ASX reporting season: Big beats, big misses, bigger moves

David:

So welcome to First Sentier Investors Curious podcast. I'm David Wilson, Deputy Head of Australian Equities Growth Team, and joining me today is Christian Guerra, who's our Head of Research.

In today's episode, we're going to be unpacking February's reporting season and walking across through a bunch of the sectors and what we've learned through that reporting season, and we'll look at some of the standout performances that we've seen. 

Before we get started, this podcast is general information for Australian audience only. It is not advice. It doesn't take into account anyone's investment objectives, situation, or needs. Funds referred to in this podcast are issued by either the trust company, RE Services Limited, or Colonial First State Investments Limited.

Product disclosure statements and target market determinations are available on the First Sentier website and should be considered before deciding whether to invest in the funds. 

And so with that out of the way, we can now turn to a discussion on the reporting season.

David:

As we always do in these podcasts, if you had to start by describing the reporting season that we've just been through in one word, what would that be?

Christian:

David, great to be with you. 

My words is the new normal. I think the last few reporting seasons, we've talked about this sort of volatility and the fact that it's sort of ever-increasing volatility in terms of results and events. But in my opinion, it's here to stay. And hence, I'm calling it the new normal. 

And what I think is interesting is this volatility around the single stock volatility around advance is greater than it's ever been. I think it's interesting that some of the moves that we saw in February were outsized compared to what I guess an investor like us would consider appropriate or normal. Hence, I'm calling it the new normal. And I think the great thing is for active managers like us who actually have fundamental views on valuations, we actually have a medium term outlook. I think it creates great opportunities. So, yeah, it's the new normal.

David:

I couldn't agree more. I'd almost sort of say my word, although it's now sort of a phrase if you like, is that it's actually sort of randomly volatile. I look at a company like AMP that reported during reporting season, and when I looked at its result, I thought the stock would be down 2% to 7%. It was down 27%. So they got rid of the hyphen. So it was a big fall. And I think it just tells you that, that's what we're in and the market we're in and therein lies the opportunity for active managers such as ourselves.

Christian:

Yeah, agree.

David:

So let's go through some of the sort of reporting season itself and also just some of the learnings from some of the sectors as well. So why don't you start with a sort of general overview?

Christian:

Sure.

David:

And a key part of the barbell that exists in the Australian market, the banks.

Christian:

Sure. So firstly, what's interesting is we talk about this sort of volatility and this elevated volatility, but it was actually a good reporting season. So overall, earnings beat expectations by about 12%, which is the best in a couple of years. And what I thought was really encouraging was when you look at the beats, it wasn't just margins, it wasn't cost control, actually sales beat and margins beat. So companies are doing a good job in terms of pushing the demand for their services, maybe taking a bit of market share, but they're also sort of controlling costs. So I thought that was really impressive.

The other thing I thought was really important, and it's something we've highlighted in the past, is that dividends beat expectations by about sort of 5% or 6%. And when you think about what dividends are, it's essentially the boards of our companies thinking about and almost trying to quantify the forward outlook. So the fact that dividends were stronger tells you that they're feeling reasonably confident.

The other thing I thought was really interesting was when you think about the forward outlook, so around 75 companies in the ASX 200 provided forward guidance or some guidance measure of some sort. And of that 75, almost 40% delivered either a beat or an upgrade in expectations, which is super encouraging, only 5% downgraded. And that meant the market actually upgraded earnings for FY26 pretty materially. And then the market's now going for about 10% EPS growth for FY26. So that's encouraging in absolute terms, but what's also important is that the last couple of reporting seasons, we've actually seen the market downgrade after reporting season.

Christian:

I guess reflecting, I guess that underlying strength in the economy, we might as well talk about the banks. I mean, they're a window into the Australian economy and they delivered a really solid, I would consider actually strong reporting season. So income was ahead of expectations. So when you think about banking income, it's interest income, markets and trading, fees and commissions, that sort of thing. So beat expectations by mid-single digits. Costs were well controlled. And then bad debt expenses came in way below expectations, again, reflecting that the economy's pretty solid. There's not much happening in the way of sort of troublesome and impaired loans.

