WHAT did the best-received results have in common this ASX earnings season?
Among industrials — which includes industries such as transportation and machinery — it was all about pricing power, cost of debt and where a company sits in its business cycle, says Pendal analyst Anthony Moran.
This marked a return to more typical themes after cost control, staffing and inflation dominated post-Covid reporting, Moran says.
“Calendar 22 was a story of strong inflation … and companies were then all about doing what they could to keep up with inflation.
“What we’ve seen in the past six months is that input costs have eased in some cases,” Moran says, citing freight and energy costs.
“Some companies with pricing power have not only kept up with prices, but also been able to achieve some margin expansion. James Hardie is a really good example of that.”
In James Hardies’ case, volumes declined as the construction sector in the United States struggled, but margins increased.
“They’ve shown a lot of pricing power because they’ve got a very strong value proposition and a very strong market position. And we’ve seen some of their input costs come off,” Moran says, adding that it was a similar story for Boral in Australia.
“The contrasting example is [plumbing manufacturing company] Reliance Worldwide. By the nature of their products, they only have limited pricing power, particularly in the US.”
Interest expense — the cost of debt — was a second theme emerging in the industrials sector.
“I’ve had a numebr of companies surprise to the upside, materially, on interest expense for financial year 2024,” says Moran.
“Because interest rates have gone up so much, it’s meant a few stocks have had 5 per cent downgrades just on interest expense.
“Amcor surprised on the extent of their interest expense step up in fiscal year 2024.”
Fellow packaging group Orora had a similar interest headwind, which took the edge off a positive 2024 outlook.
With interest rates higher and interest expenses normalising, an imbalance in price-to-earnings and Enterprise Value / EBITDA metrics in some stocks over recent years is coming back into alignment, Moran says.
“One of the reasons the PE ratio looked so cheap was the low interest expense, even when a company had a lot of debt on its balance sheet.”
A third theme of the earnings season was where companies are in their business cycles, Moran says.
“Not all sectors and countries economies are moving on one track.
“There are a variety of industry cycles running at different stages.
“So companies are seeing a range of end-demand experiences — and that could be driven by the country in which they operate”.
Moran refers to James Hardie and Reliance as cases in point.
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Due to the vagaries of the US housing cycle, strategies of home builders and the preponderance of fixed rate mortgages, there has an unexpected uptick in new housing starts, but the renovation sector remains in the doldrums.
“While James Hardie’s volumes were quite weak last half, it has exposure to this upside in new homes and that’s benefited their outlook.
By contrast, Reliance is exposed to the repair and remodel market … and hasn’t benefited from upside in new homes.”
As always, the weather matters, Moran says — particularly for building materials companies such as BlueScope and Boral.
“BlueScope has a diversified exposure to the Australian construction industry. Its volumes surprised to the upside in the last half year, and they will be flat in the current six months. It’s not seeing any great weakness,” Moran says.
“It’s not just resilient demand though — it’s also the good weather, which has moved from La Nina in FY22 to more benign conditions recently.
“That’s quite significant for Australian construction companies.”
Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.
He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.
Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
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