earnings season. final results

IMPORTANT INFORMATION AND DISCLAIMER FOR RETAIL CLIENTS

The Economic Insights Series provides general market-related commentary on Australian macroeconomic themes that have been selected for coverage by the Commonwealth Securities Limited (CommSec) Chief Economist. Economic Insights are not intended to be investment research reports.

This report has been prepared without taking into account your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments, or as a recommendation and/or investment advice. Before acting on the information in this report, you should consider the appropriateness and suitability of the information, having regard to your own objectives, financial situation and needs and, if necessary, seek appropriate professional of financial advice.

CommSec believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made based on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by any other member of the Commonwealth Bank of Australia group of companies.

CommSec is under no obligation to, and does not, update or keep current the information contained in this report. Neither Commonwealth Bank of Australia nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this report. All material presented in this report, unless specifically indicated otherwise, is under copyright of CommSec.

This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399, a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. This report is not directed to, nor intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or that would subject any entity within the Commonwealth Bank group of companies to any registration or licensing requirement within such jurisdiction.

Economics | September 1, 2021

Earnings Season. Final Results. Company Reporting Season

This update builds on reports released on August 16, August 23 and August 30, covering companies that reported earnings for either the full-year or half-year to June 30.

In total, 171 companies reported their earnings results (142 companies reported full-year results to June 30; and 29 companies issued half-year results).

While 82 per cent of companies reported a profit, this is short of the near 88 per cent long-term average. But more companies reported either higher profits or smaller losses. The increases in profits have boosted cash levels to record highs and permitted more companies to issue dividends, special dividends or buybacks.

A key trend in the reporting season has been the desire of companies to reward shareholders for their loyalty. Total dividends announced totalled $40.9 billion. And a key issue for companies over the reporting season has been to determine what ‘living with Covid (LWC)’ will mean, with some predicting tougher times ahead.

State of Play

The first earnings snapshot only covered 27 companies. These were the ‘early-reporters’ – those companies that released earnings results in late July or over the first two weeks of August. It was clear from the first snapshot that companies had generally done well over the past year with a number declaring that they had the best year on record or were in the strongest position they had ever been in.

Over the third week of August an additional 65 companies reported and the initial findings were reinforced. And it was clear from the press releases and earnings calls that more chief executives were mulling the challenges and opportunities that would be posed by LWC world. That is, the time when high vaccination rates allow economies to remain open and essentially live with the virus.

Economic Insights. Earnings Season. Final Results.

September 1, 2021 | 2

In the fourth week of August, an additional 67 companies from the ASX 200 reported results. And there were an additional 12 companies in the final two days of August.

The profit results further emphasised how positive conditions had been for many listed companies over the past year supported by government and central bank stimulus, economic recoveries overseas and improvement in local job market conditions. And while a stand-out of the earnings results from listed companies was the increases in dividend payments, there wasn’t a shortage of companies wanting to pursue growth opportunities.

Overall, August 2021 reporting season was better than the past two but short of the results obtained in 2017. The good news was that companies lifted profits and trimmed losses. As a result cash at hand is now at lofty levels. Not all companies are using the cash to issue dividends – caution still exists. In fact 19 per cent of companies won’t issue a dividend (long-term average, 15 per cent). Those that are issuing dividends are providing bumper capital returns.

The best way to determine if companies have disappointed or delighted shareholders is the day 1 response on the sharemarket. This is not an exact science as a lot is happening every day. Global sharemarkets may have dropped or soared in the previous session for a raft of reasons and influenced share prices. And for individual companies, the earnings result, market expectations, earnings guidance from the company and past performance of the company’s share price can all affect the share price reaction on earnings day.

The share prices of fewer than half of the ASX 200 companies (47 per cent) were higher on the day of issuing their earnings result. The average daily loss was 0.6 per cent. But interestingly two days after releasing earnings, more company share prices were higher (54.5 per cent) with an average loss over the period of 0.2 per cent. That indicates that there has been a period of reflection by investors with more confident about the outlook.

Stand-out gainers on day 1 were Wisetech (up 28.5 per cent), Nanosonics (up 21.9 per cent) and artist marketplace Redbubble (up 19 per cent). Biggest falls were recorded by Appen (down 21.4 per cent), Kogan (down 15.8 per cent) and Monadelphous (down 14.4 per cent).

Aggregate results for the full-year reporting ASX 200 companies

Over the year to June, aggregate revenues lifted by 6.5 per cent with 77 per cent of companies lifting revenues (average increase 18.2 per cent). Aggregate expenses rose by just 1.0 per cent with 67 per cent of companies reporting higher expenses (average increase 12.6 per cent).

