Reading between the lines of the spreadsheet, the annual earnings season has given some clues as to what’s to come for Australian businesses and the broader economy over the next year.
The annual results of Australia’s top 200 listed companies are a dashboard of their performance over the past 12 months, as well as what they hope to achieve in the coming year.
Despite some serious headwinds in fiscal 2022, Australia’s largest companies have fared quite well.
Profits were up
Overall corporate profits rose sharply in the 12 months to June 2022.
BHP announced its second highest profit since 2011 and a record dividend. Underlying profit from continuing operations jumped 26% to $21.32 billion.
If you include its oil division, which spun off into Woodside during the year, it posted a stellar net profit of $30.9 billion.
High commodity prices and record sales from its iron ore operations in Western Australia fueled growth.
Woodside also posted strong numbers, thanks in part to its acquisition of BHP’s oil assets and rising energy prices.
Its half-yearly net profit after tax increased fivefold to $1.82 billion.
Russia’s war in Ukraine and ensuing energy supply shortages also saw Whitehaven Coal post an increased profit of $1.95 billion, a massive turnaround from recent losses.
“The one big sector that’s gaining across the board is commodities,” said Steve Johnson, chief investment officer of Forager Funds.
“If you take out the financial stocks, so the big banks, the commodities sector has made more profits in the last four months than the entire non-financial section of the ASX.
“They are making extraordinary profits.”
But strong numbers weren’t just for resources.
Earnings at global logistics technology company WiseTech Global jumped 80% to $194.6 million, while retailer JB Hi-Fi’s after-tax net profit rose 7.7% to $544.9 millions of dollars.
“Results were generally good, that was probably the main theme, certainly, all the way through the back window. We’re looking at earnings over the past 12 months, not what’s happening right now,” Johnson observed.
Not everyone was a winner
Every reporting season has a few losers.
Once one of the biggest winners in lockdown life, Kogan posted a full-year loss of $35.5 million this year.
In fiscal year 2021, it recorded a profit of $3.5 million and in fiscal year 2020, its profit after tax was $26.8 million.
“The only really really weak point is online retail,” Mr Johnson told The Business.
“They were the main beneficiaries of the COVID lockdowns, I think a lot of people thought advanced demand was going to stay.
“We’ve really seen a huge pullback in that regard, it’s gone back to pre-COVID trends and unfortunately for a lot of these companies their costs have remained high.
“Most of these companies are back to losing money like they were in the pre-COVID years and I think that’s been a big negative.
“A lot of us are very uncertain about whether or when they will return to profitability.”
For others, the drops weren’t as big, but earnings were down from a year ago.
Building materials maker Boral reported a 40% drop in annual profits as construction blockages and bad weather dampened demand and increased costs. It still posted a profit of $149.7 million.
Cement maker Adbri also saw its profits plummet, down 15% to $48 million.
“A microcosm for what is happening”
InvestSmart chief strategy officer Evan Lucas said these construction sector numbers are a sign of what’s to come.
“Requesting concrete is always a way to see how construction is going, and what Adbri’s outcome tells you is that they’re starting to feel the pinch and the downturn is happening,” he said. -he explains.
“The same with CSR, Boral and James Hardy, to some extent – they show you the future.”
Wesfarmers – the owner of stores like Bunnings, Officeworks, Kmart and Target – posted a profit of $2.35 billion for the year to June 30, 2022, down 1.2% from 2021.
But CEO Rob Scott’s comments on consumer behavior are perhaps more telling.
He noted to the media during his earnings presentation that as inflation bites, he expects sales to remain strong but margins to come under pressure as consumers seek a bargain.
“We have noticed that customers [during COVID] weren’t as value conscious as they normally would be and what we’ve seen over the past few months, I think, to a large extent is a normalization of customers being focused on value, which is obviously very important.”
Roger Montgomery of Montgomery Investment Management warns some retailers may struggle more as inflation rises and people refrain from spending.
“Another side effect of COVID has been the ongoing supply chain issues that companies are facing, and we have seen companies like City Chic, Lovisa and Supercheap Auto respond to these supply chain difficulties by investing more in inventory,” he observed.
“Now that can be a good thing, if sales stay buoyant, but if sales drop, those stocks will need to be refreshed.”
Coles chief executive Steven Cain noted that shoppers were starting to buy less or cheaper products as his company’s profits rose 4.3% (to $1.05 billion).
“Maybe as many as 20% of consumers…obviously find it difficult,” he said.
“What we’ve seen in the current quarter is that, for the first time, we’re seeing a significant increase in transactions, but we’re also seeing a reduction in baskets.
“Given all of the headwinds the economy is currently facing, the ongoing supply chain bottlenecks, rising interest rates, inflation… the ongoing geopolitical tensions, as well as the ongoing issues persistent weather…I really think it’s going to be a challenge for, overall, the companies to hit their historic earnings growth target of 5.5% this year,” Montgomery said.
It will come as no surprise that companies that have made big profits have often returned them to their shareholders.
Woodside tripled its dividend to US$1.09 and BHP also delivered to shareholders a payout of US$1.75 per share.
But this kind of spectacle was far from universal.
Fortescue Metals Group (FMG) cut its dividend by 43%, to $1.21.
“Fortescue and Rio Tinto, however, have withheld some of the money,” Montgomery said.
“Banks are also encountering investors with lower payout ratios.
“I think what was more compelling, in light of the fact that there were fewer companies increasing their dividends this year than last year, were the very large buyouts that were announced by a multitude of businesses.”
A series of companies announced share buybacks, including Qantas ($400m), A2 Milk ($150m NZ), Seven West Media (10% of its shares) and The Reject Shop ($10m). of dollars).
Buybacks occur when a company buys its own shares and then cancels them, thereby reducing the number of existing shares and, therefore, increasing the value of those that remain.
“These buyouts are a way to return money to shareholders without committing to ongoing dividends,” Montgomery added.
An anxious year ahead
Typically, companies give hard numbers on what they think earnings will look like in the coming year.
But with this level of detail not particularly available this season, it’s clear the business community is just as uncertain about Australia’s economic future as the rest of us.
“As we’ve seen in 2020 with COVID, the opacity of the inability to actually predict what next year will be like, that’s why they’re backing off,” Lucas explained.
“We know interest rates are going up, we know inflation is everywhere, we also know the cost of energy is going to be everywhere, which makes it very difficult to give those numbers and so companies don’t want to get burned with it.”
“It’s still very uncertain what the economy will look like 12 months from now, a lot of it depends on what happens on the inflation and interest rate side,” Johnson added.
“I don’t think businesses are just being coy, I think it’s real uncertainty in their perspective of how their consumers and customers are going to behave over the next 12 months.”
Mr Lucas predicts that with economic conditions tightening further, worse numbers are yet to come.
“The earnings season that has been is a retrospective number, the earnings season ahead is what you need to focus on.”