Reporting Season Review: Macro issues overshadow solid results

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
07 March 2022, 10:25 AM
Sectors Covered:
Equity Strategy and Quant

  • February result beats were among the strongest in recent history, but stocks (frustratingly) failed to hold onto price gains, or enjoy material EPS upgrades.
  • Investors can take comfort that recent volatility looks disconnected from strong corporate fundamentals and a solid outlook for the Australian economy.
  • We think investors will continue to be rewarded for investing in quality, which includes mid-to-small cap stocks caught up in macro volatility.
  • Our Best Ideas from reporting season include Santos (STO), Treasure Wine Estates (TWE), Cochlear (COH), Lovisa (LOV), Seek (SEK), Corporate Travel Management (CTD), NextDC (NXT), Baby Bunting (BBN), Hub24 (HUB) and GQG Partners (GQG).

Macro issues overshadow solid results

Results strongly beat conservative expectations in February, which has been a consistent theme through the pandemic. Despite some huge initial responses (ASX50 Beats up +7% on results), prices have since faltered as investors struggle to reconcile tighter financial conditions and the Ukrainian conflict.

Fewer than 22% (16% pcp) of companies have provided FY22 guidance, leaving wide margins for error given ongoing earnings variables. This conservatism was mirrored in revisions to FY22 EPS forecasts (ASX200 Industrials) of only +2.6%, which imply FY22 EPS growth of a mere ~3% (pcp ~30%).

Price moves post results, minor FY22 revisions and similarly flat EPS forecasts into FY23 look disconnected from what were fundamentally solid 1H22 results. However, conservative forecasts leave ample scope for EPS upgrades/surprise as earnings clarity emerges.

Encouragingly, results have shown that:

  1. demand has bounced back quicker than anticipated post each wave of restrictions (Retailers)
  2. supply chain bottlenecks and workforce management problems are showing early signs of easing (Amcor (AMC), GUD Holdings (GUD), Downer EDI limited (DOW), Sims Metal Management (SGM)).

Dominant market positions help to weather inflation headwinds

February results clearly showed that margin headwinds around supply-chain disruption and cost inflation (wages, inputs) remain an ongoing concern, although absenteeism is now abating with the pandemic.

The companies faring best are employing mitigation strategies via; cost-out (Banks, Telcos, Insurers); product premiumisation/mix (Treasure Wine Estates (TWE), Tabcorp (TAH), REA Group (REA), Coles Group (COL)); productivity gains (Commonwealth Bank (CBA), Medibank Private (MPL), Healius (HLS) and cost pass-through (Brambles (BXB), Amcor (AMC), Lovisa (LOV).

Stocks with dominant market positions (higher margins) are those best armed to offset inflationary headwinds, and we profile key exposures on page 10.

Commodities offsetting risks from inflation and conflict

Generalist investors are rotating exposure into Energy/Commodities in recognition that global inflation and geopolitical risks are powerful tailwinds.

The reorganisation of trade flows due to Russian sanctions is spiking energy pricing (oil, gas, coal), and lifting met coal, aluminium and grain prices. All are significant export earners for Australia. Commodities: Offsetting risks from inflation and war, March 3, covers this theme and key picks in detail.

Look through the uncertainty and rotate to quality

The looming tightening of financial conditions in 2002 has notionally driven a rotation from Growth (expensive Tech, High PE, Smalls) into Value and inflation beneficiaries (Financials, Commodities).

However, the rotation isn't mutually exclusive to growth, with high quality franchises (CSL Limited (CSL), Cochlear (COH), Treasury Wine Estates (TWE)) and high quality mids (Lovisa (LOV), PWR Holdings (PWH), NextDC (NXT)) well supported after strong results.

Further, The Morgans Growth Equity Model Portfolio actually outperformed the ASX200 Accumulation index by 80bps (up +2.9%) in February, and slightly pipped performance of the far more conservative Core Equity Model Portfolio.

See Michael Knox’s recent discussion on The Ukraine crisis, February 22. He also cautions that the March 16-17 Fed meeting is a potential volatility trigger as the Fed's tone toward the pace of US rate rises becomes clearer.

Markets retain an appetite for quality and not just size, value or safety. We advocate investors consider Australia's strong fundamentals, and stay on guard to capitalise on oversold equity opportunities likely to emerge.

Find out more

Download full research note

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.

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