Australian corporates prepare to bare all as ASX corporate profit-reporting season kicks off

As the economy slowly grinds down, the next month or so will give a glimpse into how our publicly listed companies are bearing the brunt of rising input costs, supply chain bottlenecks, labor shortages and recession fears.

It is annual profit-reporting season, the time of year when companies on the ASX open their books for all to see just how well, or otherwise, they have been performing.

But the big theme this time is not so much about looking back at the year, but more likely to be all about looking forward, as businesses face increasing costs and uncertainty about the future.

Cost crunch

Just like households, in the past six months or so, many businesses have been facing surging input costs and an inability to access adequate supplies, which will weigh on their profit margins.

“Margin degradation, I think, is going to be a huge theme during this reporting season,” RBC Capital’s head of equities Australia, Karen Jorritsma, said.

RBC Capital Markets’ Karen Jorritsma warns dividends to shareholders will probably be lower.(ABC News: Dan Irvine)

“I think it’s a case of the market having to get used to margins potentially going backwards for the first time in a long time.”

BetaShares chief economist David Bassanese explained a range of factors are weighing on companies.

“Energy prices have been going up, both gas prices and oil prices, [and that is] helping the energy sector, but [for] other sectors that are consumers of energy, it’s obviously going to hurt them,” Mr Bassanese observed.

A middle-aged man in a royal blue suit and open-necked pink checked business suit sits in an office, looking at the camera
BetaShares’ David Bassanese says rising power bills are hurting businesses.(ABC News: Dan Irvine)

“With rising interest rates, the borrowing costs faced by corporations are really going up as well.

“And wages pressures, we haven’t seen a lot of it in the official statistics as yet but, certainly, anecdotally, businesses are talking about labor shortages and rising wage pressures.”

Which could mean a fall in new employment.

“I think, certainly, in the hiring, we may see a pulling back and businesses will continue to rationalize where they can,” Mr Bassanese predicted.

‘Line in the sand’ between now and the future

All of those headwinds will impact company profits, warned UBS equity strategist Richard Schellbach.

A slender man in a dark suit and patterned tie stands side-on, beside a picture window overlooking other high-rise offices.
UBS’ Richard Schellbach expects good results from energy companies.(ABC News: Dan Irvine)

“Much the same as last year’s reporting season, a highlight, or rather a low light, will be the inability of companies to maintain profit margins,” Mr. Schellbach said.

“When you have input cost pressures, mapping over with a slowdown in revenue, you obviously have difficulty in terms of maintaining profit margins.”

JB Were chief economist Sally Auld said that, as cost pressures continue to rise for both business and consumers, the flow-on impact in coming months could really start to bite.

A middle-aged blonde woman with short hair sits at her computer with her right hand on a mouse.
JB Were’s Sally Auld says this reporting season will signal a change in direction for Australian businesses.(ABC News: John Gunn)

“I think there are some question marks about the sustainability of consumer demand, just given everything we know that’s going on with rises in interest rates and what’s happened to real incomes growth in the household sector,” she said.

“I think it’ll be a reporting season that really draws a line in the sand between, what is probably going to be a pretty solid six months for earnings growth and, looking forward, what is likely to be a far more difficult and far more uncertain environment for earnings growth.”

The winners and losers

Each reporting season tends to reveal some big wins and big losses and our experts predict the divide may be even larger than usual this year.

“There is very significant divergence between the sectors that have done well — obviously energy would be a big part of that, and the commodity exporters — and sectors that haven’t done so well, such as consumer discretionary, where the markets really started to worry about the resiliency of the household sector,” Ms Auld said.

Mr Schellbach said there was no question where the strongest results would come from.

“The miners and energy stocks, their earnings over the last 12 months are up 100 or 200 per cent, and that is really what has driven the strong profit growth across corporate Australia.

“So, from a pure profit growth point of view, they will no doubt be the winners.

“At the other end of the spectrum, our concerns are focused on stocks exposed to the domestic consumer and also the housing cycle, so that would be retailers and building material companies.”

Maple-Brown Abbott co-portfolio manager Phillip Hudak said the divergence would not just be about sectors.

A broad-shouldered balding man with glasses smiles as he looks out to his right over other high-rise office buildings.
Maple-Brown Abbott’s Phillip Hudak says the outlook for business is “cloudy”.(ABC News: Dan Irvine)

He said companies that have not been able to pass their cost increases through quickly to their customers would not have strong numbers.

He added that companies that over-earned during the COVID-19 period would be in for some bad news too.

“Some great examples would be many of the retail companies, including the e-commerce players, which may see their revenue and earnings and, on top of that, their higher-than-expected margins that they’ve been able to generate over this period, mean reverting reasonably quickly.”

It’s all about the future

Analysts predict that, while conditions have recently started deteriorating for many businesses, first-half numbers should be enough to see most companies deliver solid results for the 2021-22 financial year.

“Current demand is holding up, although there are significant risks of a slowdown emanating over the next six to 12 months,” Mr Hudak said.

Mr Bassanese agreed this year’s results will mostly be sound.

“In the main, the economy has been strong, consumer spending has been strong and businesses have faced cost pressures, but they’ve been able to pass them on through higher prices.

“So it wouldn’t surprise if the overall earnings results for the half were pretty good.”

It is the 2022-23 financial year outlook to watch out for, with many companies likely to choose not to provide forecasts.

“Forward guidance will be heavily scrutinized by the market,” Ms Jorritsma said.

“Everyone’s going to be looking for any kind of comments from management around whether they anticipate a recession.

“I personally don’t think that CEOs or corporates are going to be in a position to state whether we’re seeing a recession or not, at this point, it’s probably not in their best interest to do that.

“But what they will be talking about is the outlook for order books, whether they’re seeing any type of impact on the consumer from what we’re seeing from rates and petrol prices.”

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