NEWS + VIEWS – 23/08/2024
MARKETS
After the share market sell-off in early August, almost all the losses have been rapidly recovered. Share markets usually use the elevator during a sell-off and the escalator when recovering. In this case, it used the elevator in both directions.
This is often a weaker time of the year for share markets. As usual, there is plenty of possible events to change the direction, at least temporarily, such as China, the Middle East, poor economic growth or inflation readings both here and overseas. Investors globally are banking on interest rate cuts to underpin buoyant share prices.
PROFIT REPORTING SEASON
The domestic reporting season is around half complete. So far earnings beating expectations have outnumbered those delivering unpleasant surprises. A word of caution however is that companies with a record of strong results tend to report at the start of the profit reporting season whereas weaker second-tier companies can fall toward the second half.
The retail sector has been reasonable. For example, JB Hi Fi’s (JBH) profit was weaker but better than expected. CAR Group (CAR), REA Group (REA) and Domain Holdings (DHG) surprised on the upside albeit with concerns that forced or distressed sales may be inflating volumes. The telcos warned of demand peaking despite solid results.
Banks have been better than expected as margins have held up. Concerns are emerging about the impact on credit quality from inflation and high interest rates for longer.
Government infrastructure spending is underpinning industrial sector activity (e.g. Seven Group (SVW)).
Rio Tinto’s (RIO) results suggest that the other big iron ore miners, BHP and Fortescue FMG), might hit expectations although weaker share prices are suggesting forward guidance may be problematic. China’s weak economic growth is weighing on the big miners. However, supporting the mining industry has proved advantageous to servicing companies SVW, Monadelphous (MND) and NRW Holdings (NWH).
Overlaying all the above are interest rates. They are intended to dampen spending in retail, but this is yet to become apparent. NAB is the first bank to highlight the negative impact of interest rates and inflation on credit quality but others are likely to follow. The major supermarkets and Wesfarmers (WES) report over the next fortnight and will give further clarity on how consumers are coping.
CSL pretty good, but not all of it
CSL’s core Behring business, which is based on blood products, has largely recovered from its COVID related weakness and delivered double digit revenue growth. Disappointing results from Seqirus (vaccines) and Vifor (kidney related products) meant that investors temporarily sold off CSL. Vifor was purchased only two years ago and is under pressure from competing products. Seqirus’ results were impacted by falling vaccination rates.
Forecast income growth of 5 to 7% and earnings growth of 10 to 13% wasn’t enough to meet analysts’ expectations (at least for a week). Underlying profit was up 11% and a creditable 15% if adjusted for currency fluctuations.
CSL has a strong record of buying and integrating large companies into the group. Vifor is the main issue for CSL, and positive trends are needed for the share price to continue appreciating.
The banks down but still prospering
Commonwealth Bank (CBA) is the only major bank reporting at this time with the others providing trading updates.
CBA’s full year cash profit of $9.8 billion was above expectations although down 2% on last year. The all-important interest margin was surprisingly steady at 1.99%. The dividend increased from $2.41 to $2.50 per share.
Westpac (WBC) reported an improvement in net interest margin of 0.03% to 1.92%. A quarterly profit of $1.8 billion represented a 6% rise on the same period last year despite flat revenues and higher expenses.
NAB’s quarterly cash profit was down 7.8% to $1.75 billion. The major news was the deterioration in lending quality and NAB made a $118 million impairment charge for the quarter. This was on top of a $363 million charge for the half ending 31 March 2024.
Management pointed to ‘inflationary pressures’ as the reason behind the fall in asset quality. NAB has the largest business lending book of the majors so the anecdotal evidence of businesses suffering is being borne out in the numbers.
Despite rising expenses and falling profits, the banks’ results point to resilience across the sector. Each have very strong balance sheets with capital well above regulatory requirements. Dividends remain healthy with even the very expensive CBA providing an almost 5% gross dividend yield.
Telstra (TLS) future mobiles and infrastructure
TLS reported a 4% rise in underlying earnings before tax and depreciation, pretty much in line with expectations. The mobile business’ underlying profit rose 9% with TLS improving customer retention. Dividends were up to $0.09 per share for the half resulting in $0.18 for the full year.
TLS wrote down the value of its business that is focussed on companies and government operations and is highlighting its strategy to exit fixed line products. CEO Vicki Brady is refocussing on infrastructure supporting the rapid increases in data demand for AI.
TLS has made significant strides in reducing its costs and workforce around its old fixed-line products. The mobile business, both retail and infrastructure, is proving to be resilient and the jewel in the crown. TLS’ challenge is its ability to build new cash flows as technology rapidly changes.
Seven Group (SVW) solid
SVW reported underlying earnings up 16% with Boral and WesTrac the big improvers. Government infrastructure spending is underpinning Boral’s business and WesTrac is benefitting from heavy vehicle sales and servicing for the commodities sector.
While SVW has its weaknesses, mainly Seven West Media (SWM), the company is well entrenched in supporting mining and infrastructure in Australia. The share price is looking expensive, but management have proven adept at growing the business to meet price expectations.
Remaining companies to report
Gerard O’Shaughnessy
P 0423 771 330
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