So the overall beats to expectations in the banks were 5% to 10%. The market upgraded by around 5%. It was a really, really solid reporting season. And as I said earlier, I think those banking results really reflected the environment that couldn't be much better. So you've got credit growth, call it 7%, 8%. Margins, yeah, margins are flattish. I mean, there is pockets of competition in lending, but there's not much on the other side of the balance sheet. So in terms of deposits, there's minimal sort of competition.

As I mentioned, mortgage arrears are under control. There's not much happening in terms of troublesome and impaired assets. So bad debt expenses are very low. Capital levels are strong. It was a good reporting season, but as I said, I think that reflects the fact that the economy is travelling along okay at the moment.

David:

But it's an ongoing story in our market, isn't it, that the banks are always sort of generally have delivered pretty rock solid earnings for a long period of time.

Christian:

I agree. Yep.

David:

And you saw that also across into the resources sector as well where BHP, you talked about dividends beating expectations. Well, BHP was one of those and it was a key part of that. And it's iron ore businesses that's rock solid, but it's actually improving its copper business now as well. And BHP, well, it's 50% Iron Ore is now 40% copper, which is a really sort of attractive asset at the moment for the market. So it did well.

Similarly, Rio Tinto also did well. Again, Iron Ore earnings rock solid. Their aluminium earnings were a bit disappointing, but again, their copper business, which is about 30% in their case, again, was sort of delivered rock solid. And perhaps even more importantly for the market, Rio Tinto decided not to go ahead with the Glencore deal, particularly Australian investors did not want to see that deal go through and we're one of those as well. And the market actually really welcomed that announcement as well, which took place right at the start of reporting season.

You talked a little bit about the domestic economy, and a really important insight into that is actually in the consumer sector. So what were the key sort of takes from there, Christian?

Christian:

Yeah, Dave, it was actually pretty interesting. So when you look at sort of consumer and retail, the staples, so call it the supermarkets, delivered really rock solid results. So they're growing sales at sort of 4% to 6%. As I said, the economy's okay. The consumer's feeling a little bit better about cost of living. There's some modest market share gains there. They've had issues with stock availability in the past, which our listeners may be aware of. Whereas this period, the shells are full, so consumers can actually walk into a store and buy what they're looking for.

So, yeah, sales growing sort of 4% to 6%, margins were a bit better. So there's some of that cost inflation is moderating, they're getting some efficiencies in their supply chain. So, yeah, I thought that the supermarket results were very solid.

The consumer discretionary on the other hand was a bit more mixed. So the results were okay. So they delivered sales growth across the board of call it 5%, which if some of these mature retailers, 5% sales growth and half is actually decent. Earnings were also okay, but the issue was really around some of the forward commentary.

So at the results, they talked about the trading updates for January and February, and they talked about the comparable sales growth for January and February, and it's slowing. So across the board, they indicated that comparable sales growth had slowed, and that actually drove the markets down, great forward earnings, and the stock reacted in terms of those stocks were under pressure through that month of February.

David:

Even the mighty JB Hi-Fi, I think it was sort of okay, isn't it? Just because the management always does such a fantastic job there.

Christian:

Yeah. Look, when you talk about well-managed companies in our market, JB Hi-Fi is really one of those companies at the top of that list. And they continue to do a great job both in terms of the core sort of JB Hi-Fi business as well as the good guys, their New Zealand business is actually doing really well. And like I said, first half result was fine. Was actually really solid. But when they talked about this sort of comparable sales growth into the new year, so for January and February, they were one of the companies and specifically that the JB Hi-Fi brand was one of the ones that talked about the fact that sales growth had slowed.

David:

I thought I'd sort of talk a little bit on the tech sector, because that certainly saw some volatility, both from reporting season, but also from the sort of whole AI disruption story. I thought just talk about a few tech stocks which are almost hiding in our mix. So you've got stocks like HUB and Netwealth that continue to take market share. They're now almost 20% combined of the platform market between the two of them. They're growing FUA at $4 to $5 billion a quarter. Their margins are up in the high 40s or almost 50% as well. So they continue to do incredibly well.

And another tech stock that people forget is a stock like PEXA, where again, in the digital property settlement sector, again, margin's very high, a lot of revenue growth and are just starting to get a little bit of momentum in the UK. The market's had to wait a long time for that, but we're actually sort of finally starting to see it.

