Apple warning spooks the market while BHP surprises on earnings and dividends

Equities 5 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Apple issues a revenue warning for Q1 as production and retail store closures have lasted longer than anticipated just a month ago. It highlights the supply chain issues related to the COVID-19 outbreak in China. BHP reports strong H1 result resulting in a declared ordinary dividend that is much better than expected by the market. HSBC is sending a strong signal to the market that the banking industry will face structural headwinds for the next three years as the bank is planning to lay off 35,000 employees and reduce risk-weighted assets by $100bn.


Apple shares listed on German exchanges are down 6% this morning as the US technology company issued a downward revision to revenue for the current fiscal quarter ending 31 March. The main issue is of course the COVID-19 outbreak in China which is constraining sales in China but also production and thus sales globally. While many companies have by now issued warnings it seems it had to take Apple for the market to wake up. Equity futures are negatively impacted across all markets.

Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors.

The first is that worldwide iPhone supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province — and while all of these facilities have reopened — they are ramping up more slowly than we had anticipated. The health and well-being of every person who helps make these products possible is our paramount priority, and we are working in close consultation with our suppliers and public health experts as this ramp continues. These iPhone supply shortages will temporarily affect revenues worldwide.

Source: Saxo Group

BHP shows why it’s best-in-class

BHP delivers something for all in their 1H result with underlying profit up 39%, but take it with a grain of salt as net operating cash flow was only up 2% y/y, but issued a potential demand and outlook warning due to COVID-19:

If the viral outbreak is not demonstrably well contained within the March quarter, we expect to revise our expectations for economic and commodity demand growth downwards. This caveat applies, to varying degrees, across our portfolio and we will continue to monitor. In this regard, we highlight the distinction between a permanent loss of demand in oil due to foregone transport services; and temporary demand losses with the opportunity to be reclaimed, as in steel and copper end-use.

Despite this warning which on the surface looks terrible the overall BHP business did very well with ROCE of 19% which is exceptional for a business operating in the lowest part of the global supply chain with close to zero moat. The improved cash flow generation has allowed The Board to increase the ordinary dividend per share to $0.65 which was much better than the consensus estimate of $0.58 and the reason why investors were excited in Australian trading.

HSBC does the ‘kitchen sink’ exercise

HSBC reports shareholder profit that’s down 53% y/y driven by a large $7.3bn goodwill impairment. Shares are down 4% in London on earnings miss but also the fact that the bank is announcing to cut 35,000 employees over three years and reducing risk-weighted assets by $100bn sending the signal to the market of a negative structural view over the coming years. This is clearly still terrible to be a bank as central banks’ policies continue to pressure the net interest margin. HSBC is signaling an expected return on tangible equity of 10-12% by 2022 which underscores the difficulties to run a bank at profitable levels for shareholders.
Source: Saxo Group

HSBC announces the press release that the COVID-19 outbreak in China and the social unrest in Hong Kong have negatively impacted the business in the Greater China segment. For global investors the bank issues the following view on the macro economy:

The macroeconomic environment as a whole remains uncertain. As a result of the impact of the coronavirus outbreak, we have lowered our expectations for growth in the Asian economy in 2020. The main impact will be in the first quarter, but we expect some improvement as the virus becomes contained. The agreement of a ‘phase one’ trade deal between China and the US is a positive step, but we remain cautious about the prospects for a wider-ranging agreement given disagreements that still exist, particularly over technology. We expect growth in the US to be resilient, but slower than in 2019.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.