Reporting Season Wrap - August 2024

September 6^th 2024
By Derek Bilney

The August 2024 Reporting Season largely met modest expectations, with reported earnings broadly aligning with consensus forecasts. However, earnings expectations for future years were downgraded, reflecting reduced optimism amidst a cautious outlook. Performance varied significantly across sectors and at the individual stock level, highlighting the diverse influences shaping different segments of the market.

The S&P/ASX 300 Accumulation Index rebounded after a challenging start to the August, ending the month with a modest gain of +0.44%. Large-cap stocks outperformed small-cap stocks, with the S&P/ASX 100 Accumulation Index up +0.72% and the S&P/Small Ordinaries down –2.02%.

Key insights identified during reporting season include:

• Weakening earnings outlook: Consensus downgrades across sectors indicated a cautious outlook, with future earnings expectations tempered by economic uncertainty.


• Higher dividend payouts: Despite a softer earnings outlook, companies increased dividend payouts, supporting total returns, and signalling robust balance sheets and confidence in future profitability.


• Retail sector resilience: Retailers exceeded expectations, benefiting from conservative forecasts. This strength contrasted with a gradual uptick in bad debts reported by banks and utility companies, indicating varying pressures across the economy.


• AI adoption: The incorporation of AI was a notable trend, with corporations increasingly using AI to enhance productivity and efficiency.

Reporting Season statistics

Earnings results were broadly in line with expectations with earnings beats slightly exceeding misses. However, a pattern of future earnings downgrades has emerged, with the ratio of downgrades outnumbering upgrades by a ratio of 2.5:1 across all sectors except IT and Banks observing downgrades (see Figure 1).

Figure 1: Distribution of Revision to Forward Next 12-month (NTM) Earnings (3-day post-result)

Source: Factset

Profitability across different measures showed mixed results, see Figure 2 for a comparison of FY24 vs FY23 results on an aggregate and a median-stock basis. Aggregate revenues increased, benefiting from higher prices and sales volumes – linked to a growing population. However, higher input costs, wages and interest expenses weighed on profitability. Significant asset write-downs and property revaluations also impacted results, for example, Dexus (DXS), reported a loss of $A1.5 billion, primarily due to write-downs of its office portfolio. The Resources sector also faced challenges, driven by falling commodity prices, further dampened overall profitability. BHP Group (BHP) – the world’s largest listed miner – whose net profit fell by over $US5 billion. Gold, Financials, and Information Technology saw the biggest gains in net profit.

The median fall in net income was considerably less than at the aggregate level, reflecting that the biggest deterioration in profitability was experienced by larger companies. Although the fall in net income appears significant, investors generally focus on less volatile underlying profits that were more resilient.

Despite these challenges, profit margins remained robust, albeit slightly lower than FY23. The median EBITDA margin stood at approximately 25% and the median EBIT margin was 14%.

Figure 2: FY24 vs FY23 Comparison (Companies reporting full-year results)

Source: Factset

Capital management: dividends and buybacks

Dividends were generally stronger with significantly more companies increasing FY24 final dividends relative to FY23. Large-cap companies, in particular, delivered higher dividends, although resource giants like BHP and Fortescue (FMG), saw reduced dividend payouts due to commodity prices, particularly iron-ore.

Figure 3: Comparison of Final Dividends (cents per share) – Companies in the S&P/ASX 20 that reported in August.

Source: IRESS

On-market share buybacks remained popular as companies sought to enhance earnings-per-share and return on capital metrics, which often influence executive remuneration determinations. Large special dividends were announced by Woolworths (WOW) and retailers JB Hi-Fi (JBH) and Super Retail (SUL).

Market reactions to results

Share prices reacted sharply to results that deviated from consensus expectations. Companies like Wisetech (WTC), Temple & Webster (TPW), Charter Hall (CHC), Life360 (360), Nanasonics (NAN), JB-Hi Fi (JBH), AMP (AMP), Pro Medicus (PME), and NRW (NWH) delivered strong results, leading to positive share price reactions. Conversely, Johns Lyng Group (JLG), Megaport (MP1), Audinate (AD8), Inghams (ING), Domain (DHG), and A2 Milk (A2M) saw negative reactions due to disappointing results.

At the sector level, IT, Financials, and Industrials outperformed, while Energy and Utilities lagged, see figure 4.

Figure 4: 3-day active return vs 3-day forward revision

Sources: Factset, ASX

Retailers (Consumer discretionary)

Retailers continued to surprise the market, delivering some of the better earnings results and share price gains. Companies like Temple & Webster (TPW, +19.36%), Super Retail (SUL, +11.83%), and JB Hi-Fi (JBH, +14.24%) announced strong earnings beats, which have been met with upgrades to FY25 estimates. Ex-300 name Universal Store (UNI, +19.24%) also delivered a stellar result. Income-focussed investors benefited from special dividends announced by JB Hi-Fi and Super Retail, at $0.80 and $0.50 per share, respectively.

