Five Key Takeaways From Australia's February Earnings Season

(Bloomberg) -- That's a wrap on Australia's earnings season and while results were largely positive, they failed to keep pace with the global earnings boom.

Here are five key takeaways:

Sells on the Decline

The number of sell recommendations on S&P/ASX 200 Index stocks, as a percentage of total ratings, fell to 18 percent on Feb. 28, the lowest since May 2016. That's down from 20 percent when reporting season kicked off Jan. 29.

Buy ratings rose to 38 percent from 37 percent while the number of hold recommendations advanced to about 44 percent from 43 percent.

More Good Surprises

The more optimistic mood among analysts is largely due to positive earnings surprises. Of the 118 companies on Australia's benchmark index that reported a surprise this season, about 58 percent were positive, led by industrials and financials, according to data compiled by Bloomberg.

Investors also reaped the benefit of improved payouts, as forecast by Bloomberg last month, with 32 positive dividend surprises outnumbering the 24 negative distribution results, according to Macquarie Group Ltd.

One exception on the earnings front was Australia's mining industry, which is led by BHP Billiton Ltd., the world's biggest. The sector “dominated some of the largest misses, disappointing on cost performance in particular,” Macquarie analysts said in a Feb. 27 note.

Volatility

The volatility that gripped global equity markets in February also played out in Australia, with 22 companies posting moves greater than 10 percent in a single session after reporting earnings. Excluding moves spurred by takeover offers, 14 firms saw increases of 10 percent or more, while eight had a similar decline.

Health Care Buoyant

The health-care sector posted the biggest increase in price targets over the period, rising an average 5.1 percent. Leading that pack was Sirtex Medical Ltd., which accepted a A$1.6 billion ($1.3 billion) takeover offer from Varian Medical Systems Inc. Consumer staples clocked the next biggest advance while utilities had the biggest decrease.

A2 Milk Ltd. won the biggest increase in price target from analysts -- 55 percent to A$4.78 -- after it posted a twofold increase in first-half profit and a partnership with New Zealand's Fonterra Cooperative Group Ltd. On the opposite end, IPH Ltd.'s price target was slashed 21 percent to A$4.55 amid a decline in intellectual property filings.

Still Lagging Global Index Peers

Despite the more upbeat mood among analysts, Australia is still lagging other markets. Buys on the MSCI Asia-Pacific Index made up more than 59 percent of total ratings at the end of February, while on the MSCI Global Index, they accounted for about 49 percent of the recommendations.

“While marginally better than ‘normal,' Australian earnings continue to lag the global uptrend,” UBS Group AG strategist David Cassidy wrote in a March 1 note.

“It is clear that the picture of an improving domestic economy driving operating leverage as is occurring in many markets offshore is not really playing out in the case of Australia,” Cassidy said. “Profit conditions remain patchy and quite stock specific.”

--With assistance from Vivek Shankar

To contact the reporter on this story: Tim Smith in Sydney at tsmith58@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Rebecca Jones, Edward Johnson

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