Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
August reporting season has profit margins and managing expectations in focus
With most ASX-listed companies having balance sheet dates of 30 June, this August is gearing-up to be a key month as reporting season kicks into full swing when companies release their full-year results.
Earnings season is a prime opportunity to assess up-to-date information on whether this year’s profit results have beaten expectations, met expectations, or missed expectations. Companies that beat on the upside will usually see a positive share price movement, and those that disappoint can expect a savage share price rout.
The last two years have been out of sync due to Covid-19, rising inflation, the war in Ukraine, Chinese lockdowns and the supply-chain disruptions that followed. This month’s reporting season will be the ultimate test in showing how well earnings have stacked-up against expectations and may give some indication of where markets are headed. Key themes to watch this earnings season include cost inflation, commodity positioning, the quality premium and FY23 earnings trends.
In terms of market performance, there has been a rotation out of risky, tech-growth companies and into safer quality companies with stable and consistent earnings. There is an expectation that profits appear to be holding up despite inflationary pressures. With headline inflation nearing its peak, the knock-on effect from the recent rate hikes is yet to be seen.
Reece Birtles, chief investment officer at Martin Currie Australia, looked at key market developments since last reporting season and noted that Australia’s economic backdrop is still strong, but supply and demand pressures are growing and there will be differing short- and long-term impacts on margins from rising inflation.
“At their core, many industrial businesses convert a primary material (bauxite, lime, clay) plus energy (gas, coal, electricity) into an end-product (e.g., bricks, cement, alumina, steel). Where companies don’t have a direct pass-through of cost inputs, they could face significant margin pressure. Other industrial businesses, such as Amcor and Brambles, faced early-cycle inflation pressure from input costs in their US businesses but are also likely to see better profit margins as costs have started to roll-over as the US brings inflation closer to target. We will also be interested to see if businesses with domestic supply chains that compete against imports can demonstrate a cost and supply advantage in the current environment to help them win market share,” Birtles says.
Birtles is also confident the rise in interest rates will benefit the banks. He says, “For the banks we expect higher rates to boost net interest margins (NIMs), especially the ‘exit NIM’ for the July or September quarters. Banks with large retail deposit bases will benefit the most. For general insurance, we are concerned by the significant supply-chain and claims-cost inflation, but premiums are now starting to outpace strong inflation. Financials, in general, will continue to face pressure on IT and wage rises next year will continue to impact their cost outlooks.”
What to look out for this reporting season:
- Banks are the first to report. CBA FY results are due 10 August. The consensus is for cash earnings to come in at $9.245 billion, down 9.0 per cent. Higher interest rates do bode well for net interest margins.
- Insurance companies to benefit from rising interest rates.
- Mining stocks are expected to announce record levels of dividends. Medium-term commodity prices are expected to drive higher due to supply-side constraints.
- Energy stocks could see a continued rise in profits due to the Ukraine saga.
- Retailers face a difficult environment. But there are some that will beat. JB HiFi and Myer have both flagged record profits.
- Travel has endured a tough time. Pent-up demand is due to hit soon.
- Consumer staples have been able to pass-on inflation to customers.
- Tech wreck is sensitive to interest rates and was hit hard. However, there are some profitable tech stocks
- Healthcare has been able to withstand a lot of Covid-19’s effects. CSL looks to be back on an upward trajectory.
Although Birtles is bearish on the Australian iron ore sector because of Chinese growth issues, he is positive on the resources sector as the world decarbonises. He says, “We are also keen to see significant improvements in the energy, construction and decarbonisation project pipeline that will benefit contractors such as Worley, Downer EDI and Monadelphous Group.” Birtles expects “to hear a lot more discussion around the domestic energy crisis and energy transition. Results for electricity generators face a wide range of outcomes given risks around hedge books, contract positioning and supply disruptions. Whilst these issues will dominate FY22 and FY23 earnings revisions, by FY24 these companies will have large earnings upgrades given energy pricing.”
Morgans has also released a reporting season playbook outlining some of the key trends expected this earnings season. These include cost inflation, FY23 earnings trends, quality premium, short selling, and positioning in resources. While the risk of missing earnings expectations is high, a lot of the negative news is already baked into the price.
“The tug-of-war between what the market expects to happen is at odds with what is currently occurring. We don’t disagree that higher interest rates portend lower economic growth, but is the market right to be worried about a collapse in earnings expectations? We don’t think so, but August won’t hold all the answers,” Morgans says.
The broker has gone on to identify 32 stocks it believes will have a positive earnings surprise owing to strong industry tailwinds and better-than-expected forward guidance statements. Companies best positioned to report well are those that can combat inflation by passing through costs.
Morgans is also expecting this season to be a dividend bonanza, with record levels of dividends to be announced driven by low-cost producers.
Here is Morgans’ list of companies to watch this earnings season.