In the first snapshot, aggregate net profit was up 32 per cent on a year ago. In the second snapshot, aggregate profits were up 56 per cent. At the conclusion of the season aggregate profits were up almost 76 per cent on a year ago (earnings per share doubled). Around 82 per cent of all companies reported a profit (long-term average, 87.7 per cent). Around 72 per cent of companies lifted profits over the past year (long-term average, 60 per cent).

Cash holdings lifted by 68 per cent to $184 billion. But only 57 per cent of companies lifted cash balances compared with a year ago. (Including half-year reporting companies, cash levels stand at a record $220.1 billion.)



Overall, 81 per cent of full-year reporting ASX 200 companies issued a dividend (long-term average, 85 per cent). Aggregate dividends rose by 70 per cent. Almost 60 per cent of companies increased dividends; 13 per cent cut dividends; 9 per cent left dividends stable; and 19 per cent didn’t report a dividend.

Over the past three seasons the proportion of companies not reporting a dividend has fallen from 31 per cent to 21 per cent and then to 19 per cent, but this is still above the long-term average of 15 per cent. Seventeen companies issued a final dividend after not reporting a final dividend a year ago.

Special dividends and buybacks were a feature of the earnings season with around $15 billion in buybacks announced alongside special dividends. The big banks, in particular, delivered on capital returns, the Commonwealth Bank buyback ($6 billion) following earlier moves by NAB ($2.5 billion) and ANZ ($1.5 billion). Retailers Wesfarmers ($2.3 billion) and Woolworths ($2 billion) also rewarded investors.

The total value of dividends was $40.9 billion (including ASX 200 companies with half-year results). The miners reported particularly strong dividend yields courtesy of a resurgence in commodity prices, which have boosted cash flows and balance sheets. And companies such as Lovisa, Sims, Newcrest Mining, Alumina and Woodside Petroleum all announced particularly strong dividends, well ahead of analysts’ expectations.

Views & observations

Aussie companies are cashed up and keen to reward shareholders, lifting dividends and – as predicted – and engaging in buy-backs or returning capital to shareholders. Financial institutions, food retailers, mining companies and telcos dominate the list of companies that have rewarded shareholders with higher payouts.

Of all the ASX 200 companies that reported full or half-year earnings to date, almost $41 billion will be returned to shareholders via dividends, up 98 per cent on the $20.6 billion of a year earlier.

As noted, fewer than half of the ASX 200 companies that reported earnings ended the day of earnings release with their share prices higher. This represents some slippage from earlier in the reporting season. Certainly the sharemarket has run hard over recent months. And much of the strength of company performance has already been locked into share prices. With the earnings season in the rear vision mirror, investors are now wanting convincing reasons to drive share prices even higher given lofty valuations.

On the second day after issuing earnings it is notable that more companies have reported an improvement in share price. Investors are clearly doing their due diligence and trying to identify those that will be successful in the LWC world.

Where guidance statements were provided, analysts and investors have been surprised at the level of caution expressed. Perhaps that shouldn’t be so surprising in these Covid times, but some had hoped for greater optimism on the back of stellar results over the previous 6-12 months (results such as those reported by Ingenia, Goodman Group, Mirvac, and JB Hi-Fi).

Amcor was one of the more positive, expecting another strong year. Auto parts supplier Bapcor is projecting similar pro forma earnings in 2021/22 as the previous year but notes the uncertainty posed by lockdowns. Office landlord Dexus also cited the uncertainty posed by lockdowns with CBDs of capital cities under pressure from working from home arrangements. Real estate firm Domain is hoping for a lift in listings as



restrictions lift in 2022, believing that they will be soaked up by demand. In contrast Lend Lease warns of a challenging year ahead.

Retailers reported mixed circumstances. Those with an online focus such as skateboard company Globe International and artist marketplace Redbubble have both said revenue growth is likely to be ‘single-digit’ in the coming financial year after record profits during the pandemic. Wesfarmers noted that sales at Target and Kmart in the first seven weeks of 2021/22 were down 14.3 per cent on a year ago with sales at Bunnings down 4.7 per cent. Woolworths said Big W sales had fallen 15 per cent in the first eight weeks of 2022. But Australian food sales were up 4.5 per cent on a year ago. Covid-related costs were up. The AFR quotes the Woolworths CEO as saying “COVID will continue to have a profound impact in 2022 but making any further predictions about the year ahead remains very difficult.”

