Investors should expect a mixed reporting season
This coming reporting period follows an extraordinary period of monetary tightening across the globe, with many corporates continuing to grapple with huge spikes in wage and input cost inflation.
Despite some recent easing in supply chain stresses brought about by the Russia-Ukraine conflict, concerns of recession in the major economies continue to build.
Against such a challenging backdrop, what can we expect to learn in the coming weeks from the listed market? Are resets to earnings expectations likely to feature? Will dividends and capital management be shuttered?
Stewart Harris: Hi and welcome to episode one of 4-Minute Monday for the August 2022 reporting season. Joining me to share his latest thoughts is Brad Potter, Tyndall’s Head of Australian Equities. Hi Brad and thanks for joining us. This profit season comes off the back of an extraordinary period of monetary tightening across the globe as central banks grapple with huge spikes in wage and input cost inflation. Against this backdrop, and with companies continuing to deal with constrained supply chains, are you expecting to see much higher operating costs reported in the coming weeks?
Brad Potter: Supply chain stress and the various associated costs have reduced a little over the past month or so, but remain at elevated levels. The Russia-Ukraine tragedy continues to put further pressure on many supply lines and input costs. We saw last week that Orica (ASX:ORI) raised money to shore up their balance sheet, as they traditionally purchase ammonium nitrate which they use in explosive manufacturing from Russia. Obviously, they're not receiving that anymore resulting in the need to find alternate supplies. The terms were elevated, causing stress in the working capital, so they needed to raise capital.
Although this is quite a stock specific issue, it's likely that many companies will be feeling pressure on the working capital line of the balance sheet. However, thankfully, most corporates really have quite pristine balance sheets and this suggests that in aggregate, we should not see this being much of an issue. However, cost pressures will certainly remain inflated for a while.
Stewart: Given we’ve seen the market de-rate this year, at least in part over concerns around recession throughout the major economies. What are you looking for when it comes to guidance and outlook commentary from Australian corporates? Can we expect to see much in the way of a reset?
Brad: This results season should be pretty solid for much of the market, albeit this is obviously quite backward looking. Our expectation is that corporates will be quite downbeat in their guidance given the pressures on labour and input costs. Labour’s hurting, both in relation to shortages and also increased wages and it's difficult to see that alleviating anytime soon. As always, albeit more acute in the current environment, some sectors will be doing well, as they can either mitigate all these inflation pressures and some may even benefit. Whereas others will just have to cop it at the bottom line. So therefore it's actually going to be quite mixed in this reporting season.
Stewart: Notwithstanding the coming impact on profitability as a result of rising interest rates, corporate balance sheets are extremely healthy as a result of many companies enjoying record earnings throughout the COVID-impacted period. We’ve already seen RIO surprise the market with a dividend cut, what are your expectations when it comes to dividends and capital management more broadly?
Brad: In the current environment it's quite difficult to envisage capital management being a big part of this reporting season, and this is really a change from the last few reporting seasons. I'm not expecting broad dividend cuts, given profits should be reasonably strong. However, buybacks are less likely to feature. As previously stated, corporate balance sheets are really generally in great shape, however I expect Boards will take quite a conservative stance given the current economic conditions.
Stewart: Reporting season starts to get moving this week, with some of Australia’s larger companies due to report. Is there any one company you’re particularly excited to hear from?
I'm a value investor and so we really never get excited by companies as we know that, eventually, we're going to have to break up with them when they become expensive! However, this week reporting season does start in earnest and we're seeing insurance companies, together with CBA, being arguably the ones of most interest.
ANZ gave a quarterly update a few weeks ago that showed very strong net interest margin expansion, which was primarily driven by deposits. I don't expect CBA to show as much margin expansion yet, but it will be of interest to see how their margins are developing going into the second half of the year.
Insurers offshore have had really strong results, with margins improving, renewal premium rates up very strongly and no real major reserve issues. So this all bodes well for QBE, and it will be very interesting to see how they report.
Stewart: That’s week one down – three to go. Tune in Monday for the next instalment. until then, stay invested.
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Brad joined the business in 2002. He has 28 years’ experience primarily in the funds management and stockbroking industry, and has overall responsibility for managing the Australian equities team, process and portfolios. Prior to joining, Brad was...