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How to decode the covid reporting season spin

Lex Hall  |  27 Jun 2020Text size  Decrease  Increase  |  
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We talk a lot about company stewardship at Morningstar and particularly the ability of managers to allocate capital. But there are less quantifiable ways to appraise what management is up to. And as the August reporting season draws near, it’s tempting to think that company managers will put all their missed revenue targets, rising costs and job cuts down to the covid effect.

One person who’s particularly alive to that possibility is Morningstar Australia equity analyst Brian Han.

“It would be easy for a company to blame the coronavirus for classifying a bunch of restructuring costs as ‘one-offs and pushed ‘below the line’,” Han says.

“But that may just be a convenient way of wiping the slate clean of costs which would have had to be incurred in future years anyway, especially if management has hitherto been slow to transform, reorganise or invest in the business in the face of structural disruptions or legacy hangovers.”

To that end, Han has drafted a veritable “cheat sheet” that will help investors decode the “creative disclosure spindoctoring” emanating from the C-suite around August and determine whether the virus will leave a permanent imprint on company fundamentals.

For instance, if in August, the CEO of the company in which you hold shares, says: “Our first and foremost priority is the safety and well-being of our staff but staff rationalisation is needed to ensure business's long-term sustainability"; Han says it's likely he means this: "Business was bloated pre-covid and the pandemic is the excuse to belatedly tackle the problem".

Or if you hear, "Non-cash and previous valuation parameters have been compromised by impact of coronavirus", you should take it to mean: "Asset was already on an impaired path before covid due to overpaying or dismal earnings".

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You can read the rest of Han’s guide to message massaging here.

In Firstlinks this week, Graham Hand rummages through some demographic figures and examines the economic impact of Australia’s declining birth rate and the fall in immigration because of covid-induced travel bans. Hand notes, for instance, that underlying demand for houses will fall by 80,000 dwellings a year because of the immigration decline.

Elsewhere this week, Morningstar director Mathew Hodge ponders what he sees as mounting challenges for Australia if Donald Trump is elected for a second term. “Australia is in an awkward position,” Hodge argues, “more idealistically aligned to the politics and values of a pre-Trump America, yet reliant on China for more than one-third of its export income. A Trump win could further erode global trade and relationships. Australia will need to walk a fine line, but there could be further casualties.”

afterpay sign

Are you one of the battalion of retail investors who have joined the Afterpay army? Or do you share the scepticism of some Australian fund managers for the buy now, pay later star? Emma Rapaport examines their reservations; meanwhile, in London, Holly Black delves into the scandal engulfing German payments provider Wirecard and the broader question of whether fund managers should make such big bets; Glenn Freeman investigates why retail investors are getting a raw deal when it comes to pandemic capital raisings; Freeman also talks to Janus Henderson for tips on hunting dividends; Amy Arnott looks at the flipside to diversification to argue that scattering your portfolio too broadly across asset classes probably won't lead to better results and can even be counterproductive; and finally, we speak with Fidelity International’s Bertrand Lecourt on why, like Michael Burry in The Big Short, he’s dipped his toe into water and waste investing.


Prem Icon Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

is senior editor for Morningstar Australia

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