Earnings season a Covid recovery story

Global developments continue to dominate, but despite some disappointments the February reporting season has overall been a breath of fresh air for the Australian sharemarket.

Companies in the energy sector ‘are going to become cash machines’, says Shaw and Partners.

Global developments continue to dominate, but despite some disappointments the February reporting season has overall been a breath of fresh air for the Australian sharemarket.

With the share prices of major companies including the big banks, Macquarie, BHP, CSL, Transurban and Woodside Petroleum reacting positively to their earnings updates and guidance, the local bourse has had a solid underpinning from the reporting season.

The US’s insistence that Russia’s military hadn’t retreated from Ukraine’s borders spiked a 1 per cent intraday rise in Australia’s ASX 200 index to a four-week high of 7356.8 on Thursday.

The ASX 200 has risen as much as 9 per cent in the past three weeks as investors sought bargains after an 11.3 per cent from a high of 7620.2 to a nine-month low of 6758.2 points last month, which tipped the local bourse into its first official “correction” of the post-Covid bull market.

A rebound from the January correction linked to jitters over US inflation and plans to tighten monetary policy has dominated and the US market has been restrained by the impact of rising bond yields on mega-cap growth stocks. The ASX 200 has risen 6.5 per cent since the start of reporting season whereas the S&P 500 was up just 3.5 per cent.

Ahead of Thursday’s results deluge, which included reports from heavyweights such as Wesfarmers, Telstra, Transurban, Woodside and Newcrest, Citi analysts had upgraded their ratings on five companies while downgrading none, according to its quantitative analyst Liz Dinh.

They also upgraded their earnings per share estimates by more than 5 per cent for 24 per cent of reporting companies, while downgrading estimates for the same number of companies.

That followed “beats” of their EPS estimates for 37 per cent of reporting companies versus downgrades of 32 per cent. Dividends per share beat their estimates for 24 per cent of reporting companies, while 20 per cent missed estimates.

As earnings season passes the halfway mark by market value, a better than expected recovery from Covid-related disruptions has been an overarching theme for domestic consumer-facing companies, but there have been significant positive surprises from global giants BHP and CSL.

CSL surged 5 per cent on Thursday and BHP rose 1.4 per cent despite another fall in iron ore prices.

Of course the reporting season can sometimes save the weaker results for the end.

Wesfarmers was obviously a disappointment as its shares dived 7.5 per cent to a three-week low of $50.81 in their worst day since the Covid panic of March 2020.

While its overall earnings met expectations for the first half, the more cyclical chemicals, energy and fertilisers divisions have potentially unsustainable boosts, while Bunnings, Officeworks and Industrial & Safety were below expectations.

Bunnings and Officeworks suffered margin pressure, and free cash flow and the dividend fell, JPMorgan’s Bryan Raymond noted.

Kmart Group, which includes Target, suffered a 9.6 per cent fall in revenue and earnings fell 59.8 per cent to $223m versus a 49.3 per fall expected by analysts, while comparable sales for Kmart fell 6.4 per cent and rose 6 per cent for Target.

But Raymond anticipated only “low single digit” percentage downgrades of consensus earnings estimates. On that basis the sell-off was an over-reaction.

Meanwhile, Woodside’s bumper annual profit and dividend hike were a “watershed moment” for the Australian energy sector amid expectations that fossil fuels will remain a vital long-term cog in the energy transition, according to Shaw and Partners.

Strong capital returns meant Australia’s biggest oil and gas producer had followed the lead of US shale producers and super majors, according to the broker, with a final dividend of US105c representing a very steep rise on last year’s US12c payout,

“Over the past several years, the chorus of investors demanding returns from the sector has grown louder,” the broker said.

“The US shale sector has responded, the super majors have responded, however the Australian listed companies have been caught in no man’s land.”

It was the first time in ages that a local and gas company so comprehensively beat estimates and at the same time provided a return to shareholders.

“There is no question we’ve gone past the point of no return regarding the ‘energy transition’ … however fossil fuels will be required to facilitate this transition, there is not enough investment occurring in fossil fuels, and the transition is going to take a long time – more than a generation,” Shaw and Partners said.

Companies “in the sector are going to become cash machines and it won’t be the last time we see Woodside reporting a double-digit dividend yield (annualised) and exceeding earnings expectations.”