Confession season shows Australian listed companies in pretty good shape

February is confession season for most Australian listed companies, when they have to open their books and reveal their half year results and how they performed in the July-December period.

It is a barrage of information and can be pretty overwhelming. There were fears higher interest rates, inflation and a slowing economy would take its toll on corporate bottom lines.

But it’s fair to say the results proved to be mixed considering the expectations. But market reaction to results was severe if they didn’t meet expectations.

Investment platform FNArena tracked companies that beat or missed analyst forecasts on key metrics such as revenues or profit, and those that recorded metrics in line with expectations. For the S&P/ASX 200 group, 35.5 per cent of companies ‘missed’ or fell short of analyst expectations; 32.2 per cent ‘beat’ expectations and similarly 32.2 per cent of companies met expectations.

CommSec confession season summary

Investment giant CommSec always puts out a terrific reporting season summary. Some of their observations were:

The recent sharemarket rally has been driven by the Artificial Intelligence (AI) frenzy, with tech stocks like WiseTech Global, Altium and Weebit Nano soaring between 24.7 per cent and 30.4 per cent in February. Data centres like NEXTDC were also strong performers, up 25.9 per cent.
Surprisingly Consumer Discretionary shares jumped 8.2 per cent in February at a time when borrowing costs and inflation are high, pressuring consumer sentiment and demand. Fashion retailer Lovisa soared 40.9 per cent, atop of the ASX 200 index. Retailers cleared excess stock, input costs generally eased and shops engaged in price discounting, with margins defended.
Westfield owner Scentre Group reported that visitation was up 6.7 per cent at its shopping malls in 2023! Temple & Webster said it had record customers shopping online and Kmart owner Bunnings highlighted that frugal Aussies were buying cheaper brands during the cost-of-living crisis.
The miners remained under pressure with commodity cost curves steepening and labour conditions challenging amid supply challenges due to rising geo-political risks.
Companies were relatively restrained in providing guidance over the reporting season. But a number of companies saw light at the end of the tunnel with interest rates, believing that rate cuts would be positive for financials and real estate companies.
Around 81 per cent of companies made a profit, but this is the lowest result in seven reporting periods and below the average of 87 per cent. Aggregate profits have fallen by 35 per cent. As a result of weaker profits, cash levels have been reduced – down by 25 per cent over the year. Still cash totalling near $200 billion is still higher than before COVID.
Despite weaker profits and lower cash levels, companies have tried to keep paying dividends. Aggregate dividends have only eased by 2 per cent. For companies in the S&P/ASX 200 index, dividends totalling $33.9 billion will be paid in coming months. That is down only modestly on the $34.8 billion of companies that announced dividends at the same juncture in 2023.

Emerging investment themes

For CommSec, a number of investment themes emerged from results season which affected particular stocks:

Moderating food inflation (Coles and Woolworths)
Lower airfares (Qantas)
Inflation-cost headwinds (Domino’s, Woolworths, Medicare, Brambles, Sims)
Global connectivity, AI proliferation, data consumption (Altium, NEXTDC)
Write-downs of the value of assets by real estate firms, especially offices (Dexus, Lendlease)
Lower commodity prices for resource companies (BHP, Lynas, IGO, Wesfarmers, Iluka, Santos) and higher operating costs (BHP)
Energy transition (Lynas Rare Earths, Santos)
Resilience of retailers (JB Hi-Fi, Eagers Automotive, Lovisa, Universal Stores, Temple & Webster, Nick Scali, Adore, Scentre, Kogan)
Reduced demand for gaming services (Tabcorp, PointsBet, Endeavour), but record Lotto expenditure (The Lottery Corporation)
Transition to digital from traditional (Tabcorp, Seven West, Nine Entertainment)
Positive outlook for housing and building activity (Mirvac, James Hardie, BlueScope Steel, Reece, Lifestyle Communities, Stockland, Domain, REA Group, Seven Group)
Rising interest rates and heightened competition (CBA, Westpac, Bendigo and Adelaide Bank)
Travel demand (Flight Centre, EVT)
Impact from cost-of-living crisis/cost cutting (some travel companies, retailers, gaming, health)

At the same time, corporate activity has picked up during the reporting season. Notable deals include French building giant Saint-Gobain’s $4.3 billion bid for CSR and Seven Group’s bid to take full control of concrete company Boral.

Is the market ahead of reality?

So reporting season was, at best, an okay result. But the market performed more than okay and is at record highs. Has it got ahead of reality and is the market headed down from these lofty levels?

According to CommSec there are a raft of factors to watch during 2024: China’s slowdown; the Artificial Intelligence theme, weight-loss drugs, the Israel-Hamas war, war in the Ukraine, and the increasing need for security of IT systems.

On a valuation basis the ASX 200 index price/earnings ratio (P/E) is now at 16.2 times, above the long-term average, while the 12-month forward dividend yield is at 4 per cent, below the historical average. Large cap valuation metrics are less attractive than small cap metrics with emerging companies positioned to benefit from an eventual easing in financial conditions, a soft economic landing, moderating inflation and lower borrowing costs.

CommSec expects the Aussie sharemarket to drift through to mid-year as the focus intensifies on possible rate cuts. The S&P/ASX 200 index is currently around 7,700 points and CommSec expects it to end this year higher, in the 7,750-8,050 point range.

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