Corporate Australia is opening its books — and the numbers probably won’t be too bad, for now
It is time for the twice-a-year look inside corporate Australia, and analysts say this profit-reporting season is likely to signal a turning point for the economy as a whole.
- Publicly listed companies have started reporting their half-year results
- The winners are expected to be consumers stocks and banks
- Worsening economic conditions mean this could be the most positive profit-reporting season for some time
“This year is even more important than usual for the half-year numbers,” InvestSmart chief market strategist Evan Lucas told The Business.
“Particularly to understand the impacts that are going on from higher interest rates, from the changes of living and the way consumers are actually dealing with the companies themselves.”
Equity strategist Andrew Tang from Morgans expects there will be a real shift as companies adjust to the new economic order.
“We are going through a period where it’s expected that economic fundamentals are going to deteriorate from rising interest rates, so how companies perform through that period is of critical importance to a lot of investors,” he said.
Interest rate rises will hurt some, but not all
The Reserve Bank’s 3 percentage points of hikes to the cash rate so far is good news for bank stocks, at least in the short term.
The Commonwealth Bank will be a key company to watch this reporting season when it delivers its first-half results on February 15.
The higher interest rates it has passed on to its mortgage customers will boost its revenue.
Almost one in two Australians bank with CBA, so Evan Lucas says it will also deliver a great snapshot of how households are faring with higher loan repayments and rising inflation.
“They’re going to tell you the microcosm about the spending of their clients, about the lending stress that they may be under, about bad and doubtful debts and whether or not they need to help their overall client base,” he said.
Other companies, like households, will take a hit from higher borrowing costs.
“The interest rate that they were paying, in some cases, [was] less than 2 per cent., and now, today, if you were to do a refinance, a five-year loan, most A-grade corporates would be paying close to 5 per cent,” WaveStone portfolio manager and partner Catherine Allfrey told The Business.
“That’s a big change that companies have to absorb in terms of their earnings, and so that will impact the earnings per share growth that they can produce.”
The full impact of inflation won’t show its face just yet
Despite rising costs, Australian consumers have only recently started to rein in their spending.
So the first-half results, which take in July 1 to December 31, 2022, will show consumers stocks are the big winners.
In fact, many retailers have already told the market they will be delivering some big numbers.
JB Hi-Fi (reporting on February 13), Super Retail Group (reporting on February 16) and The Reject Shop (reporting on February 23) have all revealed increased sales in their preliminary sales updates.
“We’re looking for some pretty strong results from some of the Aussie retailers defying expectations of an imminent slowdown and a collapse in earnings expectations,” Mr Tang said.
“We saw some really great updates from Super Retail Group, the owner of BCF as well as Rebel Sports, do particularly well, which shows you just how resilient the Australian consumer is.
“So we do think that that will continue to play out over the course of February when companies provide results.”
But those strong numbers will not stick around.
The latest retail trading data from the Bureau of Statistics showed an almost 4 per cent drop in sales in December, typically the busiest time for retailers.
BHP (reporting on February 21) accounts for 10 per cent of the Australian Stock Exchange so it has the power to shift the whole ASX if its share price swings significantly.
It is also the biggest miner in the world and therefore one of the biggest beneficiaries of higher commodity prices.
“You always watch for BHP because it’s a barometer to see the consumption of growth,” Mr Lucas explained.
“It is one of the biggest, baddest providers of iron ore, obviously, but it’s also copper, and copper gives a great understanding of how construction is going, how industrial movement is going.
“So [with] BHP, you’ve always got to have an eye on to see what they tell you around the outlook for their main areas, their four pillars being iron ore, nickel, copper, and coal.”
The US has given a strong indication of what we might expect to see from the tech stocks this reporting season.
The FAANG stocks have taken a real hit, with the likes of Microsoft, Amazon and Meta laying off tens of thousands of staff as they have tackled rising costs.
Ms Allfrey would not be surprised if we hear similar decisions from local tech firms, like Brisbane-based cloud computing company Megaport (reporting on February 9).
