Rudi’s View: Positives From February Results

Rudi's View | 10:00 AM

High- and Lowlights from the February results season which is mostly surprising to the upside.

By Rudi Filapek-Vandyck, Editor

With less than one week left of February, we're only about half-way through the local results season in terms of companies reporting.

In terms of market capitalisation, however, some 80% of the ASX has by now shared its financial performance for the six months to December 31st.

On Monday, the FNArena Corporate Results Monitor has assessed 173 results. That number will still grow by around 200 over the coming days (on our methodology, the Monitor is one day behind on actual result releases).

Hence, a lot can still change, but there is a lot to like so far.

Renewed economic momentum domestically is generating considerably more positive news as also illustrated through the near 40% in positive surprises thus far (results plus guidance) on FNArena's assessment.

It had been a while since local corporate market updates had such an overwhelming skew towards positive outcomes. And while more than one-in-four results (27.7%) still fails to meet expectations, the extreme volatility that had been anticipated (including by myself) has equally been biased to the upside.

Sure, share prices in Alliance Aviation ((AQZ)), Audinate Group ((AD8)), Inghams Group ((ING)), Intelligent Monitoring ((IMB)), Lovisa Holdings ((LOV)), MA Financial ((MAF)), Megaport ((MP1)), PolyNovo ((PNV)), and Zip Co ((ZIP)) have experienced double digit declines on the day of reporting, but many more results have been rewarded through double digit rallies, often after share prices had been sold off prior on a variety of narratives and concerns.

There's a class of market participant who considers price action equal to divinity --you know: the market is always right-- but a multitude in upwards correcting share prices this month puts a big question mark over that kind of logic. My personal take is also: who'd like companies to update and report less frequently?

That'll only give false narratives and misguided sentiment an opportunity to inappropriately impact for longer. See also TechnologyOne's ((TNE)) AGM update this month. That could've hardly been timed any better. Those shares went up 21.50% last week.

Having said so: renewed strong selling for growth and technology stocks on Monday equally signals market sentiment has yet to turn in a major fashion for this market segment. This is how Bear markets operate; they offer hope, then squash it again.

Companies that enjoyed strong share price gains last week include Austal ((ASB)), Electro Optic Systems ((EOS)), Hansen Technologies ((HSN)), Hub24 ((HUB)), IPH Ltd ((IPH)), Magellan Financial ((MFG)), Netwealth Group ((NWL)), and Telix Pharmaceuticals ((TLX)).

In some cases, like for Australian Finance Group ((AFG)) for instance, those initial gains disappeared just as quickly, but in most cases strong selling pressure beforehand has proved a solid platform for an eye-catching rally on better-than-speculated financial health and prospects.

It is also not always obvious why a given share price rallies or tanks post financial update. Read Morgans' and UBS' assessment of MA Financial's ((MAF)) interim report and you'd be scratching your head as to why that share price has been punished so dearly.

Goodman Group ((GMG)), on the other hand, did not upgrade its FY26 guidance and with data centres now representing around 73% of work in progress, the market wants to see announcements involving new customers and financial partnerships. Sometimes patience is in short supply.

Shares in G8 Education ((GEM)) have been on a sharp slide south throughout the past twelve months and on Monday the childcare centre operator's market update revealed bad news can still transition into something much worse. Occupancy has now declined to 54.4%, down -7.5%pts from the same period last year.

To illustrate how negative those numbers actually are, RBC Capital pointed out on the day, even during covid pandemic days, occupancy remained above 60% and never saw a decline more than -4.5%pts.

No surprise, that share price is now below the depths of covid-outbreak days, having wiped out everything gained post 2011, ex dividends.

Outlook Is King

Unexpectedly, maybe, there's actually a public debate taking place whether financial results this month are genuinely as great as share price responses suggest.

On Morgan Stanley's number crunching, for example, 'beats' and 'misses' seem almost perfectly balanced, while for UBS there are many more positives than otherwise.

The missing link might well be provided by Macquarie where analysts observe this month's price action remains closely correlated with outlook statements provided by the companies.

FNArena's Monitor combines the two --financial result and outlook-- and on that basis, as also indicated earlier, the current season is shaping up as possibly the best since corporate profits peaked in 2022.

One of the eye-catching features is many companies surprising with their dividend payouts. On Macquarie's observations, dividends have been topping forecasts by 7% while 10% of reporters announced new or expanded share buybacks.

Mining companies are happily contributing to the extra spoils for shareholders, see also Evolution Mining ((EVN)), Perseus Mining ((PRU)), Ramelius Resources ((RMS)), and others.

While, understandably, a lot of attention goes out to miners and banks, Macquarie points out the real winners this season are local defensives. Their results are beating forecasts by 10% on average, which, helped by the fact there's usually no threat of imminent AI disruption either, provides support for defensive share prices.

Think Telstra ((TLS)), for example, but also AGL Energy ((AGL)), BWP Trust ((BWP)), and nib Holdings ((NHF)).

All else remaining equal, the broker suggests this trend might bode well for the likes of Coles Group ((COL)), Ramsay Health Care ((RHC)), and Woolworths Group ((WOW)) that report later this week.

The worst experience thus far is reserved for the local healthcare sector with shareholders' pain extending far beyond CSL ((CSL)) and Cochlear ((COH)). ResMed ((RMD)) and Telix Pharmaceuticals ((TLX)) are exceptions, though it doesn't necessarily protect their share prices in the short term.

For retailers and consumer-facing businesses, the report card thus far is rather mixed with the RBA rate hike seemingly creating a well-defined demarcation between winners and losers.

While share prices for growth companies remain under a large cloud, below the surface their growth prospects are eroding. Macquarie reports this is the only segment in Australia this month that is thus far reporting net 'misses'.

Think Pro Medicus ((PME)), but also Aussie Broadband ((ABB)), Megaport ((MP1)) and Zip Co ((ZIP)).