Australia’s full year reporting season is drawing near and Goldman Sachs has whittled down the list of stocks it reckons will deliver positive and negative earnings surprises, or surprises on capital management or outlook statements.
Goldman Sachs sees positive surprises coming from dominant telco Telstra (TLS.AU), miner South32 (S32.AU),聽Bluescope Steel (BSL.AU), casino operators Crown Resorts (CWN.AU) and Sky City Entertainment (SKC.AU) (SKC.NZ), horticultural play Costa Group (CGC.AU), and financial software provider Bravura Solutions (BVS.AU). All the stocks are rated buy except Bravura Solutions which is rated neutral.
Here’s why the broker is bullish on South32:
We expect the company to end聽FY17 with around US$1.3bn of net cash. With limited near-term requirements internally for the cash, there is a strong likelihood that S32 can increase its active returns of capital to shareholders, in our view. Currently S32 is around c.40% into an US$500m buyback program. We believe that there is a very strong chance that the program could be doubled to US$1bn. Combined with c.US$400m of ordinary dividends, we estimate聽S32 could deliver a total capital return of c.12% over the following 12 months.
And here’s why Goldman Sachs is upbeat on Telstra:
We believe Telstra鈥檚 FY17聽result (August 17) has the potential to positively surprise given we believe it will announce the outcome of the capital allocation review that it is currently undertaking. We see this as an opportunity for Telstra to crystalize a significant amount of value from its long-term (30+ years), inflation linked NBN payments. In our recent note, we estimated that if it were to securitize these at a discount rate of 4.55% and buy back stock, it could be c.20% EPS accretive across FY19-21E and support a 34垄ps dividend (vs. GSe 28垄ps).
The result will also provide an update on the performance of its productivity program. Although we see this A$1bn program as somewhat conservative relative to global precedents, its ability to deliver on this does face a significant degree聽of investor skepticism. Hence a strong performance on costs at this result should help Telstra to build credibility for its broader program.