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The week that was: earnings and covid collide

Emma Rapaport  |  07 Aug 2020Text size  Decrease  Increase  |  
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The first of the August reporting season results were somewhat overshadowed this week by the Victorian government's decision to move to stage-four lockdowns, forcing almost all retailers to close and stoking fears that the worst is far from over for the Australian economy.

The criteria for JobKeeper program will be eased, under a new plan announced by Treasurer Josh Frydenberg, adding another $15 billion to the coronavirus recovery scheme.

Australia's share market finished the week higher by 1.44 per cent, after earlier gains outweighed Friday's session which closed lower.

Week 2

National lockdowns and restrictions on large gatherings sent the commercial property groups into panic mode, but two operators have emerged largely unscathed (so far). No-moat-rated ALE Property Group (ASX: LEP) revealed on Tuesday that it has been largely unaffected thanks to its strong tenant, Woolworths-backed ALH Group, continuing to pay all rents despite tough conditions for pubs.

Morningstar senior equity analyst Adrian Atkins expects a similar outcome during secondary waves of infection and lockdowns and has maintained his fair value.

Read Atkin's full report here:  ALE Property's Distributable Profit Grows 7% in Fiscal 2020 Despite Pub Closures

BWP Trust (ASX: BWP) was another one to be spared, with the vast majority of rent coming from highly defensive Bunnings Warehouses. During the COVID-19-impacted June quarter, 98.8 per cent of rent was received from tenants. Non-paying tenants included gyms and other retailers that were given rent abatements because they were forced to close during the lockdowns.

Atkins says Australia's second wave of infections and lockdowns in Melbourne suggest rent abatements will reoccur. Overall, though he believes BWP's rental income remains "highly secure".

Read Atkin's full report here:  Resilient BWP Trust Posts Flat Fiscal 2020 Result

Results from several large firms gave us an insight into just how much the coronavirus has transformed Australian business.

Medical device manufacturer ResMed (ASX: RMD), which is known primarily for its sleep apnea product, has done an about-turn, rushing to deliver ventilators to hospitals around the world fighting coronavirus on the frontline. ResMed's top-line sales were boosted by these one-off ventilator sales, adding an additional 6 per cent to total gains.

However, Morningstar analyst Johannes Faul's says near-term outlook for the company's sleep apnea treatments is subdued, as current sleep apnea diagnosis rates are tracking below the previous corresponding period, and coronavirus-related ventilator sales are expected to trail off.

"Lower sleep apnea diagnosis rates impact directly on device sales which contribute approximately half of revenue," Faul says. 

RMD shares screen as significantly overvalued, trading at a 29 per cent premium to Morningstar's fair value estimate. 

Read Faul's full report here:  ResMed Faces Near-Term Headwinds but Long-Run Strategy and Outlook Sound 

On Friday, Insurance Group Australia (ASX: IAG) reported a full-year profit of $435 million, down almost 60 per cent, after a challenging period of drought, bushfires and a pandemic. Also reporting, REA Group (ASX: REA), operator of property classifieds website realestate.com.au, and American media and publishing giant News Corp (ASX: NWS).

Analyst reports will follow in the coming days.

RBA: the long road to recovery

As expected, the Reserve Bank left rates unchanged at its Monetary Policy meeting on 4 August.

There were plenty of “V” words in Governor Philip Lowe’s statement, but none linked to the shape of economic recovery, Morningstar head of equity research Peter Warnes points out.

"The words included “virus”; “very high infection rates”; “very high level of liquidity”; “very difficult period”; “volatility”; and “Victoria”," he says.

"The statement revealed the RBA board is increasingly concerned about the shape of the economic recovery."

The RBA also ruled out a negative cash rate to stimulate the economy, even though it has predicted the unemployment rate to rise to 10 per cent by the end of the year.

Read Warnes’s full take on the meeting .

Earnings season heats up

August earnings season will really kick into gear next week as some of the largest publicly traded banks, resources, property companies, and other firms are expected to report their earnings.

They include:

  • Challenger Ltd (ASX: CGF) - Tuesday 11 August
  • Commonwealth Bank of Australia (ASX: CBA) - Wednesday 12 August
  • Transurban Group (ASX: TCL) - Wednesday 12 August
  • AGL Energy Limited (ASX: AGL) - Thursday 13 August
  • Goodman Group (ASX: GMG) (f) - Thursday 13 August
  • Telstra Corporation Ltd (ASX: TLS) - Thursday 13 August
  • Woodside Petroleum Limited - Thursday 13 August
  • National Australia Bank Ltd. (ASX: NAB) (q) - Friday 14 August

This article is part of Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

is an editor for Morningstar.com.au

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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