I mentioned at the start of the podcast that you see this sort of randomly sort of volatile sort of market at the moment. And a stock that I'd call out on that is actually carsales. It delivered double-digit revenue growth, double-digit EPS growth. It's strong in its Korean, Brazilian, American, Australian operations. It continues to deliver well. Tech's great in place. It continues to invest in its business, but its stock was marked down despite a sort of solid result.

And the other stock, which I'd call out as well, is WiseTech. And again, the market actually liked its result, but it's endured a lot of volatility, but it's in the early stages of its repricing strategy. It did announce a very heavy staff reduction, which actually the market sort of applauded. And so the market, if you've got the sort of right strategies going into the sort of period of disruption from AI, then I think the market's going to reward you for that.

Christian:

I agree.

David:

So I think actually the Australian tech sector is actually in a pretty good place where most of the companies were able to demonstrate through reporting season that they've got strategies in place to actually either take advantage of that AI or at least try and actually forestall the impact of it.

Christian:

Yeah. And you asked me earlier about JB Hi-Fi's management team and I'd also throw in carsales in terms of the quality of their management team and how they look compared to some of their peers.

David:

Yeah. It's amazing when, sitting here as sort of external investors and we're investing in these companies and you think of the likes of Commonwealth Bank, West Pharmas, Carsales, JB Hi-Fi, these are really, really well managed companies. They're very, very safe stewards of our investors' money and they're the sort of companies that you're happy to support through ups and downs in the economy, ups and downs in the markets. Let's go to a different sector where you've got sort of all different rays of management, the industrials, Christian.

Christian:

Yeah.

David:

What do we see there?

Christian:

So pretty interesting. So we saw some really solid results and we saw a couple of, I guess, companies that are facing a bit more in the way of a challenging environment. So I'll start with the good and a company that we've talked about in the past, and look, this company just keeps on delivering and that's Brambles. So they're still doing, despite the fact that they've delivered year-on-year on year-on-year growth since the pandemic, which seems like a long time ago now, they're still doing, call it mid-single digit top line growth. They're growing EBIT on an underlying basis at around 10%. Cash flow's strong. They actually delivered a cashflow upgrade at the result. And again, this is just a well managed business. I mean, they inherited a business that had some issues. This is the management team I'm talking about here. And they've just taken a number of years to put steps in place to make the business a lot more resilient.

Things like they've got better contractual terms with their customers, which seems obvious, it wasn't the case here. So if customers lose a pallet, they're forced to pay for it. That's actually changed customers' behaviour. So customers are getting a lot better now about returning the pallets that they use. And as a result of that, Brambles is buying less pallets because there's less pallets lost. And again, that's driving big improvements in their free cash flow. So I thought that was a really decent result. Again, I think they've got a bit of a track record there.

Qantas was okay. Yeah, they're growing sort of top line sales revenue at mid single digits, profit's growing probably 10%. They're seeing a bit of weakness in the sort of more high end corporate part of the market domestically, but the ledger market is super strong. So the Jetstar brand is doing really well.

David:

I think it's also underappreciated, just how well run Qantas is.

Christian:

Really, really complicated company. One of the more complicated companies, I guess, in our universe in terms of the companies we look at in terms of all the moving parts, and we've obviously seen that the last week or so with the oil price. But, yeah, ledger demand is strong. They're seeing that via Jetstar. There are some issues on the horizon, I mean, certainly short term with the oil price and jet fuel, that's a key concern near term while this conflict persists. They've got some sort of medium term cost issues, but again, well managed companies and they delivered a pretty good result. And then the other one that I'd highlight is Reece where again, just to be very, very clear, the results in absolute terms, not great.

David:

And the last result wasn't really good at all.

Christian:

Back in August, yeah.

David:

In August. Yeah.

Christian:

So you look at what they've said here. I mean, look, sales are growing at mid single digits, but earnings are going backwards. So just to be clear, earnings are going backwards, but the result simply was better than what the market expected. So I think, yeah, you're right. They had a really tough result last August and the market really marked them down in terms of earnings and the rating on the stock. But this result was a bit better.

The profit decline wasn't as bad as what some feared. They gave guidance for the full year, which was actually about, call it 5% to 8% above what people expected, what the market expected. So that was positive. And really the story of Reece is it's really around their Australian business, their Australian, New Zealand business. So the US business is very challenged. And that simply reflects the fact that the US housing market is in this state of freeze where because of where interest rates are, owners are not selling and therefore buyers are not buying. There's just not a lot of stock on the market.

