Caution & Gyrations Dominated August Results

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

By Tim Boreham, Editor, The New Criterion

The just-concluded profit reporting season has challenged the adage that the market knows best and always gets its right.

Judging from some of the share-price reactions to the disclosures, investors often had it wrong leading in to the results and then scrambled to compensate with massive sell offs or gains.

If there’s one way to sum up the period, it was the month of the Great Overreaction one way or other.

Take the chicken processor Inghams Group (ING) and the immediate -21% sell off in response to the full year numbers.

Ingham’s 2023-24 performance essentially was sound –  a 68% profit leap to $101.5m on revenue of $3.26bn, up 7%.

But the company fell ‘fowl’ of the market by revealing a new contract with Woolworths Group ((WOW)) its biggest client would involve “phased reductions in annual volumes”. Some analysts also suggest the new deal will be on new favourable terms.

Nonetheless, management guided to current-year underlying earnings growth of 0-6%, on a volume decline of -1-3%. The Woolies news is not good, for sure, but does this justify the company losing one-fifth of its value?

Similarly, shares in health insurer nib Holdings (NHF) lost -17%, despite underlying net profit rising 3% to $196m.

Apart from the number simply missing expectations, another culprit was that margins are “normalising” (that is, falling) faster than expected after the covid windfall era when no-one went to hospital if they could help it.

Once again, it’s a moot point whether the harsh reaction was justified.

Shares in boat and ferry operator Kelsian Group ((KLS)) last Monday tumbled -20%, after the company took the interesting approach of pre-reporting numbers it then formally disclosed on Wednesday.

Management said the numbers “exceeded analyst forecasts” but the apparent problem was higher-than-expected capital investment on various projects, including its Kangaroo Island terminal.

Another biggest loser’ award goes to a2 Milk ((A2M)), which buys the fancy cow juice from Synlait Milk ((S1M)) and markets it in Asia as infant milk formula.

a2 shares fell -19% after reporting a seemingly sound result; a 7.7% net profit gain to $167m. But management warned of a likely decline in the Chinese infant milk formula sector this financial year.

a2 is exposed to the negatives of China’s stagnating economy and the nation’s declining birth rate but this headwind is not exactly unknown. There’s also a potential tailwind if the US Food and Drug Administration approves its formula for the US market.

In the resources sector, coal miner Yancoal Australia ((YAL)) shares were poleaxed -14%.

This was not so much because of the known decline in coal prices Yancoal’s realised price for the half-year was down -37% – or because thermal coal is on the nose generally.

Rather, the company committed the sin of cancelling its interim dividend to retain flexibility for “corporate initiatives”. And we all know that taking a dividend away from an Australian investor is like taking infant milk formula away from a baby.

On the flipside, shares in logistics software provider WiseTech Global ((WTC)) soared as much as 21% after posting a 28% rise in earnings before interest, tax, depreciation and amortisation (ebitda), with a similar revenue increment to just over $1bn.

Investors latched on to a beefy ebitda margin of 50%.

Another odd reaction was the 8% gain afforded to glove maker Ansell ((ANN)), despite a -48% profit fall to US$76.5m. The lower-than-expected deficit was enough to swing sentiment, along with the forecast of current year adjusted earnings per share (EPS) of US107c-US127c.

EPS for 2023-24 came in at US105.5c, -8.5% lower so there’s nothing to suggest the company will shoot the lights out (management expects “broadly neutral” conditions in the current year).

Some stocks were sold on the back of ostensibly good numbers, if only because their shares had surged in the lead-up to the numbers.

Examples are the all-conquering industry property trust Goodman Group ((GMG)), sleep apnoea leader ResMed ((RMD)) and blood-products giant CSL ((CSL)).

Others taking the long road back from perdition, such as troubled fundie Magellan Financial Group ((MFG)) which chalked up its best performance fees since 2021.

With the expectation bar lowered, discretionary retailers including JB Hi Fi ((JBH)), Super Retail Group ((SUL)) and Baby Bunting ((BBN)) duly outperformed.

Leading online retailer Temple & Webster ((TPW)) took us back to the good ol’ pandemic days with a with a 26% revenue surge to $498m. Kogan ((KGN)) was not as impressive, but the shares still leaped 12%

Led by the Commonwealth Australia Bank ((CBA)) – arguably the most important economic bellwether stock the banks reported improved net interest margins and still-benign debt delinquencies.

Still in the financial services sector, the rising margins of key insurers Suncorp Group ((SUN)) and Insurance Australia Group ((IAG)) showed that not all of their hefty premium rises are being subsumed by the increasing cost and incidence of claims.

Gold stocks shone in an otherwise iffy’ resources sector, including Northern Star Resources ((NST)) and Evolution Mining ((EVN)). For sure, cost pressures are evident but when bullion’s at a record US$2500 an ounce, it’s hard not to make money.

According to Macquarie Equities, companies are taking a conservative approach to current-year guidance, with companies experiencing net EPS downgrades of 23% – slightly worse than average.

“Whether guidance turns out to be conservative still depends on the timing of rates cuts and how much unemployment rises,” the firm says.

Macquarie says the market is factoring in mere 0.1% EPS growth for all companies, -3.2% for resources stocks and 5.1% growth for industrials (excluding the banks and property trusts).

In FY24, overall EPS looks to have fallen -4.4%, albeit skewed by the resource sector’s -17% decline.

Macquarie says the biggest winners have been the growth stocks, notably Cleanaway Waste Management ((CWY)), Breville Group ((BRG)) and the aforementioned WiseTech Global.

Much of the performance was company, rather than sector, specific. In the online classified sector, Car Group ((CAR)) and REA Group ((REA)) chalked up nice numbers. But Domain Holdings Australia ((DHG)) was slightly off the pace while employment house Seek ((SEK)) proved one of the season’s biggest disappointments.

Plumbing supplier stalwart Reece ((REH)) warned of slower housing conditions and its shares fell -5%, but rival Reliance Worldwide ((RWC)) reported better than expected US conditions and its shares soared 9%.

AGL Energy ((AGL)) shares crept up 2.3%, despite guidance for lower current-year earnings. A couple of days later, shares in fellow retailer and generator Origin Energy ((ORG)) cratered -9% after warning of lower electricity prices.

But Tyndall Asset Management’s Brad Potter describes the trends as “resilient”, especially in terms of profit margins holding up.

As with Macquarie, Potter notes a trend to cautious guidance statements, which is understandable give the economic uncertainties including the timing of potential rate cuts locally and in the US.

(RBA governor Michele Bullock warns there will be no rate cuts before Christmas, while Federal Reserve peer Jerome Powell says US rates cuts are nigh).

If the conservatism proves to be overdone, that sets up further earnings surprises and another round of volatile share gyrations – in next February’s reporting season.

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