Hatchings
AUGUST 2024 – ISSUE 21
The August 2024 Reporting Seasons
Back to normality, beating on costs, the Aussie consumer keeps on keeping on. So where is the pain?
Author: Platypus Asset Management
Over the last six months guidance for the ASX 300 FY25 Earnings Per Share (EPS) growth has decreased significantly from an estimate of +5.1% to +1.8% with this slide accelerating through the second half of the FY2024 reporting season.
Back to normality
After almost 4.5 years mentions of COVID have finally stopped with even the most impacted sectors (Travel and Healthcare), putting the initial shutdowns and subsequent reopening, restocking, destocking cycles behind us.
As has been the case in recent reporting seasons, stocks that disappoint and miss analyst expectations are dealt with harshly and stocks that exceed expectations are rewarded. Examples include the share price reactions to the Cochlear Ltd (COH) and Wisetech Global Ltd (WTC) and FY24 results. COH beat on earnings expectations on August 15 however FY25 guidance missed expectations by ~6.5% and the stock has fallen ~15% since yet WTC reported earnings on August 14 that were ~5% above analyst expectations and have since rallied ~40%.
Beating on cost
As an aggregate, the ASX 300 beat FY24 market expectations for revenue by 6%. On a margin basis this number increases to 31% of the companies reporting. This shows that companies have been better able to control their cost base as both customer demand and inflation have moderated after 3 years of above average long-term levels.
The Aussie consumer keeps on keeping on…
The Australian consumer continued to defy market expectations throughout FY24 with better-than-expected results from JB HiFi (JBH), Super Cheap (SUL) and Temple and Webster (TPW) highlighting the underlying strength of the consumer. FY25 updates also pointed to this trend continuing, with sales up 4% year on year (yoy) indicating that the consumer cycle may have bottomed.
Interestingly, Domino Pizza (DMP) and Collins Foods (CHK), reported poorer results than expected even though fast food has traditionally been considered recession proof. This however was not because of the Australian consumer: DMP was affected by underperforming international markets namely Japan and France and CHK’s margins were impacted by cost increases for both labour and raw materials.
Where is the pain?
The banks that reported in August all showed better than expected bad and doubtful debt charges. The challenging credit cycle that was expected by the market has still not come to pass. Going forward the key question for investors, is whether this a new normal or just an elongated cycle?
However, higher interest rates do have bite. This was highlighted by the result of the Endeavour Group (EDV). Whilst the underlying sales results were reasonable, (Dan Murphy’s sales + 4.7% and the hotel division sales + 1.8%), this was offset by a 22% increase in interest costs, leading to NPAT being 3.2% lower than the previous year.
In the Resources sector, commodity prices (with the exception of gold and copper) moderated materially during the second half of the year as a result of weak demand from China. This has resulted in companies curtailing production (MinRes Iron Ore, BHP Nickel West, Core Lithium). Looking forward into FY25 the dividend streams of the major miners may come under pressure if Iron Ore remains below $100/t. Subsequent to the end of the reporting period the Chinese government unveiled a widespread program of monetary policy easing. This initially resulted in a rebound in commodity prices, time will tell if this program will be able to stimulate longer term sustained demand.
As always, outlook comments at upcoming Annual General Meetings will give further colour on how FY25 is starting. We will be particularly interested in commentary surrounding the credit cycle, consumer trends and customer demand from China.
Without limiting the foregoing, this material may contain estimations about future matters (including forecast financial information) which are based upon selected information known and assumptions made as of the date of this material. Such estimations are subject to risks and uncertainties and actual results may be materially different. Nothing contained in this material may be relied upon as a promise, representation, warranty or guarantee by PAM (or any other person, including any director, officer or any related body corporate of PAM) in respect of such estimations.
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