While near-term lockdown uncertainty will likely weigh on the operating profits of discretionary retailers, they could yet benefit from “revenge spending” from consumer pent-up demand ahead of Christmas, should economies re-open once vaccination targets are met. Still, the surge in spending seen at the height of the pandemic in 2020 is unlikely to be repeated due to the “economics of enough,” where households have already stocked up on household goods like home office furniture and TVs.

That said, construction, building materials, insurance and diversified financials companies have posted upgraded forecasts for the next financial year.

Insurance companies noted substantial increases in premiums (QBE, Suncorp, and IAG). Suncorp lifted home premiums by around 9 per cent with QBE lifting premiums 12 per cent across Asia and the Pacific. In the two days after releasing earnings results, share prices for companies in the ‘Property & Casualty Insurance’ sector were higher with Suncorp and QBE both up 8-9 per cent. Insurance claims, particularly, for motor vehicles have been dampened by lockdowns.

Strength in residential sales, home building and renovation were highlighted by James Hardie, REA Group, BlueScope Steel, Ingenia and Domain.

Activity in construction, engineering and industrial property is buoyant and that is expected to continue. Mirvac notes that it is in the strongest position that has ever been in. Online delivery continues to drive demand for industrial space at Goodman Group noting it cannot deliver supply quick enough. A number of companies have noted skill and materials shortages, especially in the mining, engineering and construction space (James Hardie, Downer and S32).

Demand for poultry remains strong amid food inflation. Poultry business, Ingham’s, doubled its financial year net income and reported sales that met analyst estimates. Its share price hit two-year highs following the announcement. Chinese demand for grains remains buoyant, supported by a bumper seasonal conditions, which have boosted harvests and Graincorp’s bottom line.

A number of companies are focussed on expansion or acquisitions with GUD noting that the pipeline of takeover opportunities remains attractive. Aurizon is focussed on expansion beyond rail into broader logistics in bulk haulage, terminals and port facilities. And while Amcor is on the hunt for more acquisitions, it notes that asset prices are ‘elevated’. Residential developer Ingenia is focussed on expansion. The company’s chief executive was quoted by the Financial Review as saying “Our acquisitions team has never been busier, our development team’s never been busier and our sales team has never been busier.”

Some companies are not choosing to limit options for 2022. Beach Energy said it might join in the merger & acquisition activity but it is also looking to lift capital investment from $671 million to $900-1,100 million. While BlueScope Steel has announced a special dividend and buyback, at the same time it is seeking to expand capacity, increasing investment at US and Australian steelmaking plants.

Merger news was one of the features of earnings season with cashed up companies opportunistically bidding for under-pressure rivals at attractive valuations amid variability in pandemic trading conditions. Woodside announced a merger with the petroleum division at BHP. Investors expressed caution, with shares in both BHP and Woodside lower on the day of earnings release. Santos claimed strong shareholder support for its $21 billion merger with Oil Search. Sydney Airport noted an expected decline in passenger numbers due to border closures, after it received a new takeover offer from the Sydney Aviation Alliance, valuing its shares at $8.45 a share. Spark Infrastructure was also subject to a $5.2 billion takeover bid by private equity giant KKR. And of course the biggest news of all was the record $39 billion takeover of Afterpay by US payments giant, Square, at the start of earnings season.



A number of companies have highlighted their success in sales in overseas markets for supporting earnings. Dominos opened 126 stores in Japan in the past year (opened 285 new stores globally). And ARB noted a 50 per cent lift in exports over the year to NZ, the US, UAE and Czech Republic. Carsales also noted strong international growth.

Some companies used the word ‘transitional’ to describe the current 2022 financial year including CSL and Breville.

Covid: Winners & losers and the period ahead

Companies like Flight Centre, Corporate Travel, Sydney Airport and Star Entertainment continue to be buffeted by lockdowns and border closures. But the lift in vaccine numbers here and overseas provide optimism for the current financial year. Indeed Qantas is planning to resume flights to selected international destinations from late 2021.

Coles noted the strength in liquor and express divisions in driving revenues over the past year. But over July and August it noted flat liquor sales and lower fuel volumes in response to lockdowns. Online deliveries in NSW had ramped up to 10 per cent of sales in recent weeks from around 7 per cent over the past year.

Winners from the Covid environment have included JB Hi-Fi, Tabcorp, Ingenia, and Domain. JB Hi-Fi said 2021 was “exceptional – not to be retreated”. As such it has flagged net profit to fall to $388-410 million in 2021/22 from $506 million in 2020/21. Like Coles it highlighted the shift in consumer demand over the past year – for JB Hi-Fi it was the shift from home office to entertainment.

