as the first week of reporting wraps up, including my view on the longevity of the red-hot M&A space and other potential deals waiting in the wings.

It’s week one so only a handful of companies have reported so far. What are your expectations for this profit season?

This profit season was tipped to be very strong, with good guidance and outlook statements, as recently as six weeks ago. But given we’re now in lockdown across many Australian states, a lot of the guidance and outlook statements will probably be quite tempered, particularly for those companies that are most affected by the pandemic.

However, the underlying earnings in aggregate will still be very strong. Given the strong economic growth we've seen leading into reporting season, and the fact that many companies are not actually impacted by COVID, such as the mining sector – where we're expecting very strong results – along with banks and several other cyclicals that have not been heavily affected by COVID.

We saw Rio Tinto (ASX: RIO) hand out a record dividend to investors following a 22% increase in profits. Do you see this record growth continuing for the mining sector?

Mining has seen incredible cash flows over the last couple of years, and particularly the last 12 months, given the strength of iron ore prices, which have been sitting at, or above, $200 a tonne for most of the first half.

Rio has recorded an incredible return on invested capital of 100% for its iron ore division, which is staggering for such a capital-intensive business. So, our expectation is that all the iron ore miners such as Fortescue (ASX: FMG) and BHP Group (ASX: BHP) will record very high fully franked dividends for the half. I expect this will continue if iron ore prices stay at these elevated levels.

The period running into reporting season is often called “confession season”. Were there many illuminating confessions?

This confession season was quite benign. Typically, we see a lot of companies resetting investor expectations leading into reporting season, as they start finalising their P&Ls.

But this time we saw the opposite and saw more upgrades than downgrades, which was quite a surprise and provides some good insights on how companies will report. We saw something similar in the US recently, where companies recorded very high profit outcomes relative to consensus expectations.

M&A activity has boomed so far this year. Do you expect these conditions to continue?

It certainly is a boom. Several companies are under various levels of takeover currently, including Spark Infrastructure (ASX: SKI), Crown Resorts (ASX: CWN), Sydney Airport (ASX: SYD) and Tabcorp Holdings (ASX: TAH). There's even speculation of a Woodside Petroleum (ASX: WPL) and BHP transaction around the mining major’s oil business.

For a quite a while, we’ve expected M&A to be a big feature of 2021 and 2022, given the vast levels of cash sitting on the sidelines and low interest rates currently. So, yes, this M&A boom will continue and Tyndall will be a beneficiary of that as there are several companies we own that are in various stages of takeover.

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Throughout August, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the “follow” button below to stay up to date.