But in their Australian business, there are some green shoots in terms of alterations and additions. So that's essentially the renovations market. So there's some green shoots there. They're seeing that via better volumes through their stores, through their branches, and those volumes are driving better margins. So the business has pretty solid operating leverage. So that was a decent result.

And then the other thing I think I'll notice that Reece management team, they invest for the medium term. So despite the fact that Australia is pretty subdued, although there are some green shoots and the US market's tough, they're still adding branches to their network at a fairly rapid pace.

On the more challenging side, the one that comes to mind is Reliance. So again, they're in that sort of US housing market. They've got some European exposure as well. And they had a very, very tough period. I mean, sales went backwards by, call it 5%, earnings went backwards by pretty materially sort of 20%, 30% sort of earnings decline. And they've got, again, issues with the fact that the US housing market is not really going anywhere. So that's a tough outlook on the top line. And then they've had to navigate this tariff issue. So they've had some manufacturing in the Asian region with it, which they've had to move some pieces around to try and negate the impact of the tariffs. That's obviously that's been a little bit costly for them both this year and it's going to cost them next year as well. So that's had impact on their costs.

And obviously with the more subdued sales and higher costs, no surprise that their earnings get crimped. Then they've got a bit of a medium term issue now, which is that copper, the copper price. So copper is around $12,000 to $13,000 a tonne.

David:

Which is good for BHP and Rio. Not too good for these guys.

Christian:

Great for BHP and Rio when you're producing the stuff, but what our listeners may not be aware of is the copper is a key ingredient in Reliance's marquee SharkBite product, which it's a push to connect plumbing product. One of the selling points of SharkBite is the copper componentry in SharkBite.

And Reliance is ... They came to the market and essentially said, "This is a medium term issue for us. If the copper price continues rising, it already has a pretty meaningful impact on our cost of goods sold and therefore our earnings, we need to do something about it." So they're looking at other metals and other polymers to maybe replace SharkBite into the medium team. Look, again, I think this manager team does a really good job managing their business and that's a medium term issue that they're going to have to navigate.

David:

Yeah. Yeah. No, sounds like tough footy there for those guys.

Christian:

Tough footy. I agree with that. Yeah.

David:

So on the healthcare sector, I thought I'd make a few comments there because it's a big, important sector for the market and for quality growth investors like ourselves, it's a sector that sort of matters and sort of helps drive performance. So it actually sort of split it in two, if you look in terms of the major stocks in the sector. So Fisher & Paykel Healthcare and ResMed both delivered very solid results, double-digit revenue growth, double-digit EPS growth.

Again, ResMed, like Carsales, was actually marked down on its result despite delivering a rock solid result. And the company continues to actually improve its gross margin as well. So both those companies, very sort of solid earnings outlooks. And again, that was reiterated through this reporting season. Against that though, you had Cochlear's result. And now this reporting season was Cochlear's fourth consecutive profit downgrade.

Now, the market's patiently waiting as they sort of bring forward their new product, their new implant product, but they continue to sort of struggle in the face of not being able to deliver that into the market just yet. So the market was disappointed there and the stock was marked down heavily on the back of that.

And similarly, CSL, which is stock that's often talked about, interestingly, V4 and Seqirus, the vaccine business, actually had pretty sort of solid results. I know we can recall the V4 they massively overpaid for a few years back, but against that, the key blood products business, which has been a sort of key driver of the company's returns over sort of 20, 25 years, it actually disappointed. Revenues were down 6%, the lost market share in Europe and the Chinese business was going through a flat spot as well. So the market is really looking for that stock to actually deliver revenue growth into the second half, but the company has really struggled for the last few halves to actually sort of achieve that. So again, that stock was marked down as well.

So I think what we've seen through reporting season and what we're trying to get across here today is that there's a lot of sort of varied stories and nuances that we sort of see through this period for active managers such as ourselves, these actually sort of represent opportunities. And so for the likes of the Carsales and ResMed where we think they've been marked down unfairly, then perhaps they represent an opportunity for people like ourselves.

Christian:

Agree.

David:

So with that, so thank you for joining us. We'll be back in future reporting seasons, so don't forget to follow The Curious podcast. For more information about our team and our strategies, head to our website at firstsentierinvestors.com.