Earnings Season: Half-time report

Earnings season is the time when listed companies report their performance over the past six months or past year. CommSec has been tracking the S&P/ASX 200 companies that have reported earnings for either the fullyear or the half-year to June 30, 2022.

We are near the half-way point in earnings season. At the close of trade on August 19, 78 companies had reported their earnings results (67 companies have reported full-year results to June 30; and 11 companies issued half-year results). Other companies in the ASX 200 have different reporting dates, with many having

September or March balance dates.

There has been no shortage of factors or themes affecting earnings results: floods in Eastern Australia; Covid19 (including Delta and Omicron); supply-chain challenges; war in Ukraine; housing cycle fluctuations; higher interest rates; labour shortages; cost pressures; higher prices for consumers and tensions with China.

Reflecting the uncertainties ahead, understandably investors have reacted cautiously to results. More companies have seen their share prices fall on the day of earnings release than those posting gains.

Revenues are outpacing expenses and profits are rising, but cash levels have been trimmed as have dividends. But quite remarkably all but two of the full-year reporting companies have announced a dividend. So far, both full-year and half-year reporting S&P/ASX 200 companies have announced dividends totalling $27.5 billion, down 5.8 per cent on a year earlier.

State of Play

When assessing earnings seasons the common term used to describe results is “mixed”. And that makes sense because there are all manner of influences affecting companies. And while some influences are positive for a number of companies, like labour demand and rising interest rates, they are negative for other companies.

So to the half-time report. First, revenues are out-pacing expenses, although we don’t know the influence being played on these nominal gains by prices and costs (that is, we don’t know the ‘real’ changes).

However, in an aggregate sense profits are up by 55.1 per cent (excluding BHP, up 21 per cent). In fact all but 5 per cent of full-year reporting companies have issued a statutory profit. Around 63 per cent of companies have lifted profits.

But interestingly aggregate cash levels are down on a year ago after soaring to record highs in the February profit season. Only 45 per cent of companies have lifted cash levels. Some companies have been shoring up operations ahead of the challenges ahead. Some have stocked up on inventories or equipment to protect their businesses from supply-chain difficulties. Some companies have increased
employment and lifted wages. And indeed others are paying dividends.

Quite remarkably all but two of the full-year reporting companies have issued a dividend – 97 per cent – well up on the long-term average of 85 per cent. But only 65 per cent have actually lifted dividends.

The best way to determine if companies have disappointed or delighted shareholders is the day 1 response on the sharemarket. This is not an exact science as a lot is happening every day. Global sharemarkets may have dropped or soared for a raft of reasons and influenced share prices. And for individual companies, the earnings result, market expectations, earnings guidance from the company and past performance of the company’s share price can all affect the share price reaction on earnings day.

Fewer than half (43.6 per cent) of the share prices of S&P/ASX 200 companies rose or were stable on the day of issuing earnings results. The average daily loss has been 0.3 per cent. And in the two days after earnings results, 48.6per cent of company share prices were higher. For context, the S&P/ASX 200 had only fallen on five of the 15 trading sessions, month-to-date, at the time of writing.

Stand-out gainers on day one were intellectual property firm IPH (up 16 per cent), investment company Pinnacle Investment (up 12.2 per cent) and restaurant group Collins Food (up 11.5 per cent). The biggest falls recorded were by telecom TPG (down 12.4 per cent), Beach Energy (down 11.1 per cent) and Challenger (down 10.1 per cent).

FN Arena constantly monitors the proportion of companies that have beaten or missed consensus forecasts with their earnings results. As at August 19, FN Arena had surveyed 106 stocks and found that 26.4 per cent of companies had reported results that have exceeded (beaten) analyst forecasts. Just over 45 per cent (45.3 per cent) of companies have issued results in line with forecasts and 28.3 per cent of earnings results have fallen short of analyst estimates.

Aggregate results for the full-year reporting ASX 200 companies

Over the year to June 2022, aggregate revenues rose by 10.4 per cent with 85 per cent of companies lifting revenues. The average increase in revenue was 21.8 per cent.

Aggregate expenses lifted by 6.2 per cent with 81 per cent of companies reporting higher expenses. The average increase in expenses was 16.9 per cent. In the previous earnings season aggregate expenses rose by 7.3 per cent with 80 per cent of companies reporting higher expenses.

Aggregate statutory net profits have lifted by 55.1 per cent (up 21 per cent if BHP is excluded, with a similar lift in earnings per share). The average increase in profit was 61.8 per cent. Just under 63 per cent of companies lifted profits over the year. Only 5 per cent of the 67 full-year reporting companies reported a statutory loss.

Cash holdings have fallen by 16.8 per cent or around $17 billion. (Add in the full-year reporting companies and cash levels are down by 15.4 per cent). Banks, insurers and infrastructure firms have cut cash holdings. Still, cash holdings rose on average by 25.7 per cent. Just under 45 per cent of companies lifted cash balances compared with a year ago.

All but two of companies (97 per cent) have issued a dividend (in February, 81 per cent issued a dividend). Aggregate dividends fell by 1.4 per cent after lifting by 5.9 per cent in the February reporting season. Almost 65 per cent of companies lifted dividends; 21 per cent cut dividends;
14 per cent left dividends stable.

So far, both full-year and half-year reporting S&P/ASX 200 companies have announced dividends totalling $27.5 billion, down 5.8 per cent on a year earlier.

