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Australian reporting season wrap

How did Australian companies fare during reporting season? Colonial First State’s Australian equities portfolio manager, Ben Lam, offers an overview of the results.

       Written by Ben Lam
Senior Investment Manager | Colonial First State
 

 

 

After the contagious Coronavirus swept the nation and shut down much of the Australian economy, August’s full-year reporting season was a highly anticipated event – one that offered valuable insight into the impacts of the pandemic on company performance.


Overall, the results were not surprising given the widespread flow-on effects of the pandemic. Overlooking Victoria’s setback last quarter, a quicker economic reopening and government stimulus benefitted many companies, particularly in the second half of the financial year. However, 40% of stocks still missed their estimates, which was above the 30% norm. As corporate earnings fell 20% – representing the largest fall since both the Global Financial Crisis of 2008 and the 1990s recession – dividends were also impacted for many stocks. But despite a challenging and uncertain backdrop, markets were generally positive on the results – with the ASX 300 up 3% in the month of August

Winners and losers

The IT sector continued demonstrating its resilience, gaining well over 100% since the market low on 23 March. Even with little to no earnings over the financial year, investors showed a willingness to continue backing IT companies and paying for growth in exchange for the promise of future earnings. Buy now, pay later stocks were key beneficiaries, including the likes of Afterpay and Zip Co.


Over the year, the real estate sector diverged across its sub-sectors. For example, retail landlords such as Scentre Group and Vicinity saw their earnings and dividends decline – with the acceleration towards online shopping driven by nationwide social-distancing and lockdown measures. Naturally, this resulted in lower rent collection due to the closure of physical stores and decreased foot-traffic – even after stores were permitted to open again. Conversely, the industrial sector, led by Goodman, performed well given the demand for warehouse space – for example, to house goods due to the consumer trend towards online shopping.


While the resource sector showed weakness in the month of August during reporting, the sector proved strong over the full year from an earnings perspective – particularly for key commodities. In particular, the gold price was strong, reflecting investors’ risk-off approach to investing earlier in 2020, while iron ore prices have supported the likes of Rio Tinto, BHP and Fortescue.


Healthcare was a mixed bag – both at the stock level and sector-wide. Across the sector, earnings for stocks like CSL and Cochlear were impacted by factors such as lower plasma collection or elective surgery shutdowns. ResMed and Fisher & Paykel Healthcare were beneficiaries of the demand for respiratory masks and humidification products to support hospitals with Coronavirus. But ResMed’s results disappointed as some of its other products (like its sleep apnoea machines) did not perform as well.


The energy sector
, which has also underperformed globally, was the weakest performing sector in Australia over the financial year – driven by lower oil prices which were impacted by volatility in March and April following a significant decrease in demand as a result of worldwide lockdowns.


The financials sector was generally challenged, with banks facing headwinds from the uncertain economic environment. While the Australian Prudential Regulation Authority (APRA) initially restricted banking dividends to ensure capital was stable, in July, APRA then allowed banks to pay up to 50% profit on dividends. ANZ and Commonwealth Bank paid dividends to investors, while Westpac did not – impacting its share price. Though regulatory relief has been provided by the government, share valuations reflect a challenged outlook for the sector punctuated by lower lending growth, lower margins due to low interest rates, as well as pressure on loan loss rates.

 

Unsurprisingly, earnings for the industrials sector were significantly impacted by the pandemic – particularly the transportation sector (encompassing the likes of Sydney Airports and QANTAS) which recorded large declines in earnings due to ongoing lockdowns and travel restrictions. 

 

Pockets of strength were evident across the consumer sectors. Government stimulus, together with a sharp rebound in spending and fewer avenues available for travel and social spending, provided a tailwind for many retailers. For example, some companies were able to benefit from consumers staying indoors and working from home, with discretionary stocks like JB Hi-Fi and Harvey Norman posting strong results. While supermarket stocks experienced a boost during the earlier panic-buying spree, many companies also had additional operational costs to ensure protection and sanitisation for their employees and customers.

What's the outlook for Australian companies?

Many companies have been hesitant to share their forward guidance in light of the uncertain operating environment. Still, given the rebound in markets and relatively muted reactions to reporting season, it seems investors are willing to look beyond the results and through to next year.


Participants are conservative in their outlook for the future but there is cause for optimism. Not only are governments and central banks continuing to provide significant stimulus to help support the economy, but the gradual removal of pandemic-related restrictions could allow businesses to gradually return to normal. However, the general consensus is that the rest of the year – which will see the US presidential election take place as well as continued uncertainty surrounding vaccine developments – volatility will likely continue before markets stabilise and pick up again in 2021.

More information

No matter the state of markets, Colonial first State carefully monitors changing developments and communicates closely with our skilled investment managers to stay up to date on the risks and opportunities of investing. Want more information? You can read the team’s timely market updates as well as access other helpful resources on our website.

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