Breville noted a fourth year of profits and 27 per cent lift in sales, recognising a consumer shift towards more premium products. But it warned of a potential shift away from goods to services in the coming year. It plans to recoup higher costs and rebuild inventories and cut its dividend to fund expansion and investment.

E-commerce retailer Kogan.com was another company to hoard inventories amid concerns about supply disruptions ahead of Christmas trade. Net profit plunged 87 per cent to $3.5 million in the year to June, with the company forced to preserve cash by dumping its dividend payment. JB Hi-Fi is also at risk from the re-opening of the economy in 2022 as people’s sights change to travel. Retailers margins could be pressured by the delta lockdown re-opening in NSW and Victoria with many forced to offload bloated stock levels through discounting and sales promotions.

Outlook

The answer to all questions is Covid-19. Economies will re-open in coming months, allowing some return to the ‘normalcy’ of daily life when vaccination rates hit critical levels of 70-80 per cent. It is hoped, this will allow us to effectively live with the coronavirus (LWC) without over-loading health systems. But while lockdowns may soon become a thing of the past, the economic recovery is expected to be bumpy as Aussies adjust to LWC.

But much can change in a relatively short period of time. Back in May and June Australia was seemingly on top of Covid-19, and then the Delta variant became dominant, driving economies back into lockdown. Businesses in many parts of the country saw a return to conditions that existed in March and April 2020.

The one constant over the past 18 months has been the provision of government and central bank support. The over-riding aim has been to keep business in business and keep workers in their jobs. And that goal has broadly been met. Commonwealth Bank (CBA) Group economists expect the Reserve Bank to delay its taper of bond purchases in September and government spending is likely to remain elevated ahead of an expected federal election in May 2022.

Overall, Corporate Australia recorded strong financial results over the past year – although the year has effectively been a ‘rebound year’ – a period of recovery from the lockdowns that dominated over June quarter of 2020. The current financial year is likely to be far more variable in terms of business conditions. While demand for goods (especially online) is still firm, this may change as economies re-open with services like travel, hospitality, recreation and personal services potentially out-performing.

Of course the biggest ‘wildcard’ remains our top trading partner China. The country has recently



dialled-back its demand for Aussie resources on concerns about inflated raw materials costs, yet another clamp-down on pollution in the steel industry and speculative activity in the property sector. Weaker commodity prices, especially iron ore, suggest that miners’ cash flows will be more subdued in the year ahead. Nevertheless, resources earnings growth will likely remain healthy with late cycle commodities and the pivot to renewables supportive of profits.

Corporate Australia is cashed up. And while some of the funds are being returned to shareholders, there is ample scope for increased investment and/or consideration of mergers and acquisitions. Given the uncertainties posed by Covid, the risk is that some companies may turn conservative and fail to embrace the opportunities presented by the re-opening of economies. Investors need to be focussed on the strategies adopted by companies, especially the balance found between short-term and longer-term considerations.

With the health crisis lingering and Covid booster shots to be rolled out, health care companies will continue to be ‘safe haven’ beneficiaries in the coming financial year. The pipeline of residential and infrastructure construction will remain healthy until at early 2022, supporting construction materials companies. And as mentioned above, insurers will continue to benefit from rising premiums.

After rising 24 per cent in 2020/21, the ASX 200 is still up by around 21 per cent on a year ago. While earnings over the past year have partly validated higher share prices, valuations are still high, with the price-earnings ratio at 19.61. At the same time, outlook in the ‘new Covid’ environment is still cloudy. And central banks are mulling issues like whether the recent spike in inflation is more transitory or permanent and the implications for monetary policy. While stimulus could be pared back as the economy regains its pre-delta footing, interest rates are likely to remain anchored at record low levels until 2023/24, with the investor ‘search for yield’ and attractive dividend yields of Aussie listed companies supporting share prices.

As a result we retain our caution about the outlook for the sharemarket, expecting the ASX 200 to be in a range of 7,500-7,700 points by mid-2022. Despite our caution, if the forecast is achieved it would translate into an attractive annual gain of around 12 per cent.

Craig James, Chief Economist, Twitter: @CommSec Ryan Felsman, Senior Economist, Twitter: @CommSec

https://www.commsec.com.au/market-news/the-markets.html

https://www.commsec.com.au/market-news/reporting-season.html

earnings season. final results

Documents