August reporting season wrap: Where should investors look when results are varied?

This year’s August 2024 reporting season has concluded with most ASX-listed companies disclosing their profit results and guidance for the 2025 financial year ahead. First Sentier Investors’ David Wilson, Deputy Head of Australian Equities Growth, and Christian Guerra, Head of Research, Australian Equities Growth, wrap up their reporting season insights with an overview of key themes, sectors and the companies they believe are well-positioned to deliver quality earnings growth for the year ahead.  

There was a general sense of apprehension heading into this reporting season with macroeconomic factors including inflation, interest rates, poor consumer and business confidence, and cost-of-living pressures remaining at the forefront of media and news headlines.

Against this backdrop, market earnings for FY24 were ahead of consensus expectations by around 3% with pockets of strength generally found within the larger, higher quality players rather than their less consistent or lower-returning counterparts. The technology sector for example, was a standout with companies wielding pricing power and resilient customer demand to support topline growth. Similarly in the resources space, the likes of global miners BHP and Rio Tinto delivered more consistent and higher quality earnings versus many of its peers in the face of lower commodity prices, cost and capital expenditure pressures. But despite many positive FY24 earnings outcomes, all eyes were on company outlook commentary which broadly held a cautious tone resulting in earnings revision trends for FY25 downgrading from 10% growth to flat. 

WiseTech Global (WiseTech) reported strong financial results and maybe more importantly for investor sentiment, an optimistic outlook. It delivered almost 30% EBITDA growth, hitting the top end of the company’s guidance range and exceeding market expectations.  For FY25, WiseTech is expecting higher margins and over 25-30% revenue growth. Its performance was complemented by the announcement of a new contract with Nippon Express, a top ten global freight forwarder, which will increase its presence in Japan, demonstrating its success in penetrating the Asian market following recent rollouts with Sinotrans, the largest freight forwarder in China, and Yamato Transport, a large Japanese freight forwarder. WiseTech now has contracts with 14 of the top 25 freight forwarding companies, split across Australia Pacific, Europe and North America. With its large total addressable market, strong customer support and pipeline of new products each year, we believe the company is positioned for a long runway of over 20% per annum revenue growth. 

Brambles similarly delivered an impressive result, delivering 7% topline sales growth for the year, with underlying profit growth lifting 17%. This is an outstanding result for a company now delivering on its global leadership position. Its performance benefited from resilient volumes and a reduction of lost pallets in its system as the company progressed its ‘Shaping Our Future’ transformation program. 

Much like all reporting seasons, stellar performers were contrasted by some poor results. While we believe there is long-term upside for both QBE Insurance Group (QBE) and James Hardie, their FY24 results disappointed the market. 

QBE had solid Australian and European numbers that support its 16% return on equity (ROE), however its trajectory for improving its North American business was underwhelming. Our view is that it is still taking time for QBE’s management team to refine and strengthen this portfolio.  

Despite delivering strong first quarter results, investors were disappointed in James Hardie’s guidance for the coming quarters, particularly in its North American market. James Hardie expects subdued demand in the company’s key repair and remodel market where activity is slowing in response to higher mortgage rates and slowing existing home sales. We view this as a short-term phenomenon and expect to see tailwinds coming from the potential interest rate cuts in the US and coupled with James Hardie’s strong capital management and value proposition, we believe the company is well-placed to increase market share through the cycle. 

Commodity prices and inflation management continued to influence company results in the Resources sector. The high quality of BHP’s underlying resources – its iron ore mines in Western Australia, coking coal mines in Queensland and copper mines in Chile– has enabled BHP to manage the underlying cost of its business despite the volatility in commodity prices, particularly iron ore more recently. For example, it can utilise its infrastructure like rail lines and ports to support the export of iron ore in its Pilbara operations in Western Australia.

Overall, investors have been sceptical about Resources companies undertaking acquisitions. While BHP delivered a series of strong transactions in the 1980s, the market remains to be convinced on the OZ Minerals transaction and was similarly dubious about its attempted takeover of Anglo-American. Similarly, the market has questioned recent acquisitions by Woodside in its LNG terminal and ammonia business on the US Gulf Coast, particularly around the rate of return that could be achieved. 

Major bank earnings were on par with market expectations. Net interest margins stabilised whilst there was a modest deterioration in asset quality (albeit off a low base), which saw arrears and corporate non-performing loans rise. Credit costs were low, provisioning was conservative, and capital remains strong with all banks above regulatory minimums, which provides ample room for banks to return value to shareholders through dividends or buybacks. 

The capitalisation of Australian banks, their profitability, growth and continued supply of credit to Australians are attractive features for investors however, we believe bank valuations are somewhat high. While we like the ongoing performance of NAB and Commonwealth Bank, we see better opportunities elsewhere in the market.  

Although consumers and retail are at the epicentre of macro headwinds, Company results indicated that household and corporate balance sheets generally remain in solid shape. We believe Australian households, mainly the older demographic/segment of the market, still have a decent savings buffer from the government stimulus fuelled pandemic-era which and coupled with potential tax cuts and lower interest rates, will be supportive of a broader retail and consumer spending outlook. Similarly, corporate balance sheets remain robust with recent dividends reflecting strong capital management and corporate confidence in their financing, balance sheet and cash flow strength. 

Therefore, we maintain a positive outlook for the Australian share market and retain the confidence that high-quality growth companies with solid earnings capabilities, industry leaders in a dominant market position with distinctive products/services and strong structural tailwinds are better placed to deliver long term returns for shareholders.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.