Australia Strategy: Reporting Season Review

About the author:

Author name:

By Andrew Tang

Job title:

Analyst - Equity Strategy

Date posted:

06 September 2022, 7:30 AM

Sectors Covered:

Equity Strategy and Quant

• August results were sound by historical standards, reflecting a stable operating environment and offering comfort to investors.
• 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 BHP Group (ASX:BHP), Santos (ASX:STO), Domino's Pizza (ASX:DMP), Wesfarmers (ASX:WES), Treasury Wine Estate (ASX:TWE), Resmed (ASX:RMD), SEEK (ASX:SEK), Corporate Travel Management (ASX:CTD), NEXTDC (ASX:NXT), Home Consortium (ASX:HMC), IDP Education (ASX:IEL) and Lovisa (ASX:LOV).

Steady August results offer investors comfort

Reporting season was reasonably benign by historical standards, with lower price volatility than usual. We think the stable economic environment drove largely in-line results, with the market seeing fewer genuine surprises to reward or punish.

It was a solid showing for ASX listed companies with an above-average beat rate (23% of the ASX 50 and 33% of ex-50 Industrials). In our preview, we noted that the lack of trading updates, conservative guidance and thus conservative forecasts set the scene for companies to meet expectations.

Unsurprisingly, only 16% of companies reporting last month chose to provide FY23 guidance. We think this will place more weight on updates at the upcoming AGM season and Christmas trading period than normal.

As a group the quality cohort outperformed ASX 200 Industrials. The strong results highlighted their pricing power and earnings resilience (WES, JBH, TWE, LOV, BXB, AMC, MPL, ALQ), but not all were immune with some concerns that rising costs and difficult comps could squeeze earnings in FY23 (EDV, WOW, COL).

We expect quality mid-small caps to hold up against the ongoing market volatility. We explore the opportunities on page 9.

FY23 expectations holding up thus far

The market’s concern around the collapse of FY23 expectations again proved to be premature as resilient trading conditions continue to hold up with most industrials (66%) seeing a <5% change to FY23 EPS numbers.

While there are some signs that higher interest rates and inflation are starting to bite (building materials, supermarkets), volumes and better pricing (Packaging, Insurers, Retail) have been enough to overshadow the risks for now.

We saw only minor (~1%) trimming to consensus FY23 EPS expectations, with profit growth of ~8% looking robust against current headwinds. The largest drags to FY23 growth were in stocks whose strong EPS growth was simply trimmed back to reality (CSL, WOW, RHC, AGL), helping to explain the market’s relatively muted responses.

A swathe of new on-market buybacks – on weaker valuations – explained why dividends were a touch below expectations outside of the market stalwarts.

Looking through commodity uncertainty

Fears around commodity demand/prices are valid, but weaker prices wouldn’t solve for mismatched supply and demand expectations beyond the short term, meaning the sector is an ongoing source of opportunity.

We discuss potential catalysts around the CCP congress (mid-October) and the European winter on page 12.

Updated stock ideas

Pleasingly, the performance of the Morgans analysts flagged “Beats” strongly outperformed both the market and the flagged “Misses” standout stocks which “Beat” as flagged were Lovisa (+40%), Whitehaven (+37%), Beacon Lighting (+17%) and PeopleIn (+14%).

We also update the Best Ideas this month adding Domino’s Pizza to other key names Santos, BHP, Wesfarmers, Seek, Lovisa, Treasury Wine Estates, IDP Education, Aristocrat Leisure and Corporate Travel.

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.

If you would like more information, please contact your adviser or nearest Morgans office. 

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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.