The prominent themes that will dominate this reporting season

Prima facie, Australian shareholders have plenty of reasons to feel excited ahead of the upcoming August results season.

Most companies have recovered from last year's pandemic-related lockdowns quicker than forecast. Profits and dividends are in a strong uptrend, Macquarie analysts observing consensus forecasts in Australia are now in their 11th consecutive month of upgrades, and expectations are building there's more of the same on the horizon.

February saw one of the best local results seasons ever, according to the market assessments of most analysts. Corporate Australia not only delivered strong recoveries in profits and dividends, but – uncharacteristically for Australia – it also soundly beat analysts' forecasts, even though they had been lifting for multiple months already.

On FNArena data, the percentages of earnings "beats" over the past three reporting seasons (before, during and after February) have been at 49%, 47% and 55%, respectively. This is well above the circa 33% average we measured over the 20 seasons prior.

According to stockbroker Morgans, corporate Australia is currently experiencing one of its strongest upgrade cycles since late 2004. Over the past three months, upgrades have outnumbered downgrades by two-to-one with both miners and energy companies enjoying the strongest momentum.

Recent corporate market updates have equally contributed further, as did Cimic Group's (ASX: CIM) interim results release last week. It wasn't exactly a shoot-the-lights-out performance from the former Leighton Holdings, but it was good enough for slightly increased forecasts, a small bump up to analysts' valuations (already well above the share price) and the share price has risen slightly too.

For a company that hasn't exactly been kind to its shareholders over the past two years, it must have felt like a welcome relief for many, and a possible early indicator of the turnaround stories that August might present.

One minor disappointment, ironically, would have come from numerous mining companies not meeting production forecasts or failing to contain costs, including BHP Group (ASX: BHP) and Rio Tinto (ASX: RIO), but the sector continues to enjoy stronger-than-expected prices for its products, which offers plenty of compensation, plus some.

Only a few weeks out from August, it would take a lot of negative news to convince investors they'll be better off selling shares in, say, Fortescue Metals ((FMG)) and Mineral Resources ((MIN)), but equally in REA Group ((REA)), Telstra ((TLS)) and Charter Hall ((CHC)).

Clearly, it hasn't happened, and I'd wager this is because the same positive prospects are currently supporting optimism in Europe and the US, where corporate performances are equally surprising to the upside.

Source: FNArena

That said, there is always the possibility this positive undercurrent might turn or exhaust itself. This would see investors on the hunt for clues both here and overseas:

• are business leaders confident enough?
• What are the effects of transitory inflation on profit margins?
• Is the consumer prepared to spend more from savings?
• Are governments able to navigate their way out of this? Did anyone mention central banks and less stimulus?
• There is always the dreaded elephant behind the curtains: what will bond yields do in the months ahead?

Not to be dismissed: investors are reminded corporate performances are always judged against forecasts and expectations. While multiple signals point towards the ongoing potential for positive surprises, it remains to be seen whether corporate Australia can maintain the exceptionally high percentages of "beats" we saw after August last year.

I am inclined to think the numbers of "beats" and "misses" will look a lot more "normal" by the beginning of September and this by default means there is potential for a lot more portfolio damage even without macro-influences and left field occurrences.

Analysts are starting to preview and re-assess their forecasts and assumptions, and I expect a lot more to be released over the two weeks ahead (early August is quiet in the season). Next week will thus dig deeper into anticipated beats and misses.

This week we preview with three themes that seem poised to feature prominently in reporting season, and beyond.

Theme 1: Cost inflation and margin pressure

It has the potential to become one of the defining features of the August results season: how much does transitory inflation impact on companies' profit margins, including through rising wages?

Sectors that have investors' attention: retailers and mining services providers.

Stockbroker Morgans has selected a number of companies with a question mark about their margins: Super Retail (ASX: SUL), JB Hi-Fi (ASX: JBH), Jumbo Interactive (ASX: JIN), Reliance Worldwide (ASX: RWC), GUD Holdings (ASX: GUD), and Accent Group (ASX: AX1).

