Australian Economy

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.

“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.

A Commonwealth Bank branch in Melbourne's CBD
Almost half of all Australians bank with CBA, so its results will give a strong picture of how people are handling the current economic conditions.(ABC News: Margaret Burin)

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.

JB Hi-Fi welcomes new chief executive
Like many of its peers, JB Hi-Fi has already told the market its half-year results will be very strong.(Lateline Business)

“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.

Resources reward

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.

Mining truck drives on red dirt at BHP's Jimblebar mine on a bright sunny day.
As the biggest company on the ASX, BHP is a bellwether stock for analysts.(ABC News: Rachel Pupazzoni)

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.”

Tech trouble

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).

A woman with blonde hair wearing a pink top sits at her computer.
WaveStone Capital portfolio manager Catherine Allfrey expects technology companies to be among the poor performers this reporting season.(ABC News: Dan Irvine)

“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.

A man speaks on his phone while looking at his computer. He's wearing a suit.
InvestSmart’s Evan Lucas says China’s economy, and how it impacts domestic businesses, will feature this reporting season.(ABC News: Scott Jewell)

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.”

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