Major miners outperform

The lift in iron ore prices to lofty new levels has seen the three major iron ore producers deliver some cracking results. Not far behind were the banks, which materially outperformed for the month. And not to be outdone was the retail sector with one company reporting a massive 86% rise in profits over the half year. 

Find out who the winners were in Week 3 of 4-Minute Monday.

Let's start with some of the large miners. BHP’s board declared its highest ever interim dividend at 101 US-cents per share, despite the company's miss on earnings. And we saw Rio Tinto announced a final dividend of just under $4 per share. Did these numbers surprise you?

The three iron ore miners—BHP, Rio Tinto and Fortescue— have paid out very large, fully franked dividends given the prodigious cash flows generated from the very high iron ore prices. Interestingly, the return on capital employed from the iron ore assets is incredible, especially given that they are all capital intensive businesses. Both Rio Tinto and BHP generated over 70% returns on capital on their Pilbara assets, and Fortescue managed an impressive 46% return on its capital.

The major miners are certainly being much more capital disciplined than in previous commodity cycles and returning excess profits to shareholders. If iron ore prices remain at these lofty levels, we expect this to continue.

The final outcome for banks

The banks have continued to surprise the market with their results. Bad debts, as we had previously suggested, and which the market probably expected, were extraordinarily low. In the case of Westpac and ANZ, they wrote back a proportion of their collected provisions that they took in 2020. As a result, they had a positive contribution from their bad debts. We believe the large tail risk from bad debts has been removed and so we expect over the next few years that these large provisions that were taken in the middle of the COVID-19 crisis will be substantially written back to profits.

The net interest margin (NIM) was really the area that surprised the market. This was based on the combination of repricing of deposits lower and the very low wholesale funding costs, together with some repricing of business lending. Overall, the improvement in net interest margins was much better than what was expected, as was the pre-provision profit of most of the banks.

For now, it appears that the market is increasing earnings quite substantially over the next few years, and we're seeing around 10 to 20% earnings growth coming through. So, the banks during the month have materially outperformed.

Can the retailers sustain their strong numbers in 2021?

A number of the consumer discretionary companies have continued to report these strong earnings; however, the market has essentially priced this in and so the share price reaction has been quite muted.

It's quite difficult to envisage that the extraordinary sales growth that these companies exhibited over 2020 will continue. We believe JB Hi-Fi, Harvey Norman, and Supercheap Auto will find it difficult to replicate those sales growth numbers. In fact, the market is essentially pricing in for sales to moderate over 2021.

Similarly, the consumer staples names—Coles, Woolworths and Wesfarmers—are also cycling really large sales growth. Of note in the Coles results was the comment about sales in the first six weeks of the year being strong, but well off the growth witnessed in 2020. As such, we saw all the consumer staples companies correct downward on this news, despite earnings largely remaining higher than they were in the pre-COVID levels. In other words, it’s pretty well priced in.

Trends from Week 3 of reporting season

Around 170 companies of the ASX 200 report in December, and to date we've had about 50% of those companies report in February. Of those companies, result beats against consensus sit around 50% and outlook and trading beats sit around 40%. So, pretty good numbers.

Resources and financials are really doing a lot of the heavy lifting. However, we are also seeing good numbers across a number of other sectors as well.

What's interesting about this reporting season, unlike some others, is that these earnings beats are often translating into significant upgrades in the forward years. We are also seeing dividends surprising on the upside. The expectation is that this will continue as earnings increase and company earnings revert back to ‘normal’ levels. There is no doubt that this reporting season has exceeded expectations.

Get the latest reporting season insights

Throughout February, I will publish my thoughts on all the biggest news from reporting season, including a look back on the week that was, and the things to look out for in the week ahead. Hit the follow button to stay up to date.