On numbers provided by AMP’s Shane Oliver, the corporate reporting season opens with the market trading at inflated multiples and an equity risk premium over bond yields (4.5 per cent) of just 50 basis points.
This is better than the US where rising bond yields have pushed the equity risk premium into negative territory but well short of the recent figure around 300 basis points.
The yield is established as the inverse of the price-to-earnings ratio – or the company’s earnings-per-share divided by the stock price.
The market price-earnings multiple at 20.1 times compares with the long-term average around 15.5 times.
Last financial year the ASX 200 earnings fell 5 per cent and this year the market is tipping a bounce back of 6 per cent growth, but importantly most of this will come this half.
The past six months of 2024 is expected to have resulted in just a 1 per cent increase in earnings, according to Oliver.
MST bank analyst Brian Johnson predicts better-than-expected earnings from market leader CBA even though the market is tipping 7.2 per cent growth with a cash profit of $5.2bn.
The earnings come against a backdrop in which NAB expected 2024 GDP growth of just 1 per cent growing by 2.25 per cent this calendar year, weighted towards the end of the year.
MST’s Hasan Tevfik forecasts evidence of growth from the last half with margins holding up and, as usual, most focus will be on the outlook statements to gauge conditions and sentiment in a post-Trump election world.
If earnings fall short of the market’s high hopes, the fallout is easy to predict.
Politically palatable solution to prices
ACCC chief Gina Cass-Gottlieb is under pressure to produce an election-friendly solvable issue the government can produce to highlight efforts to control cost-of-living increases.
Her supermarket report goes to Treasurer Jim Chalmers at month’s end and he then has one month to release it publicly.
The timing is smack in the middle of the formal federal election campaign and – just as Chalmers would love to see an imminent RBA rate cut – a saleable nugget from Cass-Gottlieb would help.
As an independent financial regulator, Cass-Gottlieb must be seen to stick to the facts, which in the case of supermarket prices are a little more complex than a 30 second grab on the evening news.
She already has her “supermarket dodgy discount” case before the courts which, irrespective of the case’s merits, smacked of a politically convenient move, and now perishable fresh fruit and vegetables would seem a potential path to the nightly news bulletin.
Coles boss Leah Weckert has even admitted to avenues to even up the decidedly unbalanced relationship between the supermarkets and growers, adding more transparency and independence to a process in which growers are locked in for 12 months on volume but subjected to retailer-imposed weekly price calls.
Last year’s interim report, while playing up the 67 per cent combined share held by Coles and Woolworths, actually had little in the way of new revelations on the market.
The trouble is, in branded goods likes biscuits and detergents, the global multinationals dominate, meat prices are low margin for the supermarkets and there are a host of intervening factors like domestic freight, conglomerate-controlled processor costs and global prices setting the market.
Some 60 per cent of Australian lamb is exported and 70 per cent of beef, so it’s more complex than just scapegoating Woolworths and Coles for higher meat prices.
Still, the heightened politics in the food sector was underlined by this week’s revelation from The Australian’s Eli Greenblat that Tanya Barden is stepping down after 12 years as Food and Grocery Council chief.
Everyone involved has pulled the shutters down but the talk around town says the big supermarkets, unimpressed with Barden’s ACCC evidence during the inquiry, suggested it might be time for new leadership at the council.
The big suppliers represented on the board allegedly read the tea leaves and they are now looking for a new chief, if anyone would want the job.
The big suppliers at least have some leverage over the supermarkets unlike the perishable fruit and vegetable sectors.
In her brief time in charge, Weckert has impressed both the stockmarket and the regulator.
Her established operating momentum has successfully narrowed the trading multiples of the big two supermarkets, with Woolworths’ price-earnings ratio at 21.4 times, just ahead of Coles on 20.9 times.
Whether the sales momentum and cost control on evidence continued in the latest half will be seen this earnings season but, with Woolworths affected by industrial action, this seems a given.
Politically Weckert has held her ground telling the ACCC about 90 per cent of supplier requests for price rises were accepted, adding $3.9bn to supplier revenues and noting that, for every $100 in sales, costs of doing business stood at $73.
Fruit and vegetables is a clear case of supermarket domination when you consider Coles, Woolworths and Aldi handle 78 per cent of sales, and most products have short shelf lives with minimal branding.
Supermarkets have the luxury of selling the product before they get around to paying the supplier but Weckert, while claiming just 1.5 per cent of fresh produce is rejected on quality grounds, has admitted there could be more transparency in its relationships with the fresh food sector.
She is also open to more transparency around comparison tools like the Choice mystery basket.
DeepSeek’s arrival embraced
The way Affinda co-founder Tim Toner sees it, DeepSeek’s emergence is a boon to his business because it helps commoditise the large language model AI market, putting a focus on those who apply AI to its 1500 customers in 75 countries.
Safety is one question mark over the open-source model used by China-based DeepSeek but Affinda’s link to the client base, rather than model source, means it captures the value.
Affinda’s business is in the document intensive financial service market – from legal documents to search companies like Seek which want to break data down to smaller usable components.
It earns more than half of its revenue offshore, has carved out a growing slice of the high-volume document processing space sorting unstructured data, and it has a separate arm, Draftable, used by global law firms.
Affinda provides AI technologies for the automation of high-volume document workflows, customising data flow and a business focused on its customers.
It helps process unstructured data, removing the need for high-cost and error-prone manual processes used by companies such as Seek for what is called resume parsing – or converting unstructured data to a structured form which can be more readily used.
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As stock prices hit record levels, corporate Australia is this month on notice to demonstrate some growth in earnings or see stock prices hammered. Equities are priced to perfection.