Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 121

What goes on during reporting season?

For equity analysts in Australia, Christmas comes twice a year, every February and August when the majority of Australian listed companies reveal their semi-annual profit results. At this time companies also provide guidance as to what growth in profit, revenue, profit margins or dividends that shareholders can expect over the following financial year. This can be a stressful time for a fund manager. When companies reveal unpleasant surprises, the company’s stock price tends to get sold down hard. Alternatively, it can be very pleasant when the company reports a good result which validates the investment case for originally owning their shares.

This is how we approach the reporting season and what goes on during a typical day. It’s not all convivial lunches with management teams in the boardroom of an investment bank overlooking Sydney harbour.

Before reporting season

In the lead up to reporting season, Aurora reviews all the stocks in the portfolio and considers the key factors and financial metrics that investors will be looking for on results day and we compare our forecasts to the consensus analyst forecasts. What we are trying to do here is to identify which companies are performing ahead of expectations and more importantly which companies have the potential to disappoint. The majority of Aurora’s funds seek to be positioned through either physical equity holdings or derivative positions to take advantage of corporate news flow that causes volatility in a stock price.

On the day

Generally companies post their financial results with the ASX around 9am. This gives investors an hour to digest the facts and figures before the stock exchange begins trading at 10am. During this period we will be combing through the profit and loss, balance sheet and cash flow statements comparing our forecasts to what the company actually delivered. Also it is important to compare how a company has performed against their peer group. For example, in isolation Westpac reporting a slight decline in net interest margin (NIM) and modest lending growth could signal a great result if both ANZ and NAB have reported big declines in both categories.

In many cases company management also gives earnings guidance or an outlook statement which is dissected in minute detail, for changes in tone and language, much like students of Renaissance literature interpreting the meanings in Donne’s Holy Sonnets. With some companies it can take a while to digest the finer details of the financial accounts.

Company management will then formally present their results to shareholders on a conference call or in person during the morning generally between 9am and midday. These presentations are directed towards the institutional investment community and are effectively closed to the media and public. These meetings can take between one and two hours, as the management team gives greater detail on the factors that contributed to the profit result and explain any potentially contentious issues.

The most informative part is always the Q&A session, which gives investors the opportunity to gauge how confident management are in tackling the more contentious issues coming out of their financial accounts. Typically it will only be the sell side analysts asking questions of management, with the large institutional investors saving their questions for behind closed doors. The problem with this is that in addition to writing research, some sell side analysts want to protect their relationship with the company and offer soft questions for the management or avoid the hard questions when the management has made some mistakes. This is where you will see agitated fund managers asking questions in a public forum, such as “What comparative advantage does QBE have in writing Argentinean workers compensation insurance?”

Lunch with the company

After the results presentation we will generally have a quick discussion to see if there have been any fundamental changes to our thoughts and discuss the market reaction. The immediate market reaction can often be misleading, as most of the trading is being done by hedge funds or high frequency traders, rather than long-term fundamental investors. Most companies will hold a lunch for investors at one of the global investment banks, where invitation is based on the combination of how big an investor you are in the company and how much brokerage the fund manager pays that particular investment bank. These events are held in the boardroom of the bank and are fully catered, though it is rare to see anybody accepting a glass of wine with their steak or fish. Many fine bottles of wine from the cellars of the investment banks get opened, offered around the table by waiters and then returned to the sideboard.

Whilst this may seem to offer institutional investors an advantage over retail investors, it is rare that any new insight is gained in these events. This occurs as they are essentially a group meeting of rivals trying to understand what others think about the company and if you know the company well or have a particularly insightful question, an analyst will save that for a one on one meeting with the company. One year I attended a lunch with Fletcher Building at which the three largest shareholders (collectively owning close to 25% of the company) were present. As neither of these shareholders asked any questions, the lunch degenerated into Building Products 101, not a great use of precious time on results day. Often several large and complicated companies report on the same day, so unless an individual company has had a particularly good or bad result, it is poor time management to spend hours picking through the financial accounts of a company that has performed as expected.

Immediately afterwards

Over the following weeks, the company will then organise individual one hour meetings with their largest institutional shareholders both in Australia and overseas. Prior to these meetings it is important to be well prepared, as this is frequently the best forum to understand whether you should buy more of a company’s stock or completely sell out. During our meetings with the management teams, we will generally seek clarity (on behalf of our investors) on certain issues that we feel weren’t covered to our satisfaction at the formal presentation. Whilst some of these meetings can be hostile or friendly, they are a valuable forum for both parties to give feedback on not only how our client’s capital has been managed in the past, but also as to how that capital should be employed in the future. Several times I have been in these meetings where management has raised a potential strategy which seemed aggressive and quite alarming. By institutional investors signalling that they would be unlikely to support a course of action or capital raising, these companies saved investor’s millions of dollars in investment banking fees!

After the management meetings and subsequent to reviewing the financial results of a company’s competitors we are then in a position to determine what changes (if any) are made to our valuation of the company and whether the security’s weight in the portfolio is still appropriate in light of competing investment opportunities.

 

Hugh Dive is a Senior Portfolio Manager at boutique investment manager Aurora Funds Management Limited, a fully owned subsidiary of ASX listed, Keybridge Capital. This article is for general education purposes.


 

Leave a Comment:

     

RELATED ARTICLES

Dividends, disruption and star performers in FY21 wrap

It's the middle of reporting season: what's really happening?

Dog-eat-dinner: a tough day in the life of a broker analyst

banner

Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.