Glenn Freeman: I'm Glenn Freeman for Morningstar. And we're here for an earnings wrap up of first half 2020. And I'm joined today by Peter Warnes.

Peter, here we are again.

Peter Warnes: We are and always good to be here, Glenn.

Freeman: So, Peter, there were plenty of surprises in first half 2020. What does this say about investors reliance on, say, company forecasts and the reporting that goes on throughout the year?

Warnes: Yeah, Glenn, that's a good question. Firstly, don't forget, 2019 wasn't a great year for the Australian economy. It was under pressure basically throughout. Year-on-year through September, the growth of GDP was only at 1.7%, way, way below trend and way below the RBA's 2.8% target. And then, we had a blip in the fourth quarter where it was a little bit better than expected and finished for 2019 GDP growth at 2.2% as the very, very weak fourth quarter of 2018 rolled off. So, given that backdrop, the reporting season, the profits that were announced weren't too bad. They were reasonable. But certainly, in terms of magnitude of increases across the board, this was probably the weakest reporting season for many, many years, probably going back a decade.

Freeman: You actually pointed out that there's 40 companies that either surprised on the upside or surprised on the downside, and that's quite a stark number, isn't it really?

Warnes: Yeah, Glenn, it is. And that gives – it comes down to the point of just guidance, corporate guidance, a commitment to continuous disclosure by companies and what is consensus. So, if you've got big movements, in other words, 5% moves, up or down, and of course, the market price is a distillation of the bears and bulls, if you like, of each individual stock, that's what they think. Now, if you've got 40 companies out of our 100 companies that I looked at or that have either surprised positively or negatively, then that calls consensus into question. But it also, I think without beating a dead horse, if you like, the management's commitment to continuous disclosure. You have the confessional period, as you lead into the reporting seasons. Some visit, some don't visit. They probably should pay a bit more. The visitation should be probably a bit more prominent, because wild fluctuations in share prices is not good for anyone.

Freeman: I mean, I know this may put you on the spot but out of the 100 or so companies that you looked at, how many of those actually issued a confession, an update in that confession season?

Warnes: Very few. Of 40, I'd say that they'd be lucky to be 5. And they were – the treasuries that went early, Downer went early, CIMIC went early because of another situation in the Middle East. But there were few and far between.

Freeman: Looking to some of the specific sectors, energy actually jumps out as one that's particularly undervalued on the back of earnings season. What happened here?

Warnes: Well, we know what's happening subsequent to this reporting season, but energy – the three energy stocks that we do cover, Woodside Santos and Beach, two of them, we increased our fair values by I think 12% or 14%. That's in Beach and in Santos. And that's related not to price of oil or LNG; it's related to production and our forward projections of the growth in production. Both are ramping up. And so, that's driving you cash flow. Now, separate that to what's happening in terms of the oil price and the LNG price. They are potentially transient and not moving our long-term valuations on those stocks. So, I'm not saying you go fishing yet. But that's a sector that you should probably have a look at once the dust settles here because the coronavirus will pass, economies will recover, and energy is still the driving force of all economic activity.

Freeman: I guess following on from that, the iron ore miners, again, probably separating out what's happened since earnings season, but how did they perform during the half?

Warnes: Well, again, and they kept the market reasonably well informed. And so, BHP and Rio and Fortescue, they all produced results that were basically in line with the market's expectations. I think the dividends were a tad lower than expectations, but not to any great degree. But the most important thing about those three companies is that their balance sheets are in great shape.

Freeman: Did we see a considerable drop off year-on-year in terms of the dividend payouts?

Warnes: No, not really. I mean, dividends held up quite well. But as I said, overall, the payout ratios in Australia are reasonably elevated. In the non-mining area, the banks are all pushing upwards of 75% to 80%. That is kind of unsustainable, and we've pulled back some of our expectations there, particularly on Westpac and National Bank. We think both Commonwealth and ANZ are fine. They've got much, much better capital positions. But don't expect meaningful increases in dividends from – I think the financial sector generally in a post (indiscernible) environment, they're going to be battening down the hatches. But don't forget, again, shareholders have done pretty well over the last three or four years.