ASX 200: Disappointing results crimped by higher costs

The extent to which companies have been able to control costs and lift their selling prices without sacrificing demand has been a source of significant share price movements.

From miners to banks and retailers, cost pressure is the key talking point this earnings season.

Corporate Australia has overall backed the official narrative that inflation has probably peaked.

However, the extent to which companies have been able to control costs and lift their selling ­prices without sacrificing demand has been a source of significant share price movements.

As the bulk of the December half-year reporting season wraps, the overall picture is a little disappointing. Some of the sharemarket weakness has been caused by hawkish central bank rhetoric. It has also been driven by disappointing results, particularly from BHP and Commonwealth Bank.

Since the start of reporting season, the S&P/ASX 200 index is down about 2.5 per cent. It is the worst reporting-season performance – apart from at the start of Covid – since August 2019.

Certainly, the market had set a “high bar” in terms of share price gains in January.

The index rose 6 per cent in the four weeks before reporting. It had also bounced 16 per cent since early October.

The S&P/ASX 200’s next 12-month PE multiple was hardly “stretched”, having only just regained its long-term average of around 15 times during the October-to-February rebound.

But as interim results started to disappoint, stock analysts became increasingly sceptical that companies would be able to meet their full-year guidance, and continued to lower their estimates.

To the extent that aggregate earnings estimates are downgraded, the sharemarket won’t be as reasonably priced as it still appears to be at the current time.

In terms of earnings per share, the consensus estimate for the ASX 200 has slipped about 0.5 per cent since the start of reporting season. With this backdrop, it’s no surprise the index has struggled.

While better than the average reporting period, earnings resilience has faded in the past two weeks.

“The culprit appears to be what we have been worrying about – costs,” MST senior analyst Hasan Tevfik said. “While industrial companies are guiding to sales which are 0.8 per cent higher than before the reporting period, they are guiding on operating costs which are 1 per cent higher.”

MST senior analyst Hasan Tevfik.

The impact of this “negative jaws” is even greater for the commodity producers, where the likes of BHP continued to grapple with annual inflation rates in the low single digits in the December half.

Still, Mr Tevfik said that despite this sluggish backdrop, companies had tended to forecast stronger dividends and capital expenditure during the reporting period.

“It all suggests Australia Inc is expecting the cost issue will be temporary,” he said.

“We worry it raises the vulnerability to a sharper decline in ­revenues.

“Of course, this can come from a policy mistake in the US, or the Chinese recovery falters, or we’ve overestimated the resilience of Aussie households and domestic activity collapses in Australia.”

Perhaps the biggest shock was Domino’s Pizza, which dived a record 24 per cent after reporting.

Some wondered if Domino’s would be able to increase its prices up to 40 per cent without losing sales. Those fears were proved well-founded as the pizza maker reported a loss of sales momentum in December and January, driven by fewer delivery customers due to higher prices and fees.

CEO Don Meij said decreased volume had a big impact on Domino’s earnings, after it “didn’t get it quite right in a buoyant market”. Commodity and labour increases were expected to continue in fiscal 2024, albeit not as significant as the increases Domino’s passed through in fiscal 2023.

“We note soft commodities peaked in June and that the disinflation trend remains intact as we move through 2023,” Morgan Stanley analysts said.

“However, labour cost increases and availability remain ongoing challenges.”

Bega Cheese dived 8 per cent, even after falling 10 per in the weeks before its report on Thursday.

UBS said it was clearly a weak result in a challenging period for Bega, given a “mismatch between cost increases and price ­recovery.”

Bega’s group EBITDA margin dived 300 basis points to 4.5 per cent.

It said the decline in global commodity prices had the potential to improve its competitive position on farm-gate milk pricing in fiscal 2024.

But UBS was cautious, based on its view that Australian milk “remains in a structural decline, which should further intensify an already highly competitive milk procurement market”.

BlueScope Steel also fell victim to margin pressure after predicting lower underlying earnings in the second half of fiscal 2023, mainly due to higher costs and weaker domestic steel sales.

But Boral shares surged 13 per cent on the day of its report.

Its first-half earnings beat expectations on the back of a 70-basis-point increase in its profit margin as it continued to push through price increases for concrete and aggregate.

Coles and Woolworths have fared better than most as cost reductions drive the supermarkets’ earnings growth.

Coles’ supermarkets inflation accelerated to 7.7 per cent in the December quarter, from 7.1 per cent in the September quarter.

Coles did say its supplier cost inflation was starting to ease in the March quarter.