February 2022 Australian Company Reporting Season – An Early Update

• As of 18 February 2022, about 45% of Australian companies have reported for the February reporting season.
• While it is shaping up to be all about inflation, the big surprise is nopass on these costs.
• Below we discuss our team’s early views on the results so far, and the emerging thematics for companies reporting.

Positive start to the reporting season

While we are still at an early point in the season, so far, the reported results have been very positive. For earnings per share (EPS) 43% of companies have beat the street’s lead-in estimates, with just 23% surprising on the downside. Dividends per share (DPS) surprise has been more even.

Post result forecast revisions by brokers have been just as positive, with 41% of stocks receiving upgrades versus only 23% with downgrades.

Strength across the P&L statement, and for value stocks

Sales, profit margins, EBITDA, capex, free cash flow, EPS and DPS revisions are all in positive territory for those companies that have reported so far. Aggregate EPS revisions have improved by +3.3%, and this has already driven total market EPS up by 2.4%, despite the large number of companies that are still to report¹.

Inflation thematic on show with rising costs

When we look more deeply at the themes and industries doing well, we see that the positive EPS revisions are being driven by one big theme – inflation. This is showing through in commodity prices, input cost pass through, interest rates and insurance rates.

Ahead of results, the market seemed to have many concerns about cost pressures, but what has really surprised from results is not the inflation itself, but the varying ability for companies to pass on these costs and work this benefit into their EPS.

Some examples of results where this has been seen include²:

• P&C insurance facing high claims costs have passed it through to consumers and revenue (Suncorp Group, Insurance Australia Group);
• Higher rates are supportive of bank net interest margins (Bendigo and Adelaide Bank, Westpac Banking Corp, Commonwealth Bank of Australia);
• Strong commodity prices helping miners (BHP Group);
• Industrial goods companies passing through input prices to end users (Amcor, Sims, BlueScope Steel);
• Agriculture’s boom in volumes and prices (Incitec Pivot, Nufarm, GrainCorp);
• Services benefiting from strong demand allowing for large price increases (REA Group, Seek); and
• Consumer goods retailers maintaining COVID-19 demand highs (JB Hi-Fi).

We would note that many Australian companies have inflation pass through mechanisms, which means as inflation increases, they have stronger ability to increase their prices. This includes many of the REITs, the Banks, and companies like Aurizon Holdings and Transurban Group.

Varying ability to pass on costs

We don’t however see this pass-through ability as being even across the board for Australian stocks. The defensive industrials look to be the most exposed to cost pressures and have had the worst EPS upgrades. Their revenue line is generally slower and less reactive, and widespread inflation is also likely to crimp their margins going forward.

A few other areas of weakness can be found in construction (Cimic Group, Downer, Boral) and companies that have a mismatch on COVID-19 disruptions or cost increases versus their ability to re-price (Inghams Group, Ansell).

Companies are also giving us plenty of anecdotes of the impact of wage inflation. In fact, Commonwealth Bank stated that they already see 3% wage inflation in their customers salary accounts, which is why they now see a rate rise as early as June.

Skilled labour is also in extreme demand, and shortages are especially being seen in tech, cyber, and compliance.

Reviewing the impact on earnings and dividends

By the end of February, our analysts will have conducted over 100 meetings with management teams of Australian corporates.

We will be looking deeply at the true impact on consumer & corporate confidence, and company earnings and dividend outlooks from the rising operating costs, shortages, rate rises, and margin pressures. We are also assessing whether the current inflation trends are transitory or structural. We will be monitoring closely the speed the RBA acts on inflation as this may become a significant theme for markets.

In late March, we will publish our usual semi-annual Reporting Season Wrap, which will bring together our full statistical framework, and key fundamental views and insights from company engagement on these themes, and our outlook for the Australian market.