Company guidance statements a priority as investors seek clarity

Guidance statements will carry even more weight than usual in terms of share price reaction this reporting season as some companies have already discovered.

An investor looking at the ASX trading board in Sydney. Picture: AAP Image/Mick Tsikas

A rapidly changing macroeconomic outlook means guidance statements will carry even more weight than usual in terms of share price reactions this earnings season, and expectations for further earnings growth may be tested as recession risks build in the global economy.

Sharemarket valuations have adjusted downward since late 2020 as the market anticipated a normalisation of corporate earnings after unprecedented stimulus during the pandemic.

The 12-month forward price-earnings ratio of the ASX 200 index has cooled to about 13.8 times versus a record high of 21 times. While still below the long-term average of about 15 times, the sharemarket’s valuation has bounced strongly from an early-July trough near 12.3 times as the ASX 200 rose despite a “confession season” fall in consensus earnings estimates.

With costs shooting up this year amid a widespread jump in inflation, interest rates surging as central banks struggle to control inflation, and the demand impact yet to play out, it remains to be seen if guidance for earnings is consistent with the consensus estimate of earnings per share growth of about 7 per cent for fiscal 2023, after expected growth of about 20 per cent for fiscal 2022.

A dividend cut and disappointing earnings guidance pushed Aurizon shares down 3.5 per cent on Monday, while Suncorp dropped 4.6 per cent after underwhelming results and guidance.

The ASX 200 index crept up to a fresh two-month high close of 7020.6 points.

CBA, REA Group, AMP, QBE, Telstra, Mirvac, ResMed and Insurance Australia Group are among ASX 200 companies due to report this week.

“Result season is starting to ramp and with it a heightened focus on outlooks,” said Morgan Stanley Australia equity strategist Chris Nicol.

“Domestic conditions are changing rapidly given policy tightening and yet-to-peak inflationary pressures. Assumptions will be tested and key model inputs recalibrated. The reset seems biased to lower earnings levels.”

The ASX 200 index crept up to a fresh two-month high close of 7020.6 points. Picture: NCA NewsWire Christian Gilles

Nicol cautioned that with the heightened uncertainty still faced by corporate Australia as surging costs and cooling demand threaten profit margins, updates to earnings guidance this year had been “widely dispersed” and estimates were now “generally stale”.

Still-resilient macro data suggests the story is “not about beats and misses but rather a recalibrating of outlooks”. Investors will get an update on the economic outlook this week when NAB’s monthly business survey and Westpac’s consumer confidence index are released.

While a somewhat optimistic February interim results season from corporate Australia was linked to rebuilding and reopening after the pandemic combined with still-accommodative policy paths, Nicol said that world had “largely reversed on many levels, particularly when measuring sentiment”.

“The impact on earnings expectations is yet to come.

“Some form of outlook commentary – long lost to Covid caution – will be increasingly demanded by investors looking for clarity and certainty in assessing risk and reward.”

A lack of detailed outlook statements from companies that has been the norm since the onset of the pandemic is likely to remain a feature of communications.

But investors may be less willing to accept a wait-and-see narrative given that there has been a worsening of the macroeconomic environment since February.

The local market has had at most a 16 per cent correction from its record high of August 2021 and is now less than 8 per cent below the record high 7628.9 points.

“Indeed, the relative resilience of FY22 earnings and the inputs that got them there will need to be stress tested for durability in changing times,” Nicol said.

“This is no time for a communication breakdown. and wage, cost, pricing and capex drivers will need to be recalibrated and reset. We envisage a cautious tone to emerge with margin and cost assumptions most focused on and then linked to softening top-line conditions.”

Schroder Investment Management portfolio manager Joseph Koh said his team was focused on costs, with resources companies in particular reporting that high energy prices were adding to their cost of production.

“Certainly on the mining side, rising costs are an issue,” he said.

“We think rising energy costs will be the greater issue in terms of this earnings season, but labour costs will be a longer-term issue. We’re seeing that demand for online retailers and consumption has been a bit mixed, with strong upgrades for companies like JB Hi-Fi and Myer, but we’ve had a weak update from Accent Group, and the US retailers have been generally weak.

“So it will be patchy for retailers, perhaps more driven by impacts of just getting out of the pandemic and getting year-on-year comparisons perhaps where people don’t have the same incentive to spend online and without the same amount of dollar stimulus that we had during Covid.”

He did not expect higher interest rates to have much impact on consumption for this reporting season due to the lags involved before demand is affected, but consumers were battling higher prices for fuel, electricity and food.

“These increasing costs will eat into discretionary spending, but the impacts are patchy so far, which is what we’ve seen in profit guidance from a few consumer-related companies,” Koh said.