Profit season gets ‘solid’ pass mark

Analysts have taken stock of the reporting season, finding only one-third were game enough to provide guidance.

Analysts have taken stock of the annual reporting season results, reshuffling their assessments of some big companies and finding only 37 per cent were game enough to provide performance forecasts amid the uncertainty of the pandemic.

CommSec markets analyst Steven Daghlian described the overall result as “solid”, with about 84 per cent of companies in the benchmark S&P/ASX200 index delivering a profit, compared to the average since 2010 of around 88 per cent.

“What was clear was those that were making profits were making bigger profits,” Mr Daghlian told NCA NewsWire.

“About 70 per cent of companies saw improvements in their earnings.

“Dividends were bigger – close to $40bn will be paid out to shareholders in the next couple of months – and certainly mining stocks dominated as far as that goes.”

The fattest record payouts came from iron ore majors BHP, Rio Tinto and Fortescue, which enjoyed the highest ever price for the steel ingredient of about $US233 a tonne in May, but it has pulled back substantially since to less than $US140/t as China moves to cap output of the metal.

BHP also dominated the substantial mergers and acquisitions news with the divestment of its petroleum business to Woodside, even though the $39bn takeover of buy-now-pay-later market darling Afterpay by a US company run by Twitter founder Jack Dorsey was the biggest buyout in Australian corporate history – both all-scrip bids.

Another big deal was domestic gas giant Santos taking on intrepid PNG-focused Oil Search.

“We have seen some consolidation in these mining and energy stocks where they’re getting larger, joining forces,” Mr Daghlian said.

Other notable deals included Ampol taking over a fellow fuel retailer in New Zealand, Z Energy, and power asset group Spark Infrastructure capitulating to an improved bid from a consortium led by private equity giant Kohlberg Kravis Roberts and a Canadian super fund.

Then there was Sydney Airport, “which keeps turning them down”, Mr Daghlian said.

Along with bumper earnings being used for share buybacks, a recurring theme was companies being extremely cautious providing any form of guidance.

“They wouldn’t be super clear with their likely outcomes in coming months and the year because of the lack of visibility moving forward because of Covid … which is not really surprising,” Mr Daghlian said.

“With many companies, they may have done well over the year, but they’re not saying too much about the coming year overall.”

High on that list were retailers, who largely managed to overcome the massive impacts of lockdowns and other restrictions on their physical stores – in some cases losing hundreds of trading days – by upping their game with online, contactless delivery and click and collect.

The supercharged force driving sales was, of course, bored stuck-at-home consumers eating and boozing in their dwellings, redecorating and upgrading them, and buying clothing and accessories even though that largely left them all dressed up with nowhere to go.

“Companies that were well placed to service people during the pandemic did well,” Mr Daghlian said.

“So the Harvey Normans, the JB Hi-Fis of the world, they both had very strong gains and profits.

“Wesfarmers as well, with Bunnings and Officeworks receiving some strong demand. Super Retail Group as well.

“Woolies, Coles – they saw improvements in profits but they were still quite cautious about the outlook.”

Online-only retailer Kogan was a lowlight, with its profit plunging as it paid extra to deal with overzealous stocking.

“That was a really heavy decline. It paused its dividend for the first time since being on the market five years ago and part of that has been supply chain issues – that’s popped up a bit with some companies … an increase in freight costs,” Mr Daghlian said.

Travel stocks held up surprisingly well as investors bet on a big recovery in travel when it finally resumes in earnest.

“Qantas was up about 10 per cent last month, Flight Centre up about 9 per cent and you had Webjet lifting about 14 per cent,” Mr Daghlian said.

“Obviously, they’ve got a long way to go – they’ve come under a lot of pressure if you look at them since the start of the pandemic, which is understandable, of course.

“Even though they came out with big losses, there were some green shoots from some of them: Flight Centre said it had a strong recovery in the US and Canada, across Europe as well.

“They received a bit of a boost after vaccination rates picked up in places like NSW.”

Healthcare was in the spotlight for obvious reasons but results were mixed.

Even though Ansell’s profit rose, the protective personal equipment maker suffered from high transportation costs and the outlook was challenging, “partly because of Covid spread across south east Asia, and that has meant the closure of many of their factories … and suppliers” Mr Daghlian said.

“Private healthcare firms were interesting. Medibank, Nib and the like had profits lifting – both signed up tens of thousands of new customers,” he said.

“Health is front of mind during the pandemic.

“Also Covid has meant some surgeries have been deferred, so for these private health insurance firms, they’re getting fewer claims, so that’s provided a bit of a boost to profits.”

Biotech giant CSL – one of the most consistent performers on the market for many years – disappointed a bit, despite higher earnings.

“It did flag a slight drop in profits in 2022,” Mr Daghlian said.

“This is a company you can basically split in two: the flu vaccine business continued to get strong gains in sales and on the other hand, the blood products business not so much because it’s finding it difficult getting plasma from the US and it’s costing more.”

Morgan Stanley agreed rising cost pressures, near-term margin squeeze and even missed sales linked to material, component and labour shortages had been a big theme, while dividends had beat estimates and buyback activity had generally been well received.

“After a strong calendar year upgrade cycle, momentum looks to have peaked,” Morgan Stanley said.

“All in all, some caution is needed around a market that is trading 4 per cent above our base case ASX200 price target for mid-calendar year 2022 of 7200.”

That’s a considerable drop from the 7500-plus level the index is currently trading at, not far from record highs, which were set and re-set multiple times recently.

Finally on the banking sector, JP Morgan has shuffled its rankings, upgrading National Australia Bank back to overweight and downgrading ANZ to neutral.

“We have become more concerned about ANZ’s struggles in the Australian mortgage market, and think the turnaround will be more protracted than we first thought,” JP Morgan said.

“We struggle to see the near term catalysts to re-rate the stock despite valuation support.

“In contrast, NAB is well positioned to drive top-line growth.”

Taking into account growth prospects versus share pricing, JP Morgan’s new pecking order is Macquarie Group in first place, followed by NAB, Bank of Queensland (noting upside from its acquisition of ME Bank), ANZ, Westpac, Bendigo and Adelaide Bank and finally Commonwealth Bank, which it views along with some others as overpriced, having breached $100 in June.

Originally published as Earnings season gets ‘solid’ pass mark, but caution advised as ASX trades near record highs, some stocks overpriced

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