Week Ahead, Earnings Season | Contact Energy – Buy Time

12 April 2021

Global markets were higher on Friday (S&P 500 index +0.8%) as US stocks reached new highs on the back of strong data. Investors shrugged off inflation concerns and focused on the economic recovery although volume on US exchanges hit a new low for the year.  

There wasn’t any major news to drive markets on Friday, but sentiment remains broadly upbeat. Interestingly, markets brushed off news that Europe’s drug regulator had opened an investigation into Johnson & Johnson’s vaccine, after four serious cases of blood clotting. 

Looking ahead, the US corporate earnings season kicks off properly this week with the major US banks reporting quarterly profits. During earnings season the focus of investors usually shifts away from economic issues and back towards company specific numbers.  For the S&P500, the consensus is for earnings growth of 25% in 1st quarter from a year ago given the extraordinary impact of COVID. The Financials sector is expected to be one of the top performers with banks expected to continue writing back loan loss provisions they made last year. 

Contact Energy (CEN:NZX / CEN:ASX)'

The NZ gentailer sector has been distorted in recent months by large investment flows from the IShares Clean Energy Index. S&P index changes for implementation on Friday 16th April remain and our view is to be to be long post 16th April. 

In terms of the detail, the index has looking to change its methodology from 30 stocks to 67 – 100 stocks, which we expect to see selling in Contact Energy for 72m shares (9% of free-float) & Meridian Energy 100m shares (8% free-float).

Overall, we are neutral on the sector. Whilst its defensive characteristics are attractive, bond rates have been moving higher which is negative, and we see increasing regulatory/political risk.

That said, our preferred pick, CEN, is attractive. It is trading on undemanding multiples (p/e ratio 18x, cash yield 5.2%) with a healthy and growing gross dividend yield of 6.5%. CEN is also likely heading into an earnings upgrade cycle on sustained wholesale price increases supported by declining gas deliverability to thermal generators, material increases in carbon prices and demand firmed by a four-year Tiwai smelter low-priced contract extension agreed in January.

We see a great opportunity for investors to BUY Contact shares this week and will release a full initiation of coverage report for members in our weekly report.


Australia & New Zealand Market Movers

The Australian share market closed little changed on Friday but has posted its best week in the past nine (ASX 200 index -0.1%). Banks including Macquarie (+0.8%) and NAB (+0.3%) were flat or up, while miners such as BHP (-0.8%) and Rio Tinto (-0.3%) eased. Gold miners Newcrest Mining (+1.1%). Afterpay (+1.2%) continued to march higher after signs of progress in its US market.
The New Zealand market slipped on Friday (NZX 50 index -0.5%) with a2 Milk (-3.3%), Ryman (-2.6%) and Spark (-1.8%) dragging the index lower.

Pacific Edge recovered +21.2% after announcing its bladder cancer test gained coverage from US insurer UnitedHealth (+3.1%). While changing clinical practice will continue to take time, recent announcements have helped to prove up the commercial model and lower the risk


3 Things Markets will be Watching this Week

  1. Reporting season in the US also kicks into gear with 24 S&P 500 companies due to report including JPMorgan, BofA, Citi, Morgan Stanley and Goldman.
  2. Locally, the latest employment data in Australia is due while the RBNZ meets on Wednesday.
  3. Bank of Queensland will release 1st half earnings on Thursday with quarterly updates due from Transurban, Mineral Resources and Auckland Airport. AGM’s are scheduled for Santos, Woodside, NZME and Seeka.


Looking ahead, the US corporate earnings season kicks off properly this week with the major US banks reporting quarterly profits.

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