The resilience of the retail sector was underpinned by several factors, including tax cuts, ongoing wealth effect, low unemployment, and signs that interest rates may have peaked. Early sales updates for FY25 were also positive, reinforcing a cautiously optimistic outlook for the sector.

Bad debts ticking up

In contrast to the retail sector’s resilience, banks and utility companies reported an uptick in bad debts though levels, for banks, remain low by historical standards. Buoyant house prices, low unemployment and prudent lending practices have helped mitigate potential losses.

Electricity retailers AGL and Origin both observed higher bad debts given customer bases include both homeowners and renters. With a cold July not fully captured in the 30 June results, these may worsen as economic conditions evolve.

AI in AU

AI was a significant focus, with several large companies like Commonwealth Bank, Telstra, Woolworths and ANZ, highlighting its role in improving productivity and customer service. Online furniture retailer Temple & Webster reported a 30% year-on-year reduction in customer services costs due to AI tools, while JB Hi-Fi and Harvey Norman noted an emerging pipeline of AI-enabled laptops and mobile phones, coinciding with a replacement cycle linked to the high rate of device purchases during COVID shutdowns.

Fund Performance during August

The Macquarie Australian Small Companies Fund, Macquarie Australian Shares Fund and the Macquarie Australian Enhanced Plus Fund each outperformed their benchmarks in August.^* Movements on the day of the result tended to be driven by stock-specific factors pertaining to the market’s initial reaction to the result, but once the initial impact dissipated, the performance of traditional investment styles played a more dominant role. Figure 5 shows the profit result hit-rate: measured by the 3-day active return for overweight positions held in the shown funds at the end of July. Although not shown in these charts, the negative outcomes avoided (via underweight positions) also contributed to active performance.

Momentum-based factors performed well with many companies performing in line with longer term trends (both positive and negative).

Figure 5: Reporting Season hit rate: % of positive outcomes (*for overweight positions as at 31 July that reported in August)

Sources: MSI, IRESS

Despite the Macquarie Australian Small Companies Fund having a hit-rate of just over 50%, active performance of this fund was strong in August highlighting that position sizing is also critical: positioning in larger overweight positions in stocks that outperformed and smaller or no holdings in the worst performing names.

The following table highlights key stock contributors and detractors during the month:

Italics indicates underweight positions

Implications for Fund positioning

The deluge of new data during Reporting Season – financial, market-related, and analyst-derived – typically results in a re-shuffling of relative stock rankings in our models, depending on the complex interplay between the model’s interpretation of the new data and the market reaction to the result. This generally leads to gradual changes to positioning in subsequent months, with a focus on maintaining moderate turnover levels.

What’s next for equity investors?

The August 2024 reporting season showcased the resilience of Australian companies in the face of economic challenges. While the earnings outlook has softened, higher dividend payouts and robust performance in certain sectors, particularly retail, suggest a cautiously optimistic outlook. The integration of AI and other technological advancements will likely continue to shape corporate strategies, driving productivity gains and potentially offsetting some profitability headwinds.

Looking ahead, we believe the Australian equity market is placed to deliver moderate returns over the next 12 months. With global central banks beginning to cut interest rates, there is potential for a more favourable borrowing environment, though the Reserve Bank is unlikely to follow suit until 2025 at the earliest. As market volatility persists, driven by both external geopolitical risks and domestic factors, our view is that systematic strategies that capitalise on market inefficiencies will be well-positioned to navigate the challenges ahead.

Author

* Past performance is not a reliable indicator of future performance. Up to date performance information for the funds referred to in this insight is available on our website at macquarie.com/mam/au-performance.

The Macquarie Australian Shares Fund is designed for consumers who:

• are seeking capital growth and income distribution
• are intending to use the Fund as a core component, minor allocation or satellite allocation within a portfolio
• have a minimum investment timeframe of five years
• have a high or very high risk/return profile for that portion of their investment portfolio, and
• require the ability to have access to capital within one week of request.

The Macquarie Australian Small Companies Fund is designed for consumers who:

• are seeking capital growth and income distribution
• are intending to use the Fund as a minor allocation or satellite allocation within a portfolio
• have a minimum investment timeframe of five years
• have a very high risk/return profile for that portion of their investment portfolio, and
• • require the ability to have access to capital within one week of request.

The Target Market Determination (TMD), available at macquarie.com/mam/TMD, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.