StarMine’s Negative Predicted Surprises – Asia

At the beginning of each earnings season, the StarMine team quantitatively analyzes the earnings estimates accuracy of sell-side analysts, using proprietary “SmartEstimates®” and the related “Predicted Surprise” measures. From these measures, we forecast companies we expect to beat or miss expectations when they next report.   Over many years, this earnings season forecast has been directionally correct roughly 90% of the time in Asia. You can view how this is done using Eikon, in the following short video.

Our picks for companies in Asia expected to miss earnings estimates for 2015 are — Sembcorp Marine Ltd. (SCMN.SI), BHP Billiton (BHP.AX), Bharat Heavy Electricals (BHEL.NS), China Unicom Hong Kong Ltd. (0762.HK) and IHI Corp. (7013.T).

SmartEstimates aim to provide earnings forecasts that are more accurate than I/B/E/S Consensus Estimates, by putting more weight on the recent forecasts of top-rated analysts. When SmartEstimates diverge significantly from consensus, you can anticipate the occurrence of earnings surprises with an accuracy rate of 70%. Revenue SmartEstimates are even more predictive of surprises, with a historical accuracy rate of 78%.

As we do each year, we selected 10 companies using the Eikon Screener that we expect to fall into the positive or the negative camp, based on SmartEstimate and Predicted Surprise data. We have summarized that data and the facts behind it for the five negative picks below. Historically, our selections have demonstrated an accuracy rate of about 90% in Asia, giving investors an edge when it comes to positioning themselves ahead of these earnings announcements. We got 100% of our picks correct last year. You can see our positive picks here.

Negative surprise predictions 

Sembcorp Marine Ltd. (SCMN.SI)

Source: Eikon/StarMine

Falling margins

After making significant investments and committing large capital expenditures over the past six quarters, this energy, water and marine supplier is seeing rig demand plummet amid falling oil prices, making many analysts question the timing of those investments. With more than SGD 200 million (Singapore dollars) in negative free cash flow in each of the last six quarters, margins at Sembcorp are likely to be compressed.

The company also may see cancellations of some key contracts after accepting only 5% as an initial down payment. Key bankruptcies in Brazil are also a major concern as Sembcorp may not be able to collect on its receivables. The company does poorly on many of the StarMine models, including a score of 2 on the Analyst Revisions Model, which means estimates could go even lower.

BHP Billiton (BHP.AX)

Source: Eikon/StarMine

Falling production and prices

For this global miner, declining oil and commodity prices and weakening production of oil and iron ore in the last half of the year will likely lead to weaker than expected earnings. A debt downgrade looms as the company scored poorly on StarMine Credit models.

Layoffs and cost cutting are likely to lead to many one-offs this year. BHP continues to invest in exploration and production but may be hampered by falling commodity prices and poor cash flow.

Most investments made in the past require commodity prices to rise to be profitable. Operating profit margins have fallen to 28%, the lowest in 10 years. Return on net operating assets has declined to 12%, also the lowest in 10 years and a sign that operating efficiency is at an all-time low, necessitating the cost cutting.

Bharat Heavy Electricals (BHEL.NS)

Source: Eikon/StarMine

Uneven expectations

This maker of electrical machinery has increased its projects tremendously while the Indian economy is booming, but not all of them have strong margins.

Overall, revenues declined by about 20% each year in the last two years. That trend might reverse as the government is looking to invest in infrastructure and development. However, these projects have seen margins fall tremendously as bidding for them becomes very competitive. Operating profit margin has fallen to below 5% in the last reported period, less than a third of what it was just a few years ago.

While the company is making the required investments in anticipation of strong demand over the next few years, any slowdown in the Indian economy could hurt BHEL tremendously. Analysts have already taken down revenue estimates for this year and next by 3% and 4%, respectively. Earnings estimates have been taken down even more, by 36% and 23% for this year and next.

China Unicom Hong Kong Ltd (0762.HK)

Source: Eikon/StarMine

Meeting government demands

China Unicom is the world’s fourth largest mobile service provider by subscriber base. The Chinese government is pushing telecom companies to increase their bandwidth, while providing cheaper access to the residents of China. That is hurting the profits of telecom companies. The government restricts the prices which telecom companies can charge their customers – another drag on earnings into 2016.

There are even two Bold Estimates of CNY0.35 and CNY0.42 – far below the consensus. These 5-star rated analysts have a strong track history of being accurate, so we pay attention to them.  Revenue for China Unicom fell in 2014 by 3%, and based on current estimates for the year, that number will be down again this year.

IHI Corp. (7013.T)

*Operating profit (billion).

Source: Eikon/StarMine

Boiler problems, delayed deliveries

IHI produces ships, aircraft engines, turbochargers for automobiles, industrial machines, power station boilers and other facilities, suspension bridges and other transport-related machinery.

Recently, some boilers were found to have welding problems, a serious safety issue, and IHI had to spend considerable resources to re-weld these boilers. Delivery was late. With many timelines missed, the company earnings are in a downward spiral.

Analysts have been quick to lower their estimates. There are even two Bold Estimates that are far below the consensus. Just 90 days ago, there were nine buys and seven hold estimates, there are now just five buy recommendations, eight holds and two sells. The Analyst Revisions Model score of 2 indicates that more negative revisions may be coming.