The five stocks you must pay attention to this reporting season

You’ve all heard the preamble before. This reporting season is shaping as a particularly important one for corporate Australia, given we are likely to see the full impact of higher rates, tighter margins, and a more challenging operating environment.

There is likely to be a lot of noise with some wild individual results and share price reactions. But, as always, there are likely to be a handful of standout themes.

In that vein, we are highlighting five companies that you should pay attention to this reporting season, both because of their significance in their own right, as well as the read-through they will provide for the sector in which they operate and broader market.

JB Hi-Fi (ASX: JBH) – 14 August (estimate)

One of Australia’s most successful retailers, JB’s results should provide insight into just how tough (or otherwise) the retail environment is and how the consumer is faring.

Some were expecting JBH to fall over post-COVID, believing the company would never be able to cycle the same numbers as during the pandemic – when we were all stuck at home buying new toys, computers, printers, and whatever else we could get our hands on the furnish the home office and keep the kids entertained.

That has not happened, however, which is a credit to management and the brand. But how have sharply higher rates and slowing retail sales impacted the company? We’re about to find out. 

Overall broker rating

1 Buy – 9 Holds – 11 Sells

Recent broker moves

• CLSA - 8 August - Upgraded to OUTPERFORM from underperform; target increased to A$50 from A$45, 8% upside 
• Citi – 6 July - Downgraded to NEUTRAL from buy; target cut to A$48 from A$55, 6% upside 
• Morgan Stanley – 29 June - Downgraded to UNDERWEIGHT from equal-weight; target cut to A$38.90 from A$44.30, 10% downside 
• UBS – 20 June - Target decreased to A$45 from A$47.50; rating remains NEUTRAL, 3% upside 
• Morgans – 13 June - Downgraded to HOLD from add; target cut to A$45 from A$50, 6% upside 

BHP Group (ASX: BHP) – 22 August, 8:30 am Melbourne time (approximate) (confirmed)

There is plenty of read-throughs to be provided by the Big Australian – Overall demand for commodities in a slowing growth environment, international (particularly Chinese) demand for commodities, and the impact of rising costs (because they have such a massive workforce and equipment fleet) to name but a few.

But, from an investor's perspective, perhaps the most important read-through will be the ability of the big miners to continue paying monster dividends. Whilst the last five years have been very fruitful in terms of divvies, no investor should forget that the miners are historically not good dividend payers and that the recent period has coincided with record-high commodity prices in many cases, and a concurrent lack of reinvestment by the miners. In BHP’s case, there was also the divestment of assets which reaped windfalls that were paid out in the form of a special dividend.

Those goldilocks conditions won’t likely be repeated moving forward, so just what is the impact of these changing dynamics on BHP’s (and the rest of the miners’) ability to pay juicy dividends?

Overall broker rating

12 Buys – 9 Holds – 3 Sells

Recent broker moves

• JPMorgan – 14 July - Upgraded to OVERWEIGHT from neutral; target increased to A$47.60 from A$44, 6% upside 
• CSLA – 1 June - Downgraded to UNDERPERFORM. Target cut to A$43 from A$46, 2% upside 
• Goldman Sachs – 3 May - Upgraded to BUY from neutral. Target is A$49.90, 15% upside

Australian Finance Group (ASX: AFG) – 25 August 2023 (estimate)

Whilst many would think the Commonwealth Bank (ASX: CBA), which reports tomorrow, would be the best proxy for the mortgage market, I’ve taken a slightly different approach. Whilst the CBA results will be incredibly important (as they have the largest residential mortgage book of any of the Big Four), this is just one element of CBA's business.

If you want a pure read-through of the mortgage market, AFG should make for interesting reading. For those that don’t know, AFG provides mortgage origination and management of home loans and commercial loans and distribution of its own branded home loan products, funded through its established RMBS program and white-label arrangements.

AFG is a pony with but a few tricks and that makes it perfect for this thought experiment. So, how have higher interest rates impacted new loan (particularly mortgage) origination, and what is AFG’s outlook for the next 12 months?

Overall broker rating

6 Buys – 2 Holds – 0 Sells

Boral (ASX: BLD) – 10 August 2023 (confirmed)

Boral, with its $4.8 billion market cap and exposure to both residential and commercial building should provide valuable insight into the state of the troubled construction industry in Australia.

I live in the southeast of Melbourne and, in recent years, we’ve had billions spent on freeway upgrades, train-line upgrades, and road upgrades, so much so that Boral cement trucks are a regular sight. 

But with Victoria now broke and numerous major residential and commercial builders like Probuild going to the wall, what has been the impact on building supply companies, and what shape is the sector in overall?

Overall broker rating

4 Buys – 6 Holds – 9 Sells

Recent broker moves (and news)

• CLSA – 24 July - Upgraded to UNDERPERFORM from sell; target increased to A$4.30 from A$3.60, 2% upside
• Macquarie – 9 June - Upgraded to OUTPERFORM from neutral at Macquarie. Cites investor day update. Target increased to A$4.50 from A$4.05, 14% upside
• 7 June - Boral Limited provides trading update at Investor Day: EBIT run rate in H2 is ahead of 1HFY23
  Updates:
• Volumes trend for year to date up on FY22.
• Rate of external volume growth slowing in Q4FY23 against previous three quarters
• May run rate slower after shorter April month compared to Q3 FY23 nationally on back of residential sector
• We have seen price traction across all regions and all product lines
• EBIT run rate in 2HFY23 is ahead of 1HFY23 and is expected to remain so for the full year

Transurban (ASX: TCL) – 16 August 2023 (confirmed)

Last but not least, Transurban. Whilst TCL will provide read-through on traffic volumes and freight/industrial volumes, it will provide more important insight into the ability of price makers to pass on costs to consumers and weather the tougher economic conditions.

Will consumers eat the higher prices, or will the latest numbers show a weakening? This might also provide some insight into the impact of work-from-home or the hybrid models that many businesses have adopted.

Perhaps most importantly, however, the numbers will deliver insight into whether or not TCL, and others like it (expensive defensives) have had their day in the sun. 

Overall broker rating

8 Buys – 7 Holds – 4 Sells

Recent broker moves

• Citi – 13 July - Upgraded to BUY from neutral. Target remains A$16.20, 15% upside.
• Evans and Partners – 1 May - Downgraded to negative from neutral. Target cut to A$13.90 from A$13.95, 7% downside

Which company results have you most intrigued?

The above five are hardly exhaustive when it comes to capturing the themes of reporting season. Qantas (ASX: QAN), for example, deserves a special mention considering everyone has been traveling of late. 

Let us know in the comments below which companies you think will provide valuable insights and why.