This article first appeared in the AFR on 1 September 2024
Reporting season is always a fascinating time.
It’s when fund managers meet with the management teams of the majority of Australian listed companies to digest the results and understand what is happening in the economy – the trends, strengths, weaknesses, who is gaining market share, who is losing it.
It is an intense month but a great way to get on top of exactly what is happening in the market in a short space of time. The August 2024 reporting season was insightful, but what exactly does it tell us?
On average, the Australian consumer remains in reasonable shape despite the cost of living crisis and higher interest rates. But we are starting to see small cracks and a divergence between two types of consumer based on demographics (older versus younger) and housing (those who own their homes outright versus those who have a mortgage or are renting).
Young renters and families with mortgages are doing it much tougher than the older demographic, who might own their home and have savings in a fixed-term deposit earning higher interest rates.
This older demographic is spending money on travel (favouring international over domestic destinations), while the younger ages are looking for cost-saving opportunities such as eating in, trading down and delaying purchases.
People are also looking to increase their insurance excesses to lower their premiums, which is probably a sensible outcome for both consumers and insurance companies.
The commodity price outlook remains uncertain and is narrowing our focus on the more controllable source of margin expansion: unit costs. Closures in nickel and lithium helped to ease labour pressures in Western Australia, and the major miners noted a deceleration in global cost inflation from around 10 per cent to around 4 per cent between the 2023 and 2024 financial year.
However, most pointed to a persistency in inflation that is now embedded in the cost base, lifting cost curves and implying higher break-even prices across commodities such as coal, copper and gold.
Interestingly, the resources sector is now the cheapest industry group in the market at around 11 times price-earnings ratio for FY25.
The strongest sector, meanwhile, was technology, with financial services also doing OK. The weakest sectors in addition to energy and resources were media and health.
Self-help gains
Self-help programs really became important through the reporting season as they helped control costs and improve balance sheets. These self-help programs also tended to differentiate companies in the same industry.
Coles, for example, had a solid result and out-performed Woolworths with a focus on efficiency gains, lower costs and a much better control in lowering theft in stores.
Suncorp also stood out with its simplification program that has now seen it re-energised as primarily a general insurance company. The sale of the bank has also released around $4.1 billion of excess capital that will likely be returned as a special dividend and share consolidation.
The real standouts through the reporting season were some of the growth companies, such as WiseTech Global, Charter Hall, Brambles, Promedicus and Reliance Worldwide. WiseTech in particular excited the market with its upgraded products and growth plans for the next few years.
More hits than misses
The reporting season itself had very slightly more beats than misses, but it was really the outlook statements and guidance for the next year that drove share prices.
Expectations for the 2025 financial year are that we are likely to see low single-digit growth in earnings for the whole market. With the whole market on around a 17 times price to earnings ratio, that puts it in the category of slightly higher than average multiples.
Interestingly, the banking sector is now more expensive than the overall market on average. With a flat to slight decline in earnings outlook, that makes it vulnerable if the other sectors perform.
Resources, property and industrials all look like achieving about 5 per cent earnings growth for FY2025, with resources the cheapest and industrials the most expensive.
With multiple political elections right around the world and interest rates at an inflection point, I am sure the fascination will continue into 2025.
