Australia Strategy: Reporting Season Playbook

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
25 January 2022, 10:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials



  • Earnings trends remain remarkably stable despite the recent Omicron and supply chain disruptions. While the uncertain outlook might temper some good results, we still see scope for upside surprises in February.
  • Key themes to watch include cost inflation, FY23 earnings trends, M&A activity, dividend surprise, short selling and positioning in resources.
  • Morgans analysts preview the results for 180 stocks under coverage that report in February and call out likely surprise and disappoint candidates.
  • Key tactical trades into results (login to view) include Sonic Healthcare, Lovisa, Ansell, Seek, HealthCo, Megaport, Hub24, People Infrastructure and Credit Corp.

Earnings trends: Déjà vu anyone?

We’re surprised that profit expectations have been reasonably stable since last reporting season in light of lockdowns and now Omicron. Since August, the net 3% erosion in aggregate ASX 200 FY22 EPS forecasts is largely a function of lower iron ore prices driving an ~8% cut in ASX 200 Resources EPS.

This implies plenty of conservatism has been built into market forecasts providing some offset. We note that only 23% of the ASX 300 scheduled to report in February have had their EPS revised lower from 1 December 2021.

Recent signals such as steady-to-positive industrials earnings momentum, double-digit aggregate earnings growth and declining valuations suggest prices should head directionally higher bar any unexpected earnings shocks. Hence, we see scope for upside surprise in February, tempered (yet again) by cautious outlooks.

Morgans analysts identify 36 positive surprise candidates calling out strong industry tailwinds and better-than-expected outlooks while 12 are expected to disappoint market expectations citing issues such as elevated valuations, softening demand and near-term cost pressures.

Profit margins in focus - strong demand offset by rising costs

ASX industrials ex-financials have enjoyed strong margin growth expanding 1.5% from pre-pandemic levels and to the highest level since 2015 but as demand picks up so too has the cost-of-doing business.

The Omicron variant continues to disrupt supply chains and labour availability. Costs are increasingly harder to absorb as shown by several notable trading updates (WOW, WES).

Analysts identify 13 companies that fare better than most in combating cost inflation and protecting margins (login to view). Names include: ALL, AMC, BXB, NXT, REA, SHL and PWH.

All set for another buoyant year of M&A

M&A has picked up after a quiet 2020. With more clarity returning to the earnings outlook and a low cost of capital, we see the prospect of a further pick-up in activity into FY23. In our view, further consideration should also be given to the upswing in M&A activity that has emerged in recent quarters.

While buying companies purely for M&A is a fraught strategy, we think it can offer some downside protection for embattled names or help peers realise value in out-of-favour sectors. We think TAH, AMC, QUB, NWL, BHP, CCP, and PPE are primed for M&A and we identify 40 other opportunities (login to view).

Can dividend surprise deliver again in February?

Dividends surprised strongly last August, with mining profits pushing market DPS expectations back to above pre-pandemic levels. Similar to EPS, flat expectations leave room for industrials dividends to again surprise in February, though to a more modest extent.

Heavyweight financials and resources remain our key picks to deliver bumper dividends for investors.

Figure 1: Reporting Season Playbook – Morgans notable surprise and disappoint candidates

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans Financial 

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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