Key issues or themes

We think Mirvac Chief Executive Officer and Managing Director, Susan Lloyd-Hurwitz has summed it up best. “There is no doubt that FY22 presented a more challenging operating environment. We experienced the ongoing impacts of COVID-19, supply chain issues, labour shortages, rising inflation and interest rates, geopolitical tension, and extreme wet weather, particularly across the east coast of Australia.”

And of course most of these factors could play a role in the next 6-12 months. And this includes “extreme wet weather” if the latest weather forecasts prove correct.

The fact that companies are reporting profits (even profit increases) as well as issuing dividends in the current environment is testament to the strength of corporate Australia. Companies have had to pivot like never before.

Below are some of the comments by company officials during the latest reporting season. And by no means are they all comments about ‘challenges’ – many companies remain positive on the outlook.

Supply-chain:

Block: Hardware cost increase was due to the increased sales of hardware, as well as increased purchase price variances and inbound shipping rates due to supply chain disruptions.

Megaport: The Group purchased additional equipment and licenses during the year to mitigate the impact of supply chain delays from its key equipment suppliers.

Baby Bunting: Further investment in inventory safety stock to offset supply chain risks that included greater uncertainty of the timing of shipping arrivals.

Lifestyle Communities: Supply chain challenges are expected to persist in the near term.

Super Retail: “Record online sales and the Group’s strategic decision to invest in inventory in response to a disrupted global supply chain underpinned our first half performance.”

Covid-19:

Carsales: “COVID has accelerated digitisation, which is creating new growth opportunities for carsales”

Vicinity Centres: Continued disruption from COVID-related lockdowns in New South Wales and Victoria during 1H FY22 and the outbreak of Omicron from late December 2021.

Demand for skilled workers:

SEEK: Job ad volumes hit a record high of approximately 325,000 in March 2022 with corporates and small to medium enterprises (SMEs) leading the activity (for Australia and NZ).

Corporate Travel: The travel industry continues to face unprecedented resourcing shortfalls with corresponding challenges to service levels, airport and airline security.

Wet weather

Downer: Despite positive underlying core markets, earnings were weighed down by the disruptive impacts of COVID-19 and severe wet weather on operations.

Suncorp: The prevailing La Niña weather pattern across Australia and New Zealand led to 35 separate weather events and around 130,000 natural hazard claims.

Adbri: Results impacted by operational challenges associated with extreme wet weather on the east coast. The
building products maker also reported higher raw material, transport, power and fuel costs.
Aurizon, Coronado and QBE also noted challenges with wet weather.

Inflation

Santos: The results reflect significantly higher oil and LNG prices compared to the corresponding period due to stronger global energy demand combined with a higher interest in PNG LNG following the Oil Search Merger.

AMP: Cost savings to offset margin compression; macroeconomic environment presents more challenging
business conditions looking forward.

Computershare: While inflationary pressures are impacting our operating businesses, and costs are expected to rise in FY23, margin income, estimated to be around $520m this year is driving strong earnings growth.

Interest rates

Dexus: While higher interest rates and construction costs increase the commencement hurdles for our
uncommitted projects, many of the projects in our city shaping pipeline provide optionality around
timing.

GPT: High household savings and low unemployment should soften the impact of interest rate increases.

Temple & Webster: Economic conditions such as interest rate increases and cost of living pressures all likely to weigh on discretionary spending.

Housing cycles

REA Group: The Australian residential property market is likely to continue to moderate as interest
rates rise. While this adjustment has already impacted property prices, the current market reflects strong fundamentals including record low unemployment, high household savings and increasing migration, which should continue to support demand.

Domain: Trading in the first six weeks of FY23 reflects ongoing growth in new ‘for sale’ listings and a return to normal seasonal trading patterns.

The period ahead

The issues that dominated over the last six months are likely to remain current over the next 6-12 months. And for investors, it is simply a case of identifying which companies respond best to the challenges.

While Covid-19 lockdowns look to be a thing of the past, what we have learned from the past 2½ years is that you can never say never. The ‘living with Covid’ environment still means that people will contract the virus and likely be forced to stay at home. It is possible that countries will eventually do away with confinement periods and that could alleviate
supply-chain difficulties.

Tight job markets are expected to continue across Australia, but much will depend on the return of migrants to fill vacancies. The Federal Government has quickly instituted an ‘approved employer’ scheme that is allowing quicker access to bringing in foreign workers.

In terms of inflation and interest rates, much will depend on the alleviation of supply-chain issues and an easing of energy prices – a key culprit in the global inflation problem.

The housing cycle will prove interesting. Rental markets are tight, as are job markets and housing supply is only responding slowly to higher demand. While interest rates have lifted and are expected to rise further, they still remain historically low. Declines in home prices will also allow greater access to the market by first home buyers. Housingdependent companies still appear generally positive about the outlook. CommSec expects the S&P/ASX 200 index to trade in a 7,100-7,400 point range by June quarter 2023, a lift of around 10 per cent on the year. Aussie sharemarket valuations have become more attractive with the Price/Earnings ratio declining from 17.7 times earlier this year to 13.9 times currently. And the dividend yield of 4.6 per cent is around the historical average since the mid-2000s.

Originally published by Craig James, Chief Economist, Ryan Felsman, Senior Economist, Divik Nigam, Associate Equity Market Analyst, CommSec