Themes emerging from Aussie reporting season - Milford Asset

Themes emerging from Aussie reporting season

David Rigby

Senior Analyst

David is a Senior Analyst, based in the Sydney office, with a particular emphasis on Australian equities, including IPOs. Prior to joining Milford in March 2014, David was a senior equity research analyst with Goldman Sachs and Credit Suisse in London covering the support services sector. In his 10 years overseas his remit spanned small caps to FTSE100 firms in industries as diverse as recruitment, temporary power, equipment rental, distribution, testing & inspection, facilities management, BPO and credit analytics. He holds a Masters of Management Studies and a BSc from Victoria University of Wellington, where he studied Technology Management, Physics and Mathematics.

With the semi-annual reporting season kicking off early in the month, February is often one of the busiest periods of the year for financial market news flow. As it stands at the time of  this writing (19th of February), with 40% of reporting ASX200 companies by number having spoken to the market (60% by market capitalisation), we can begin to see some major themes emerging.

Earnings beats tied with misses

To date, the number of companies that have seen the market upgrade bottom line earnings expectations is the same as those that have seen forecast downgraded (40% each, with 20% unchanged).

This may seem a touch disappointing given the increasing strength of global economic growth, but is probably a fair result given the recent weakness in Australian consumer metrics (e.g. retail sales) and unemployment rates that are falling but still lag many international peers.

US tax cuts showing through

Interestingly, stripping out interest and tax from earnings (i.e. looking at ‘EBIT’) to get a better read on operational business performance, the collective results look considerably weaker (43% downgrades, 28% upgrades). This highlights the initial impact of President Trump’s tax reductions.

Companies such as Boral, Orora, Ansell and Transurban, each with significant US operations, have been able to offset a disappointing operational performance with lower taxes. Such benefits have usually comprised both a component of tax asset/liability accounting as well as a lower actual tax rate, and so are a mixture of lower (temporary) and better (ongoing) quality positives.

Cost pressures are emerging

In many cases, the source of the operational weakness noted above is emergent cost inflation – a particularly topical development given many market commentators have highlighted this as the root cause of the recent equity market sell off.

These cost pressures have come in the guise of higher wages (especially in the US), raw material prices (e.g. paper, plastic resin and oil) that are often traded in USD, or energy prices (especially in Australia). In many cases, the negative effect has been exacerbated by customers destocking (running down older, lower cost inventory before buying newer, more costly items) and a lag in companies’ ability to pass on price rises due to contractual terms and so may be partially temporary (or less likely to intensify).

Automation incentives increasing

One way companies plan to mitigate cost pressures is by investing in automation to gain further efficiencies, especially as the US tax changes make such investments more attractive by providing a five year window for enhanced deductions.

The Amazon effect

Finally, another factor offsetting price increases from the consumer point of view is the arrival of Amazon in Australia. JB Hi-Fi, in particular, noted that it planned to ‘invest’ heavily in price (i.e. increase discounts) to defend online market share.

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.

Disclosure of interest: Milford Funds Ltd. holds shares of amazon.com, Boral, Orora and Transurban on behalf of clients. 

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