Reporting Season Playbook: July/August 2022

About the author:

Author name:

By Fiona Buchanan

Job title:

Co-Head of Research, Senior Analyst

Date posted:

14 July 2022, 9:30 PM

Sectors Covered:

Property, AREITS

Watch

• The ASX200 is likely to close FY22 growing EPS at a healthy 21.6% but FY23 growth is where the market will be focused. As conditions become less favourable, quantity and quality of earnings will matter.
• Key themes to watch include cost inflation, FY23 earnings trends, quality premium, short selling, and positioning in resources.
• Morgans analysts preview the results for 146 stocks under coverage that report in August and call out likely surprise and disappoint candidates (pages 12-157). 
• Key tactical trades (page 2) include CSL Limited (ASX:CSL), AGL Energy (ASX:AGL), Lovisa (ASX:LOV), Amcor CDI (ASX:AMC), JB Hi-Fi (ASX:JBH), SEEK (ASX:SEK), Treasury Wine Estate (ASX:TWE).

Managing expectations – the macro will continue to dominate

To an outsider looking in, the ASX200’s FY22 EPS growth of 21.6% followed by an estimated 9.6% next year would normally pique the interest of most.

Throw in a below-average market PE of 13.5x as an entry point and these conditions would normally make for a great risk-adjusted trade. But normal is not the environment investors are operating in.

The tug-of-war between what the market expects to happen is at odds with what is currently occurring. We don’t disagree that higher interest rates portend lower economic growth but is the market right to be worried about a collapse in earnings expectations? We don’t think so, but August won’t hold all the answers.

FY23 – from COVID recovery year to possible recessionary year?

While there are many reasons for investors to keep to the sidelines, and we agree the risk of negative surprise remains high, there are also reasons for forecasts to turn out better than feared:

1. Economic conditions are sound.
2. Lack of company guidance has seen many analysts err on the side of caution.
3. Less divergence amongst analyst forecasts implies greater forecast confidence.
4. Fewer negative trading updates in May-July indicate a more stable operating environment.

Morgans analysts identify 32 candidates for positive earnings surprise pointing to strong industry tailwinds and a better-than-expected outlook, while 9 are expected to disappoint market expectations citing issues such as elevated valuations, softening demand, and near-term cost pressures.

Profit margins in focus – demand side to be given more scrutiny

Until now, the demand side of the margin equation has received little scrutiny given the resilience of Australian consumption. We are however seeing signs from the US reporting season that consumers are tightening their belts.

While Australia’s economy does enjoy strong relative benefits to the US (high commodity prices, lower inflation), demand, which is affecting volumes, operating leverage, and margins, will come into keen focus in August. Companies have several tools at their disposal to combat inflation.

These include cost out, product premiumisation/mix, productivity gains, and cost pass through. We call out key all-weather companies we think are most capable of resisting cost inflation: WOW, COL, CSL, AMC, REA, AGL, ALQ, CTD, TWE, and PWH.

Looking through commodity volatility

We expect near-record levels of dividends to be announced but industry issues are likely to dominate including labour shortages, cost and production guidance, and deferred growth capital. We take a patient, conservative view, noting compelling, unchanged medium-term commodities fundamentals driven by chronic supply-side constraints.

This scenario suits established low-cost producers over leveraged producers or explorers/developers. Our sector best ideas include BHP, STO, S32, WHC, and NHC.

Reporting Season Playbook – Morgans notable surprise and disappoint candidates

Source: Morgans Financial

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.