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Australian reporting season wrap

What began as a generally positive reporting season closed with some disappointment – with overall earnings falling short of expectations and several companies withdrawing guidance for the year ahead, explains Ben Lam.

       Written by Ben Lam
Senior Investment Manager | Colonial First State

This time last year, Australian companies withdrew guidance during reporting season due to uncertainty about the future. A year later, it seems not much has changed on that front – with companies’ expectations for future financial years uncertain, once again, due to the impact of the coronavirus. Read on as Senior Investment Manager Ben Lam reviews the recent reporting season.

On one hand, reporting season marked a time of expansion and recalibration across the Australian share market, with billions in buybacks, capital returns and special dividends announced across multiple sectors. But on the other hand, it became apparent by the end of the season that the recovery markets hoped for in February had been somewhat derailed after the delta variant of coronavirus pushed several cities into lockdown. Certainly, the ASX 200 grew about 28% for the year ending 30 June 2021 – with many companies reporting earnings for the period. However, those earnings tended to disappoint relative to expectations – with delta impacting even stay-at-home companies to some degree. Consequently, prospects for future financial years skewed to the downside, and a number of companies withdrew their guidance not only due to increased uncertainty about the impact of lockdowns, but also due to analysts downgrading expectations for the next financial year.

But it wasn’t all negative.

For example, in the Financials sector we saw a number of companies return capital to investors, which could be read two ways; some companies may be confident they won’t need the excess capital and can see things through, while others may see growth opportunities associated with the reinvestment of capital as being limited and, provided they’ve retained sufficient capital to deal with existing initiatives, are happy to return funds to investors. In particular, the insurance sub-sector was a key performer following margin increases – but whether that’s due to premiums increasing or the number of claims reducing (or a mix of both) during lockdown is unclear.

We also saw some significant dividends from the Materials sector – particularly from iron ore. While historically many miners tended down the mergers and acquisitions route when they’ve had outsized earnings and excess funds, it seems they’ve been practising good discipline in recent times. Despite this, Materials was the worst performing sector as the price of iron ore price fell.

Corporate activity picked up. Of note was Square’s bid to takeover Afterpay for $39 billion (announced at the start of the season), which marks the largest takeover in Australian history. This was the key contributor to the Information Technology sector leading market performance. Spark Infrastructure also accepted a $5.2 billion takeover offer from a consortium of investors, while BHP announced plans to collapse its dual-listed company structure. If BHP proceeds, it will become the largest stock on the Australian market at current prices.

Over the period, we also saw some focus on ESG considerations – most notably BHP, which announced its potential divestment in its oil and petroleum division to Woodside. Even without a dedicated climate target from the Australian Government, more companies announced net zero targets across different sectors, including the likes of ASX, Boral, JB Hi-Fi and Beach Energy.

Interestingly, while the property sector has been challenged due to the pressure associated with lockdowns and business closures on rent collection, real estate securities have still experienced some outperformance. We could attribute this to investors’ tendency to look through the downsides of lockdowns and to the possibilities of an economic reopening.

Hope for the Australian market

Understandably, economic uncertainty and market volatility can feel unsettling, particularly since the full impacts of this year’s lockdowns have yet to be measured. However, while the recent reporting season shared some similarities with reporting season this time last year, the progress markets have made has only been temporarily derailed – not completely undone. Because unlike FY21, companies have some reassurance about FY22, with the vaccine rollout serving as a light at the end of the tunnel and a key driver behind Australia’s eventual economic reopening.

As conditions in the Australian economy and in financial markets continue to evolve, our team will keep a close eye on developments to better understand the risks and opportunities of investing. Stay up to date on the latest through the team’s timely market updates and topical investment articles.

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