August reports: The near-final assessment

In the end, corporate results season throughout August was not as bad as many had feared.

The obvious observation to add is that while most companies managed to cope with rising input costs, supply chain bottlenecks and staff absenteeism (if not shortages), the truth of the matter is most sectors in Australia have been enjoying ongoing strong demand for their products and services - and that might just be the one key factor that is about to change.

That prospect, and the persistent message from central bankers that tightening policies are continuing for longer since inflation remains too elevated for comfort, meant the August price action and share price responses always had a macro factor attached.

To achieve a positive share price follow-through that lasted longer than one day, companies needed more than a forecast-beating result. They also needed strong, confident and believable guidance for the year ahead, without the prospect of having to face macro-headwinds from rising interest rates, and without macro-inspired selling to interfere.

For many a share price, those were simply too many conditions that needed to be fulfilled. The Australian share market is likely to conclude August with a small gain, helped by last-day-of-the-month support from institutional investors, which might as well serve as the perfect summary for the season: it wasn't too bad, but the prospect remains of recession ahead for the world's largest economies.

In particular, following Jay Powell's speech at Jackson Hole, this prospect is poised to remain longer on investors' minds post-corporate results.

The scorecard

The final stats have not yet been established, but there are sufficient indications corporate Australia performed reasonably 'ok' during the first six to eight months of calendar 2022. Investors need not look any further than market updates on the final day from the likes of Harvey Norman (ASX: HVN) and Webjet (ASX: WEB) - both beat forecasts but with different share price responses.

With 318 results included, the FNArena Corporate Results Monitor has registered 96 (30%) companies beating market expectations against 85 (26.7%) "misses" and 137 (43%) reporting in line with forecasts. 

In response, analysts have issued 76 rating downgrades versus only 27 upgrades, while the average individual price target was cut by -2.25%.

These numbers are not the kind of numbers that describe a positively inspiring results season, but it equally has not been the worst outcome post-GFC - far from.

The August season of 2019, for example, was a decisively worse experience with FNArena only registering 24% "beats", outnumbered by 25% "misses", and soon after banks and cyclicals started announcing dividend cuts, even before covid presented itself months later.

This time around dividends, on balance, still managed to surprise on the upside even though many are expecting leaner payout times forthcoming.

Many of the surprises this season stemmed from cyclical companies, coal, iron ore and energy producers included, but virtually no one thinks this year's cash abundance for the likes of Whitehaven Coal (ASX: WHC), Woodside Energy (ASX: WDS) and Fortescue Metals (ASX: FMG) will prove sustainable, though it also doesn't by default mean the end of extra benefits for shareholders in these companies either.

On calculations by Wilsons, Australia's Top10 companies in market cap paid their shareholders circa $50bn in dividends, including Woodside's largest interim payout in eight years and the first dividend increase from Telstra (ASX: TLS) in seven years.

There was equally excitement in the smaller cap space with Cronos Australia (ASX: CAU) achieving profitability and declaring a 1c dividend for shareholders; the first ever by an ASX-listed medicinal cannabis company.

Plenty of signals suggesting payout ratios have peaked, also because boards including Rio Tinto's (ASX: RIO) are preparing to invest more to secure growth at the other end of the cycle. Also, plenty of dividend payouts were supported by asset sales or merger-benefits.

In addition to dividends, companies are equally still keen to buy in their own shares, with a2 Milk (ASX: A2M), Nine Entertainment (ASX: NEC), Northern Star (ASX: NST), Qantas Airways (ASX: QAN), Santos (ASX: STO), and Whitehaven Coal all announcing fresh buybacks.

Further downgrades on the horizon

In the end, a majority of companies (circa 60%) managed to outperform estimates, but about two-thirds saw analysts subsequently cutting forecasts for the year ahead. As a result, the strong 20% growth in aggregate EPS achieved in FY22 is now forecast to be followed up by circa 6% only in FY23. And market strategists are still of the view that further downgrades will be forthcoming.

Wilsons, for example, has now joined UBS's prediction EPS forecasts in Australia might remain under pressure for another six months. Economists at Jarden predict the relative resilience of consumer spending in Australia will start weakening by year-end because of the lagging impact of RBA rate hikes.

The RBA, similar to other central banks, is expected to continue hiking rates at upcoming board meetings.

Jarden said the "reduction in spending is what central banks need to achieve in order to bring inflation back into line with targets".

The team of retail analysts at the firm believes covid-beneficiaries, such as household goods, are most at risk in the period ahead, hence Jarden is less keen on JB Hi-Fi (ASX: JBH), Harvey Norman, Nick Scali (ASX: NCK) and Kogan (ASX: KGN). Instead, consumer staples should prove safer, along with typical value-plays and companies servicing youth or higher-income consumers, or those still enjoying the spoils from society re-opening.

