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.
Earnings season: ASX profits boomed by 56pc
Australia’s largest companies rebounded strongly after two years of pandemic interruption, achieving a 56.3 per cent uplift in aggregate statutory profits over FY22.
In a report published by CommSec economic insights, revenue outpaced expenses as constituents of the benchmark S&P/ASX 200 index pushed through higher costs onto customers. Surging commodity prices underlined profits for miners while a buoyant housing market supported bank earnings.
The bumper profit numbers are all the more impressive given the avalanche of pressures corporates faced over the past 12 months.
Speaking to the Inside Investor, Montgomery Investment Management founder and chief investment officer Roger Montgomery said there was no shortage of themes impacting earnings this year including inventory build for retailers, COVID-19 impacts, floods off the east coast, interest rate hikes, supply-chain constraints, war in Ukraine, labour shortages and soaring inflation.
Interestingly, aggregate cash levels fell from the highs reached in February. Part of this is explained by outflows for dividends declared in 2021, but it also highlights the aforementioned cost pressures including payments for additional inventory and higher costs for staff absenteeism. Subsequently, 27 per cent of businesses cut dividends, above the historic average.
Statutory profit also accounts for non-cash gains such as property revaluations. Industrial property developer Goodman Group achieved an operating statutory profit of $3.4 billion, however just $1.5 billion was from operations with the remainder attributed to non-cash movements.
Commenting on earnings season, Montgomery said results were “roughly in line” with his expectations.
“Overall, we had a bit more than 40 per cent of companies surprise to the upside, [and] a little bit less than 30 per cent disappointed. And about a third were in line with expectations.”
Future expectations remain elevated
While current year results were largely met or exceeded expectations, analysts have slashed future earnings with 79 companies downgraded compared to just 26 upgrades.
According to Bloomberg, aggregate earnings remain elevated with a 4.5 per cent increase pencilled in for next year and a further 6.8 per cent rise in 2024. Montgomery expects further revisions over September as the market reviews result in more depth and models are updated.
He suggests market multiples could compress further, particularly if the US Fed continues to reduce the size of its balance asset. But Montgomery says the biggest driver will be earnings. If like most economists believe, a recession is on the horizon for the US, Europe and perhaps even Australia, this will negatively impact corporate profits.
Montgomery adds: “Consumers have spent a lot of money and now their mortgage rate has gone up, fuels going up, electricity and gas have gone up. So there’s a smaller amount left in the consumer’s wallet to spend on anything else.”
Subsequently, he is looking for companies with structural growth. He points to REA Group, owner of realestate.com.au, as one company relatively agnostic to what the economy is doing.
When house prices are rising – like over the past two years, more properties are listed for sale. When house prices fall, turnover might fall, but listings stay up and REA can offset volume falls via price increases. Montgomery adds that listings have been falling for the past 15 years but the company has still compounded earnings at 24 per cent.
“You want to buy those businesses that are demonstrating an ability to continue to grow their revenue, continue to either maintain or improve their margins and therefore grow EBITDA and NPAT [net profit].”
Seeing the forest from the trees
For another company he likes over the next three to five years, Montgomery points to home-grown aftermarket auto parts manufacturer and distributor ARB.
He admits sales were brought forward during the pandemic and in the near-term customers will shift spending away from goods toward services like travel and dining out. But Montgomery believes ARB’s growing store and distribution footprint, particularly in the United States, will underwrite future growth.
“I think the market is underestimating the growth that they can get potentially out of the United States that’s an option that has virtually no value to stock market investors at the moment.”
“Over time, that cyclical Australian exposure will reduce and their overseas growth will start to shine. The market will see that and re-rate the stock.”
