Quick Bites | A disappointing reporting season

As most readers will know, ASX-listed companies must report their financial results to shareholders at least twice a year, within two months of the end of their balance sheet date. As most companies have balance sheet dates of 30 June, the main reporting season takes place in August when many companies release their full-year results.

Where is the Earnings Per Share (EPS) growth? 

Source: Goldman Sachs 

How did we perform this year? Not great. A few out-takes from the reporting season below. 

According to Macquarie, Australia’s corporate earnings fell -4.4% in FY24, although that was 1.1% better than they had expected. At the sector level, most earnings turned out to be a little more resilient than expected but still flagged year-on-year declines. 

For the Macquarie analysts, Resources had the largest upside surprise, with EPS growth 2.9% above expectations (but still a -17% year-on-year fall). Banks were more resilient than expected (but earnings still down -1.4% year-on-year). Real Estate Investment Trusts (REITs) were disappointing, with aggregate EPS 2.1% lower than expected. And Industrials was the only sector to deliver growth. 

According to Goldman Sachs (GS), earnings misses out-numbered beats (38% versus 32%), with the ratio of beats to misses (0.8x) well below the long-run average (1.4x). Disappointment came more at the margin line than on revenues, which were generally in-line with expectations. GS has ASX 200 FY24 EPS growth at -4.6%, and a second straight year of falling profits for the index. Sales growth for the average firm slowed again to +6.4% from +8.9% in the previous corresponding period (pcp), but stickier costs (particularly wages) continued to put pressure on profitability, with margins back in-line with long-run averages. Dividends fell -1.9%, but were higher than forecast (-3.6%), thanks to rising pay-out ratios and a number of special dividends from retailers (Woolworths, JB Hi-Fi, Super Retail). Small caps continued to underperform (45% of small caps missed vs 31% of large caps).  

Earnings misses outnumber beats 

Source: Goldman Sachs 

Outlook commentaries were generally cautious, with earnings revision trends weaker than normal. FY25 EPS growth has been cut by 3% for the ASX 200 (from 3.7%), raising prospects of a third year of negative growth for the index.  

Across Industrial firms, while revenue forecasts were trimmed, the bigger driver of downgrades was margins given companies are struggling to pass on higher costs. Downgrades were broad-based, but larger in cyclical sectors (Steel, Gold, Media, Energy & Mining), while of the more defensive sectors, Healthcare continued its run of negative earnings momentum. Banks, with better Net Interest Margins, was the only sector to see net upgrades (albeit to flat earnings for next year) despite highlighting some concerns around deteriorating asset quality.  

Margins down as companies struggle to pass on rising costs 

Source: Goldman Sachs 

Consumer spending appears to have experienced a modest recovery from a weak 2Q24. Early FY25 trading updates from listed firms suggested like-for-like sales were up around 2-3%. Spending trends continue to be mixed, with older demographics supporting consumption while younger, indebted households struggle against cost-of-living pressures. Younger cohorts are generally trading down for value given pandemic savings buffers are now exhausted.  

Leading players continued to gain market share with strong execution (Bunnings, Kmart, Supercheap Auto). To date, there appears little evidence that the recent tax cuts are doing much to fuel spending, with most of the gains likely having been saved. Ongoing weakness in consumption appears to have flowed through to a weaker advertising outlook across the traditional media sector. 

China’s property market weakness is finally translating to lower commodity demand with construction activity cooling and commodity inventories rising. The mining and energy sectors continue to be impacted by weaker commodity prices and rising costs. Cost cutting and asset sales are becoming a greater focus given the need to strengthen balance sheets. The softer China backdrop is impacting oil demand and refining margins throughout the region. Given rising capital expenditure (capex) costs, mergers and acquisitions (M&A) continues to be a bigger focus in the resources sector. 

Resources disappoint with falling commodity prices as Chinese growth fades 

Source: Goldman Sachs 

In commercial property, Retail rents are again growing, with Office still the weakest subsector. Residential REITs are reporting a pick-up in sales inquiries, but settlement trends remain soft and elevated construction costs are still a challenge to profitability. Credit conditions for CRE have eased meaningfully and the write-down of valuations has slowed, but firms are generally still flagging further divestments. Data centre operators continue to report increased demand, but are dealing with land scarcity, complex planning, regulatory hurdles, and challenges with securing enough power. 

Despite ongoing margin pressures, cost-out programs were relatively modest. Examples of firms with strong pricing power were rare and more customers are seen as struggling with cost-of-living pressures (insurance premiums, online classifieds and construction materials were exceptions). There is evidence of an easing in the labour market, a notable fall in staff shortages, but wages are still playing catch up with inflation. Interest costs continued to rise despite the fall in market rates as debt maturities are driving a repricing higher, but balance sheets and working capital trends remain solid. Capex surprises were less common than expected, with management more cautious and budgets having been reset for the higher cost environment. Buy-backs and M&A levels remain relatively subdued. 

Banks the only sector to see upgrades