Aussie equities: What we learned in ASX reporting season

Corporate Australia is looking robust as macro forces work their way through, says Pendal’s OLIVER RENTON

• Earnings season surprisingly conventional
• Five big themes in reporting season
• Find out about Pendal Focus Australian Share fund

ASX earnings season — which wound up at the end of February — delivered a more robust-than-expected picture of the economic backdrop.

Earnings upgrades and downgrades were broadly in line with historical averages despite higher inflation and a tight labour market.

But a closer look at the half-year results shows signs that increasing prices, higher rates and energy prices are at different stages of working their way through corporate Australia.

Investors should be a little wiser as to how this all plays out — without yet having the full picture. 

As always there are opportunities and risks over the remainder of 2023, says Oliver Renton, an analyst and co-portfolio manager with Pendal’s Australian equities team.

“If you look top-down at how the reporting season played out, it was pretty normal in terms of the mix of revisions, upgrades and downgrades,” says Renton.

“That’s illustrative, because it wasn’t expected to be a normal reporting season with all the fears around the consumer, home-owners, interest rates and macro-economic forces more broadly.

“So, to come out of the reporting season relatively unscathed in terms of earnings shows the economy is probably holding up better than was feared.”

Here are Renton’s five big themes from this reporting season:

Interest Rates

The effect of higher interest rates is generally well understood. There is a lag, however, as companies adjust decision making to reflect higher costs of capital, says Renton. 

Also, with some companies locked in to fixed rates or hedging, the impacts are yet to fully flow through company P&Ls.

“A few companies hit expectations at an operating level but missed at a net profit level.

Alot of that can be attributed to interest costs.”.

Labour cost pressures

Early signs of higher wages are starting to show in company results.

But the full effect could take to two-to-three years to flow through in countries like Australia, he says.

“Even as some of the heat comes out of the headline employment and wages statistics, we continue to be cautious on labour pressures coming through and pressuring margins.

“Labour pressures come through with a lag and we see that persisting for some companies over the forecast horizon.”

Inflation

“In an inflationary environment, we favour companies with a degree of pricing power, strong margins and control of their cost base.

“The online classifieds companies, CSL and COH have these attributes, for example, and they held up relatively robustly.”

Consumer confidence

The earnings season has not resolved concerns about the outlook for household spending and consumer confidence, says Renton.

“This was not the sort of reporting season that washed those concerns out.

“Ultimately, the economy does need to cool, rates probably need to go up or stay higher for longer and the outlook is for a more cautious consumer.”

Energy

This reporting season, energy stocks had exceptional periods for revenue off the back of high commodity prices.

That largely flowed through to bottom-line results and strong dividend outcomes.

“Ampol had revenue up 78 per cent, Viva was up 66 per cent, Santos was up 65 per cent and Woodside up 142 per cent boosted by the BHP transaction,” said Renton.

“Of course, if they’re making those sort of revenues, then that’s inflation which is coming through the rest of the economy.”

Share price performance

ASX-listed stocks dropped about 3 per cent over February through the company reporting season, giving back some of the strong gains in January.

“At a headline level reporting season appeared quite normal, but there is a lot going on under the surface and much-discussed macro drivers are only just starting to come through in actual company earnings,” says Renton.

“This reporting season was not a widespread cleansing event.

The same pressures we’ve been speaking about for the past 12 months are not in the rear-view mirror yet.

“The good thing is that the intersection of those macro forces with company specifics continues to create opportunities to add value.”

About Oliver Renton and Pendal Focus Australian Share Fund

Oliver is an analyst and co-portfolio manager with Pendal’s Australian equities team. He has more than 15 years of industry experience.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

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