Benign reporting season points to soft economic landing

It’s still early days in the August reporting season but corporate updates so far have been consistent with the soft economic landing scenario projected by the Reserve Bank.

It’s still early days in the August reporting season but corporate updates so far have been consistent with the soft economic landing scenario projected by the Reserve Bank.

While the full economic impact of rate hikes will take much longer to be felt, it’s somewhat reassuring that the extreme volatility in producer and consumer prices, the fastest interest rate increase in three decades and slowing economic growth haven’t yet produced a collapse in profits.

With a number of large companies reporting this week, about 20 per cent of companies by total capitalisation have now reported. So far the results for the past financial year have been “solid”, according to UBS equity strategist Richard Schellbach.

He said the early signs from reporting point to the “continued resilience of the Aussie economy”. But while earnings “beats” have outnumbered earnings “misses” by a solid ratio of three to one so far this August, analysts have continued to lower their outlooks, with FY24 earnings being revised down by a ratio of 3:2, Mr Schellbach noted.

As well as the resilience displayed by bellwethers such as CBA, Boral and James Hardie, a preponderance of profit warnings from corporate Australia in recent months may have lowered the bar enough in struggling sectors like retail and to allow for better than expected outcomes.

That was certainly the case in the recent US quarterly reporting season which surprisingly generated a higher-than-normal number of beats of consensus estimates for corporate earnings.

CBA’s June half-year report was slightly better than expected, with a higher-than-expected net interest margin. And while the bearish majority of analysts dug in their heels, the better than expect result, combined with stronger than expected capital returns, helped its shares stabilise around $104.00. That’s about 15 per cent above the consensus price target of analysts. With a challenging revenue environment, inflationary pressures and early signs of deteriorating credit, Barrenjoey’s Jonathan Mott said it was “hard to see material upside” in CBA shares.

Based on his forecasts it is trading on an expensive valuation of 20 times forward earnings.

But CBA “showed that credit trends and asset quality across both the bank and its divisions still look healthy”, according to UBS. In response to this resilience from Australian households, UBS banking sector analyst John Storey extended his expectations for the credit cycle and lowered his expectations of bad and doubtful debts for FY24 by a substantial 28 per cent.

General insurers also showed that they still had margin tailwinds, according to Mr Schellbach. “All year our proprietary consumer survey work has pointed towards the strong pricing power which insurers enjoy,” he said. “This week’s results have confirmed this dynamic, with both QBE and Suncorp showing an ongoing improvement in underlying margins.”

Boral’s result on Thursday also showed volume strength in the domestic market. Picture: AAP

Boral and James Hardie results were more significant positive surprises thanks to stronger-than-expected margins and volumes, generating double-digit percentage share price gains.

“Builders are enjoying solid activity levels and pricing power,” Mr Schellbach said.

James Hardie’s result on Tuesday not only showed that the US housing market is flying, but that profit margins in Australia remain firm.

Boral’s result on Thursday also showed volume strength in the domestic market, as well as an impressive ability to continue to pass on the still-relentless cost inflation through to customers.

In the retail sector, Myer dived as much as 17 per cent on a profit warning, although having fallen about 50 per cent since March, its shares rebounded 15 per cent over the next three days.

But Baby Bunting shares surged 21 per cent after a positive trading update early this month.

Shares of luxury brands retailer Cettire jumped 17 per cent as revenue doubled, margins improved and it swung to a profit amid rapid customer growth, while also reporting a strong start to FY24 trading. Nick Scali was another positive surprise, its shares up 13 per cent as its FY23 profit beat expectations by 5 per cent and it reported strong orders in June and July.

“For the most part, you’re definitely seeing a more cautious consumer, people are much more selective with their spending, and in the last couple of months that has become clearer,” CommSec market analyst Steven Daghlian said.

“We will wait and see what we get with interest rates, but with many borrowers going from low fixed rates to high variable rates, it can obviously take some time for that to show up.

“At the moment, the market is not pricing in a rate hike in September, but it will be interesting in the second half of August with updates on wages, employment, retail trade and inflation.

“They could all be indicators that have an impact on what the RBA does with rates, but the thinking in most countries is that rate hikes are close to done and that is helpful.”

He said that while earnings reports will have some bearing on the sharemarket in the coming weeks, the main driver in the short-term would be inflation and interest rates, and whether the Australian and US economies can avoid things “becoming a bit ugly” in coming months.

Reporting ramps up next week with more than 50 of the top 200 companies due to report, including property trusts, CSL, Transurban, Seven and Telstra.