Annual General Meeting (AGM) season
01 Dec 2016
By Shadforth Financial Group
The AGM season has come and gone and a few themes dominated the headlines. Guidance in general was mixed but negatively biased. Of the 64 small cap stocks that updated guidance for financial year ending 2017 there were 45 downgrades. Companies also received a high number of strikes as investors shunned pay increases, and rightly so. As Australian wage growth goes backwards, why should executives delivering less than stellar results benefit at their shareholders’ expense?
Investors initiated a rotation out of infrastructure, utilities and property stocks that act as proxies for bonds and into growth stocks. Yields ticked higher and small caps underperformed slightly. There was a risk-off trade ahead of the U.S. elections as the probability of a Trump win became a reality. Ultimately the sell-off in the bonds and bond proxies was accelerated after Clinton was Trumped.
Themes coming out of the banks remained relatively consistent, including flat dividends and continued margin pressure as funding costs increase and lending margins get squeezed. Cost discipline and control will be a focus going forward, combined with the sale of non-core assets or businesses to ensure that capital ratios continue improving. Finally, there will be a definite increase in deteriorating assets and bad and doubtful debts driven by New Zealand dairy and mining areas like Western Australia and Queensland. However there is the chance this could reverse as we have seen commodity prices and the milk process improve over the last few months.
Diversified financials performed fairly well, although there was some short-term pain as a result of Brexit, causing funds under management outflow. However, recovering markets and increased confidence then led to a recovery in funds under management.
Resource companies were generally quietly confident, showing the first signs of life in a long time. In fact, diversified metals and mining company South32 announcement of a bolt-on acquisition leads us to believe we are through the bottom of the cycle. Generally output was slightly lower, costs remained stable and commodity prices remained relatively firm, giving rise to the potential for upgrades to earnings going forward.
Healthcare saw most companies reiterate guidance with the exception of the downgrade from Healthscope. This was a company-specific issue as the mix of service changed and the level of demand weakened substantially. This was not evident in the case of Ramsay Health Care. Despite very favourable demographics, aged care remains out of favour as investors question how the operators have been charging patients and the Government changes reimbursement legislation.
Property companies all reiterated guidance with no downgrades to earnings expected. Valuations remain a different issue as consideration for higher rates and higher capitalisation rates are considered going forward. A trend evident from the property landlords was a definite slowing in retail sales, particularly specialty retail. Office and residential sales, however, remain strong.
Property companies issued a few remarks regarding early signs of settlement issues, especially around foreign buyers. These settlement issues remain very low and properties are being easily resold. This was echoed by the banks who are yet to see any real stress in the apartment and development markets.
Infrastructure and utilities
The infrastructure and utilities stocks also reiterated guidance with solid traffic and revenue outlook, but stock performance was dominated by the sharp re-rate lower as long bond and yield stocks lost momentum.
Gaming stocks were dominated by news flow, with the Tattersalls and Tabcorp merger announced and Crown executives were arrested in Macau, driving a negative sentiment into the gaming stocks with revenues at risk given lower VIP participants in local casinos.
All in all, the AGM season was negatively biased which was hardly a surprise given the risks within the markets, the political landscape and slow global growth environment. Companies will need to pedal very hard to get earnings growth as the revenue line struggles. Mergers and acquisitions and cost cutting are going to drive earnings going forward.