Jarden's preference thus lays with the likes of Treasury Wine Estates (ASX: TWE), Universal Store Holdings (ASX: UNI), Flight Centre (ASX: FLT), Domino's Pizza (ASX: DMP) and Metcash (ASX: MTS).

The disappointments 

Having said this, every season generates its number of disappointments and this time these did not include Telstra, AMP (ASX: AMP) or QBE Insurance (ASX: QBE) but your typical defensives: supermarkets, REITs and utilities. Higher costs and rising rates in many cases proved too much to absorb.

The same observation can be made for producers of commodities, especially among smaller cap companies, and in particular the producers of gold. This may yet prove a harbinger of what lays ahead, with Wilsons commenting:

"We believe the current dynamic of passing costs onto consumers cannot last forever, and companies (unless they have a significant competitive advantage) may have to change tact before the end of this calendar year," it said. 

"This could lead to margin pressure for many sectors in the ASX 200."

Among mining companies that disappointed were Aeris Resources (ASX: AIS), Champion Iron (ASX: CIA), Sandfire Resources (ASX: SFR), OZ Minerals (ASX: OZL), Panoramic Resources (ASX: PAN), Pilbara Minerals (ASX: PLS), Resolute Mining (ASX: RSG), West African Resources (ASX: WAF), and Westgold Resources (ASX: WGX). 

On UBS's assessment, the Materials sector suffered most from analysts cutting forecasts this month with both miners and building materials companies struggling to cope with input cost pressures. Financials, on the other hand, held up well as banks proved solid and insurers triggered upgrades.

Standouts and surprises

Energy stocks were the stand-out performer thus far in 2022, which equally matches the sector's outperformance overseas.

One conclusion that gained traction throughout the month is that many shares had been sold down too far and those companies sit high on the list of outperformers this month. Consider, for example, the most successful sector in August was Information Technology where, according to Wilsons, 80% of companies beat analysts' estimates, followed by Real Estate (72%) and Financials (65%).

Technology stalwarts that surprised positively this month include Altium (ASX: ALU), Hub24 (ASX: HUB), IPH (ASX: IPH), and Megaport (ASX: MP1).

Equally important, some of the most highly valued companies on the market continued to add to their success story, including Audinate Group (ASX: AD8), IDP Education (ASX: IEL), Lovisa Holdings (ASX: LOV), Pro Medicus (ASX: PME) and WiseTech Global (ASX: WTC).

Plenty of others provided lots of evidence it's too big of an ask to achieve a successful turnaround when overall conditions are this challenging, and likely to worsen.

Examples: Appen (ASX: APX), Aurizon Holdings (ASX: AZJ), Estia Health (ASX: EHE), GWA Holdings (ASX: GWA), Inghams Group (ASX: ING), Magellan Financial (ASX: MFG), Mayne Pharma (ASX: MYX), Nuix (ASX: NXL), Ramsay Health Care (ASX: RHC), Wagners Holding Co (ASX: WGN), and Zip Co (ASX: Z1P). 

Broker outlooks

Macquarie points out that the Australian market (ASX200) is trading on a Price Earnings (PE) ratio of 14.5x on December forecasts and 14.4x on forecasts to June 2023. Macquarie analysts have only 2.6% EPS growth in aggregate left for FY23, followed by 1.2% for FY24. The aggregate forecast for both years is negative for Resources. 

Macquarie has adopted the view there will be a (global) recession next year.

In small contrast, analysts at Citi remain convinced the Australian economy is likely to remain relatively resilient for longer. Thus their EPS forecast is for 7.7% growth in FY23, followed by a negative -6% in FY24. The Resources sector on Citi's forecasts will still enjoy a year of positive EPS growth ahead (just!), but then fall off the proverbial cliff by FY24 (-23%).

The key difference in these forecasts hides in the timing of when exactly economies will feel the impact from central bank tightening, as well as to the severity of it all.

Adds UBS: "We note that over the past 20 years, the average annual earnings growth delivered by Australian companies has been 5.5%," it said. 

"Given input cost pressures are not going away, labour supply issues will remain, and interest rates still have further to rise, we would be impressed if 2023 earnings growth is able to meet this historical mark."

One positive is the Australian share market is again offering a prospective yield in excess of 4%, ex-franking.

Wilsons concludes: 

"We currently believe quality is the best place for equity portfolios, within a backdrop of a slowing growth, margin compression and heightened uncertainty," it said. 

"Quality companies that have the ability to pass on costs should be well placed as broader margin compression plays out.

"Over the next year, we expect global economic growth and earnings growth to slow significantly. As a result, companies with high quality, resilient earnings streams should be increasingly sought-after by the market and this should lead to outperformance."

Within this framework, Wilsons points to Cleanaway Waste Management (ASX: CWY), CSL (ASX: CSL), James Hardie (ASX: JHX), Lotteries Corp (ASX: TLC), Telstra, and ResMed (ASX: RMD).

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