Mentioned: AMP Ltd (AMP), Commonwealth Bank of Australia (CBA), Challenger Ltd (CGF), Dexus (DXS), Insurance Australia Group Ltd (IAG), Mirvac Group (MGR), Macquarie Group Ltd (MQG), Newcrest Mining Ltd (NCM), Suncorp Group Ltd (SUN), Transurban Group (TCL), Telstra Corp Ltd (TLS) The second week of earnings season typically features financial heavyweights, property firms and the major telecoms player. In other words, sectors that have felt the impact of the pandemic harder than others. But surprisingly, the news this week has been heartening. As results during the reporting season indicated, the second half of 2020 didn’t prove to be a drag on ASX-listed companies. This week’s announcements have built further on that theme. What the numbers clearly show is that corporate Australia has put the worst effects of the pandemic behind. Investors are in line for much better returns. “There was little to rave about in the first-half earnings release, though the future holds the prospect of stronger earnings growth,” Morningstar analyst Shaun Ler said about the Challenger Financial (ASX: CGF) results, but his words would hold true for most of the large companies that reported this week.

Eyes on CBA and Telstra

Commonwealth Bank (ASX: CBA) and Telstra (ASX: TLS)—the dominant players in their respective sectors, were the most watched stocks for the week. Australia’s biggest bank posted a 10.8 per cent drop in half-year cash profit, after coronavirus-related lockdowns pushed up its expected loan losses. But chief executive Matt Comyn on Thursday signalled a rebound in investment and hirings as the economy recovers. He underlined that positive outlook by lifting the interim dividend 50 per cent to $1.50 a share, and also flagged the prospect of higher payments later in the year. Morningstar equity analyst Nathan Zaia called the results “stronger than expected”. “Lower loan losses in the medium term, expectations of stronger business lending growth, and the time value of money,” were the reasons Zaia assigned for increasing his fair value estimate of CBA shares by 8 per cent to $77 each. Zaia expects the bank will begin to return excess capital to shareholders within the next 12 months. Australia’s biggest bank posted a 10.8pc drop in half-year cash profit, after coronavirus-related lockdowns pushed up its expected loan losses. But chief executive Matt Comyn on Thursday signalled a rebound in investment and hirings as the economy recovers Telstra’s half-year income also dropped—down more than 10 per cent due to hits from COVID-19 and the NBN, while revenue was down 9.7 per cent. Still, the telco maintained its 8 cents-a-share dividend. Senior equity analyst Brian Han says the preliminary impact of COVID-19 on Telstra demonstrated the relative resilience of its earnings and the comfort of its balance sheet. “Critically, the guidance for another 8 cents a share (dividend) in the second half sends a positive signal on management’s line of sight to near-term cash flow trajectory,” he added. Shares in the narrow-moat-rated Telstra are trading below Morningstar’s $3.80 fair value estimate.

Mixed results for financials

Other financial heavyweights reported a mixed bag of results but most forecast improved prospects. Macquarie Group (ASX: MQG) signalled a rebound in its third quarter trading update, helped by increased commodities trading amid the pandemic. It now expects full-year profit to only be “slightly down” on the previous year, eclipsing analysts fears of a sharp decline. Investment manager Challenger Financial also benefited from strong inflows in its funds management unit and rising momentum in its life business. It reiterated full-year earnings guidance of $390 million to $440 million. “Challenger is in much better shape since last year’s COVID-19 scare. A strong capital position saw dividends resume, product sales are improving and cash operating earnings margins and returns on equity will likely improve in the medium term,” Morningstar’s Ler said, while lifting his fair value estimate slightly to $ 7.50 per share. Beleaguered wealth manager AMP Ltd (ASX: AMP) also swung to a full-year profit of $177 million, compared to a $2.5 billion loss in 2019, but its shares lost ground after US suitor Ares Management dropped a $6 billion-plus bid for the 172-year-old group. General insurance firms have been hard pressed to deal with adverse court rulings related to COVID in their business interruption policies, as well as rising natural hazard costs. But that doesn’t seem to have affected their core earnings. The higher provisioning caused Insurance Australia Group (ASX: IAG) to post a $460 million loss, but its half-year cash earnings jumped 22 per cent to $462 million. Rival Suncorp (ASX: SUN) also saw higher earnings across all business lines in the six months through December, pushing its cash profit higher. Shares in the two companies jumped on the news, but both stocks remain undervalued to Morningstar’s fair value estimates.

Return to offices

Meanwhile, the country’s largest listed office owner reported half-year earnings this week, just as corporate Australia is returning to offices. Contrary to expectations, the working from home (WFH) trend has not weighed heavily on its books. Dexus (ASX: DXS) reported a 55 per cent decline in first-half profit but much of this was because of asset revaluation gains being lower from a year ago. Despite the pandemic, Dexus managed to lease over 100,000 square metres of office space —a 24 per cent jump from the previous year—as multinational tenants looked through near-term uncertainty to sign long-term leases. It expects to maintain full-year distribution per security. Despite the pandemic, Dexus managed to lease over 100,000sq m of office space —a 24pc jump from the previous year—as multinational tenants looked through near-term uncertainty to sign long-term leases On the other hand, developer Mirvac (ASX: MGR), which has a significant residential housing presence, posted a 35 per cent fall in first-half profit on Friday. It still declared an interim distribution of 4.8 cents per share.

Transurban’s lonely road

Among other major companies, Australia’s biggest toll road operator Transurban Group (ASX: TCL) plunged to a $448 million half-year net loss, as daily traffic skidded on its road network due to the disruption caused by the pandemic. Lower toll revenues slashed earnings by 23 per cent to $840 million, and the company cut its interim dividend to 15 cents per share. But analysts have shrugged off its rare weak results. “Conditions should improve from here and we expect significant growth in the second half as the firm cycles the heavily virus-impacted second-half fiscal 2020,” Morningstar senior equity analyst Adrian Atkins said. While he has trimmed Transurban’s earnings forecast slightly, Atkins says traffic volumes in Sydney and Brisbane early this year have been as good or better than pre-COVID-19 levels. Melbourne is rapidly improving and he expects US roads to recover through 2021. Gold miner Newcrest (ASX: NCM) was among the earliest sector companies posting half-year results this week, and it did not disappoint with net profit more than doubling to $US553 million, and an interim dividend of 15 US cents a share. The improvement mainly reflected a 26 per cent uplift in the gold price and a 17 per cent rise in the copper price, Morningstar director Mathew Hodge noted. Newcrest shares remain undervalued below his $28.50 fair value estimate. Next week will be the busiest of this earnings season. Major companies that we will be watching include:

• JB Hi-Fi (ASX: JBH)
• BHP (ASX: BHP)
• Rio Tinto (ASX: RIO)
• Fortescue Metals (ASX: FMG)
• Coles Group (ASX: COL)
• Aurizon Holdings (ASX: AZJ)
• Ansell (ASX: ANN)
• Adairs (ASX: ADH)
• Breville Group (ASX:BRG)
• Dominos Pizza (ASX: DMP)
• Treasury Wine Estates (ASX: TWE)
• Super Retail Group (ASX: SUL)
• Coca Cola Amatil (ASX: CCL)
• Tabcorp (ASX: TAH)
• Santos (ASX: STO)
• Woodside Petroleum (ASX: WPH)
• QBE (ASX: QBE)
• Star Entertainment (ASX: SGR)

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