“Megaport called out this week that they’re going to look to reduce costs, bring in an external consultant to help them strategically, but also that they had seen deceleration in its spend,” Ms Allfrey said.
“That seems to be a trend across the board, so that will be something that I’ll be watching.”
“It’s an interesting one,” Mr Tang added.
He noted the share price rally of some of the tech stocks in the US was out of step with company earnings.
“What we’ve seen with the US reporting season is … tech [stocks] rally in the US on some, I would say, some pretty underwhelming results.
“We think that a similar dynamic could also play here.
“Given sentiment and performance around the tech sector had been so weak in 2022, we think there’s a very low bar for earnings.
“You might very well see some of the tech names bounce on the back of or possibly in line with softer results.”
China’s economy will continue to impact Australian businesses
Our biggest trading partner was locked down for most of the first half of financial year 2023.
With its sudden reopening in December, economic movements there, or the lack thereof, will show up in company results here.
“Their reopening is a good thing for Australia,” Mr Lucas said.
But he warned it was a double-edged sword.
“It will probably mean that they go through a level of inflation for the rest of the world,” he said.
“You can’t have that many people buying things, consuming things, without that high demand, that inflation, which means higher costs and interest rates, possibly, there.”
Mr Tang said China’s reopening, coupled with Australians’ increased travel in the past seven months, would benefit travel stocks.
“How some of the travel names are seeing the recovery in the travel sector will be very important,” he told The Business.
“We think it’s a theme that not only will play out through the reporting season, but for the rest of this year.”
Qantas (reporting on February 23) and Flight Centre (reporting on February 22) will be key ones to watch.
Company guidance may be short-sighted and dividends may shrink
As Australian businesses grapple with higher interest rates and operating costs, it is unlikely they will give too much solid guidance for what they think is in store for the years ahead.
“If I was a on board of directors or a CEO right now, to give guidance in this environment is quite difficult, because it’s quite uncertain,” Ms Allfrey said.
“They might just comment on the second half. I doubt they’ll give much in terms of what’s going to happen over the calendar year or fiscal year ’24.”
Mr Lucas is more hopeful companies may be transparent.
“It’s no longer 2020 or 2021, it’s 2023, so things like COVID, and therefore clouding future expectations from firms, has finished,” he said.
“Therefore, you should actually be getting back to the way it was in 2019 and before that about getting forward guidance and understanding what the company thinks is going to happen over the next three to five years.”
Mr Tang will be looking for that guidance too, but he is not sure how forthcoming companies will be with the outlook, or their dividend payments.
“We are a little bit more cautious around dividends, the environment, I guess,” he said.
“Unless you’re a corporate that is very confident on the outlook for your company and the demand profile, then I think a lot of corporates will tend to reserve some of that capacity for the full-year results.
“I think there’s a lot of concerns that the mortgage cliff, with a lot of fixed-rate mortgages rolling off in the second half of the year, will really come down on earnings.
“We’re certainly not in that camp but I think just think the general fear and confidence around the outlook for the economy may keep a lot of corporates on the sidelines when it comes to paying out dividends.”
For your diary
Here’s when some of the key Australian companies will be reporting:
- A2 Milk — February 20
- AGL — February 9
- AMP — February 16
- Beach Energy — February 13
- Bendigo and Adelaide Bank — February 20
- BHP — February 21
- CBA — February 15
- Cochlear — February 15
- Coles — February 21
- CSL — February 14
- Flight Centre — February 22
- Fortescue Metals Group — February 15
- IAG — February 13
- James Hardie Industries — February 14
- Macquarie Group — February 7
- Medibank — February 23
- Megaport — February 9
- Mirvac — February 9
- NAB — February 16
- Newcrest — February 16
- Northern Star Resources — February 20
- Origin Energy — February 16
- Qantas — February 23
- QBE Insurance — February 17
- REA Group — February 10
- Rio Tinto — February 22
- Seek — February 21
- South 32 — February 16
- Suncorp — February 8
- Telstra — February 16
- Transurban — February 7
- Wesfarmers — February 15
- Whitehaven Coal — February 16
- Woodside — February 27
- Woolworths — February 22
- Zip — February 23