ASX Reporting Season Expectations

ASX Reporting Season Expectations

ASX Reporting Season Expectations 150 150 Dominic Mlcek

Impact of Inflation and supply change distributions to be a key theme

It’s no surprise that a key focus during this reporting season will be the impact of inflation and supply chain disruptions. While there’s nodoubt that Omicron has brought challenges for company management teams to deal with such as labour shortages and product availability, we ultimately see these as being short-term issues.

The underlying demand drivers still look positive and corporate balance sheets remain in good shape. This should both bode well for the interim results in February and FY22 releases later in the year, where we expect earnings growth to remain positive and in the mid to high single digit range. This has been echoed in current market expectations as earnings have been upgraded quite substantially.

Resources Sector

A host of production updates have been provided across the resources sector. We’re therefore not expecting any major surprises from names in our portfolio like OZ Minerals (OZL), Woodside Petroleum (WPL), Alumina Ltd (AWC) and BHP Billiton Limited (BHP).

Although the spot price of Iron Ore is substantially below the levels we saw this time last year, increased Chinese infrastructure investment following the recent policy reversals could extend above average pricing.

BHP

BHP’s second quarter shipment levels remained strong. Base metal prices have enjoyed a strong performance period which should drive BHP’s copper earnings, although management are now pointing to the low end of the FY22 production guidance range.

OZ Minerals

OZ Minerals earnings will also benefit from higher copper prices. However, plant maintenance, resourcing constraints and higher freight rates have put upward pressure on costs.

Woodside

Woodside should deliver strong earnings this reporting season on elevated pricing, and we wouldn’t be surprised to see further upgrades to consensus expectations.

Consumer Space

Recent trading updates from the likes of Wesfarmers Limited (WES) and Woolworths Limited (WOW) have reflected current trends in retail that we expect to continue into reporting season. The standard supply chain challenges coupled with a slowdown in foot traffic, and lower margins as shopper shift to online ordering will continue to be a theme.

In Wesfarmers case, housing related categories remain strong which should help drive earnings for Bunnings. This has also been positive for James Hardie (JHX), who have already delivered a solid third quarter result with upgraded profit guidance for the full year on the back of the strong US housing market and new product launches.

Broader Industrial Sectors

The health care, IT and broader industrial sectors may have mixed results this reporting season with the likes of Goodman Group (GMG) and Altium Ltd (ALU) enjoying strong demand momentum which should see them beat market expectations.

We’ll be keeping a close eye on CSL Limited (CSL)’s blood plasma collections in the hope that they’re returning towards pre pandemic levels. We are also hopeful that Transurban Group (TCL) will see close to pre pandemic traffic volumes.

Lendlease Group (LLC) needs to build on the recent momentum from last year’s strategy day and show some progress on recalibrating their cost base, while working towards their FY23 and FY24 targets to significantly increase their development and production pipelines.

Capital Management

Last reporting season we saw roughly $18 billion of buybacks, capital returns and special dividends announced. We don’t expect the same level of returns this earnings season, however we do still expect strong capital returns in the way of dividends. We’re expecting the overall dividend yield of the market to continue to move higher towards the longer-term average of 4.5%.

Dominic Mlcek is a Portfolio Manager at Viridian Advisory. 

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