As of 30 August, we are now 80% of the way through reporting, with only around 20 or so companies left to release their results. Ahead of our usual whitepaper that brings together the themes from both our data and our 100+ company engagements each season, below we provide a quick top-down summary of the reporting season’s results and themes.
Surprise in the results driven by revenue and pricing power
Despite war, rising rates, elections, and lots of inflation, Australian companies have delivered sales, earnings, and dividends results ahead of the market’s expectations leading in to the season. The charts below highlight the skew twaords positive "surprise" across the board, with 49% of companies beating consensus expectations for their earnings per share (EPS) results, versus only 23% missing.
The strong results were driven by sales/revenue and pricing power, and this flowed to better dividend per share (DPS) outcomes for investors. The EPS beats were also spread across the market, with domestic cyclicals and real assets the best performing super sectors from a surprise perspective.
Despite the great surprise in the results, brokers trimmed their forecast earnings based on management’s guidance outlook statements and consideration of the poor macro-outlook.
Revisions reflect weaker outlook
Despite the great surprise in the results, brokers trimmed their forecast earnings based on management’s guidance outlook statements and consideration of the poor macro-outlook. Sales trends remained positive on good pricing power but there were more EPS and DPS downgrades than upgrades.
This reporting season’s negative EPS revision skew made this the weakest since the onset of Covid-19, but far from an outlier versus history.
Delving deeper, the EPS and DPS downgrades were driven by three dominant themes across all stocks:
- Profit margin pressure was evident from elevated inflationary and staff pressures and digital investment.
- Capex increased to invest in organic pipelines, business transformation and carbon reduction plans.
- Companies ended up with more debt on working capital build due to supply chains and retained more cash for future investment.
Profit Margin Revision
Price reactions don’t match treatment of costs in revisions
Whilst the best EPS upgrades were in the utilities, banks and technology sectors, and the worst were in resources, price reactions were a different story. Looking further at the reaction, the market:
- Appears to like the capex/production/pricing outlook for resources sector and accepted the cost increases;
- But punished consumer companies investing in a digital arms race and dealing with inflationary price increases; and
- Punished utilities who are pushing out EPS improvements until 2024 due to rising electricity prices.
EPS revision (median change)
Earnings growth outlook down on previous
The bar has now been set at 4.9% EPS growth for the year ahead. This net positive (but weaker than previous) growth expectation includes double digit growth for industrials sectors but profit declines for resources.
The hard work for us doesn’t finish once the data is in.
We continue to meet with management teams of our 100+ investee companies to digest their ability to insulate costs from inflation and enjoy an uptick in revenue from the rising prices across the economy.
In late September, we will publish our semi-annual Reporting Season Wrap, which will bring together our full analytical framework, and delve into the key fundamental views and insights from company engagements.
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Past performance is not guide to future returns.
Source: Martin Currie Australia, FactSet; as of 30 August 2022. Data for the S&P/ASX 200 Index. Expected next 12 Months (NTM) data is calculated using the weighted average of broker consensus forecasts of each portfolio holding – because of this, the returns quoted are estimated figures and are therefore not guaranteed and may differ materially from the figures mentioned. The figures may also be affected by inaccurate assumptions or by known or unknown risks and uncertainties. In respect of the broker consensus data the number of brokers included for each individual stock will depending on active coverage of that stock by a broker at any point in time. A median of brokers is typically utilised. All estimates avoid stale forecasts which are removed after a certain number of days.
Surprise: the percent of companies where there is a >+/-2% difference between company reported results and broker consensus forecasts.
Follow on Revisions: the percent of companies with a +/-2% change in broker consensus next 12-month (NTM) forecasts after companies have reported their results.
Up: upwards revisions to broker consensus next 12 month (NTM) EPS forecasts after company reported results >2%; Down: downward revisions to NTM EPS >-2%. Neutral: revisions to NTM EPS between -2%<>2%.
Price reaction: the average price movement within two days after company reported results.
LTM: last 12-month actual; NTM: next 12-month forecast
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