On the other hand, the broker also believes investors might currently be underestimating the potential for margin expansion at: Afterpay (ASX: APT), Orora (ASX: ORA), Link Administration (ASX: LNK), Ramsay Health Care (ASX: RHC), Chorus (ASX: CNU), Tabcorp Holdings (ASX: TAH), Domain Holdings (ASX: DHG), Amcor (ASX: AMC), and IDP Education (ASX: IEL).

Theme 2: M&A is back!

With Sydney Airport and Oil Search firmly in play, both investors and analysts are starting to look for who could be next?

JP Morgan has identified the most likely candidates among the large REITs in GPT (ASX: GPT), Dexus (ASX: DXS), and Lendlease (ASX: LLC). There is, as always, seemingly more potential among the smaller cap players in the sector: National Storage REIT (ASX: NSR), Abacus Property (ASX: ABP), Irongate Group (ASX: IAP), Hotel Property Investments (ASX: HPI), and Waypoint REIT (ASX: WPR).

Morgans has identified no fewer than 35 potential M&A opportunities for investors:

• Acrow Formwork and Construction Services (ASX: ACF)
• Aerometrex (ASX: AMX)
• Earlypay (ASX: EPY)
• Cooper Energy (ASX: COE)
• Karoon Energy (ASX: KAR)
• a2 Milk (ASX: A2M)
• GrainCorp (ASX: GNC)
• Treasury Wine Estates (ASX: TWE)
• United Malt Group (ASX: UMG)
• Tabcorp Holdings (ASX: TAH)
• Japara Healthcare (ASX: JHC)
• Mach7 Technologies (ASX: M7T)
• Regis Healthcare (ASX: REG)
• Volpara Health Technologies (ASX: VHT)
• Blackmores (ASX: BKL)
• Dalrymple Bay Infrastructure (ASX: DBI)
• Silk Logistics Holdings (ASX: SLH)
• Nufarm (ASX: NUF)
• iCar Asia (ASX: ICQ)
• Iress (ASX: IRE)
• Praemium (ASX: PPS)
• National Storage REIT
• Bapcor (ASX: BAP)
• Baby Bunting (ASX: BBN)
• MyDeal.com.au (ASX: MYD)
• Redbubble (ASX: RBL)
• The Reject Shop (ASX: TRS)
• Data#3 (ASX: DTL)
• LiveHire (ASX: LVH)
• NextDC (ASX: NXT)
• Over The Wire Holdings (ASX: OTW)
• Superloop (ASX: SLC)
• Qube Holdings (ASX: QUB)
• APA Group (ASX: APA)
• Spark Infrastructure (ASX: SKI)

Theme 3: Dividend supercycle

On Morgans' data, the percentage of ASX-listed companies who paid out a dividend in February rose to 57%, from 53% in August. Market forecasts for earnings and dividends have risen by approximately 14% since then, which pulls back total dividends domestically to equal the total payout from 2019.

What has improved is the average payout ratio: circa 70.5% now versus 75% two years ago, leaving businesses with more to invest for the future.

No surprises here when all and sundry are once again looking at the banking sector to reinstate dividends and add additional payouts and share buybacks on top due to excess liquidity. ANZ Bank (ASX: ANZ) already surprised early this month, will CommBank (ASX: CBA) follow suit next month?

No surprise, also, many eyes are staring at BHP Group, Rio Tinto, Fortescue Metals and other iron ore producers for positive surprise potential on excess cash and little appetite to spend it on operations and/or M&A.

Insurers could surprise too. And Ampol (ASX: ALD) is everybody's favourite this year to splash out on extra shareholder benefits.

As per standard practice, FNArena will be paying close attention over the coming six weeks. Our dedicated year-round Corporate Results Monitor is currently empty, but won't be for long.

Follow me for more like this

Click the 'follow' button below to be among the first to be notified of my next post on Livewire.

This resource has been contributed to Livewire by the team at FNArena.