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Earnings wrap: Coronavirus hits WiseTech and Crown

Australian companies are suffering the consequences of the deadly coronavirus outbreak in China.

Mentioned: The Star Entertainment Group Ltd (SGR), WiseTech Global Ltd (WTC)

Australian companies are suffering the consequences of the deadly coronavirus outbreak in China, dubbed COVID-19. WiseTech Global and Crown are both caught in the fallout.

WiseTech tumbles 35pc

WiseTech (ASX: WTC) chief executive Richard White took a $1.6 billion hit on Wednesday after the logistics company reported a surprisingly weak first-half result and said it expected to earn as much as $31 million less than forecast. The company blamed the coronavirus, saying the outbreak was causing an effective shutdown of China.

WiseTech expects to deliver full-year earnings of $114 million to $132 million, down from its previous forecast of $145 million to $153 million.

It now expects full-year revenue to grow 21 per cent to 29 per cent to $420 million to $450 million, down from the previous prediction of $440 million to $460 million.

"The unexpected outbreak of coronavirus (Covid-19) and the effective shutdown of China, a critical driver of the global manufacturing supply chain and a 16 per cent contributor to global GDP, is creating negative flow-on effects to manufacturing, slowing supply chains and economic trade across the world," White said in a statement.

The stock plummeted 27.3 per cent on Wednesday to a nine-month low of $21.40. Yesterday, it was down another 11 per cent to close at $18.88. That's a 35 per cent fall in less than two trading sessions.

Price Chart | WiseTech Global (ASX: WTC)


19/02/2020 - 20/02/2020. Source: Morningstar Premium

Despite the drop, Morningstar equity analyst Gareth James says the stock remains overvalued. At yesterday's close, it is trading at a 133 per cent premium to James’s $8.10 fair value estimate.

James had expected the first-half result to be "explosive" following accusations made against the company by two offshore short-selling research firms late last year and early this year. However, he says the coronavirus downgrade was the icing on the cake.

"Although we weren't entirely convinced by the accusations, the market was clearly nervous going into the result and needed evidence and reassurance that the business is performing well," he says.

"The guidance therefore came at a particularly bad time for the stock. We expect the share price fell so heavily following the result because the market has realised that WiseTech is susceptible to macroeconomic and company specific issues.”

Related article: Coronavirus: Impact and Opportunity

James's fair value implies a price to earnings ratio on Wednesday of 36 versus 99 at the share price. A P/E ratio reflects the earnings potential of a company in the eyes of investors.
The P/E ratio of the broad Australian share market has for the most part fluctuated between 10 and 20, with a long-term average of about 15.

The weak first-half result represents the first hiccup for WiseTech since its incredibly successful IPO in 2016. At its last peak, WiseTech's share price had risen by over 1000 per cent since the IPO. The company also upgraded its fiscal 2019 revenue guidance three times before exceeding guidance at its result. James says this arguably created a perception that WiseTech "could do no wrong".

WiseTech declared an interim dividend of 1.7 cents per share, fully franked, compared with 1.5 cents a year ago.

Read the full report: WiseTech Global remains overvalued following weak first-half result

Crown's temporary downturn

Crown Resorts (ASX: CWN) has similarly warned of the coronavirus's impact after the casinos operator reported a lower first-half profit result.

The company's normalised net profit, which adjusts for significant items and variances in win rates, fell 11 per cent to $172.7 million compared with the first half last financial year.
Crown chief executive Ken Barton said the 2020 first-half result reflected mixed trading conditions across their various businesses and he flagged concerns over the impact of coronavirus outbreak on trading.

"Crown has recently experienced softer trading conditions as a result of travel restrictions and general community uncertainty in response to Covid-19, particularly over the Lunar New Year period," he said.

Crown Resorts dropped 0.3 per cent to a six-year low of $11.76 on Wednesday.

The company had a difficult end to 2019 after media allegations of impropriety, which it denies, and union disputes over pay increases.

However, Morningstar equity analyst Brian Han has a positive view on the Crown's long-term outlook and continues to expect Crown to take a significant share of Star Sydney's VIP customers when Crown Sydney opens in 2021. At yesterday's close price of $11.90, shares screen as slightly undervalued against a fair value of $13.40.

Uncertainty is likely to continue in the short-term, Han says, with the virus impacting the New Year period.

The company declared an interim dividend of 30 cents per share.

Crown’s rival Star Entertainment (ASX: SGR) faces coronavirus risks too. However, at midday on Thursday, it had added 19 cents, or 4.59 per cent, to $4.33 despite being virus impacted and having a near 50 per cent plunge in half-year net profit because of lucky VIPs.
It is trading roughly in line with a Morningstar fair value estimate of $4.50.

Read the full report: Crown’s VIP business challenged short-term; FVE cut by 3 per cent

Other companies to watch on Thursday included Sydney Airports, Qantas, Boral, Austal, Beacon Lighting, Bingo, Coca-Cola Amatil, Domain, Iluka, Integral Diagnostics, Lendlease, Medibank, Origin, Perpetual, Santos, and Whitehaven Coal.

Morningstar has compiled a handy list of more than 150 companies under coverage that will release earnings results during February Reporting Season.

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