27 September 2023

Profit reporting season: How it could impact investments

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Profit reporting season for ASX-listed companies is kicking off and Stephanie Chalmers* says expectations are high.

The past financial year has been pretty extraordinary — not just for all of us living through the pandemic, but also for Australian companies.

Some have thrived despite, or in some cases because of, the pandemic and the resulting restrictions.

Others have suffered but have begun their recovery. And some, such as airlines and travel agents, remain highly affected.

It’s been an extraordinary period for those who own shares in Australian companies too.

The Australian share market rose by more than 20 per cent over the year to June 30 and it continues to hit new highs.

Over the next month, ASX-listed companies will be releasing their financial results, which may sound a bit dry but can have big implications for you, whether you own shares or are looking to jump into the market.

Here’s why it matters and what to expect this time around.

What exactly is reporting season?

Reporting season is a period of a few weeks when many of Australia’s publicly listed companies disclose the details of their finances — and it happens twice a year.

Members of the public can buy shares in companies that are listed on a stock exchange, for example, the Australian Securities Exchange (ASX).

These companies need to comply with disclosure laws, meaning they need to keep the market informed about the state of their finances and other major changes.

Part of that disclosure is releasing financial reports twice a year that summarise their position for the past six months — including whether they’ve made a net profit or loss.

Typically, the reporting happens in February, providing a snapshot as at the end of December, and then again in August, following the end of the financial year on June 30.

There are some firms that have different end dates for their balance sheets, so they don’t adhere to these windows, but most results come out within a few weeks of each other, creating a so-called “reporting season”.

This time around, CommSec says about 170 of the top 200 companies which make up the benchmark S&P/ASX 200 index will report either their full-year or half-year results.

Notable exceptions will be major banks. While Commonwealth Bank will report its results, ANZ, NAB and Westpac will release their full results in a few months’ time.

OK, but why should I care?

When you own shares in a company, you have a stake in how that company performs because it’ll affect the value of your shares.

If you’ve bought the shares as a long-term investment, you’ll be hoping the value increases over time so you can make a profit when you sell them.

Paying attention to a company’s results come reporting season will provide a window into how its finances stack up, what its strategy is and how management is viewing the outlook.

Results reports contain plenty of specifics that can help you form a view about whether a company is going to be a good investment.

These include how sales are tracking, what the major sources of revenue are, how high costs are, how much debt it must repay and how fast it’s growing.

There tends to be a lot of jargon involved in how these figures are reported by the companies, but if you follow our reports over the next few weeks, we’ll explain what it all means.

The other thing you’ll find out by paying attention during reporting season is whether you’re going to receive a dividend payment for shares you own and, if so, how much it’ll be.

What is a dividend?

A dividend is a payment returning some of a company’s earnings back to its shareholders.

When a company makes a profit, it may decide to use that money to expand the business or invest in new technology, for example.

But a company that doesn’t have grand expansion plans or has been accumulating profits may decide to distribute some of that profit among shareholders through a dividend payment.

During the pandemic, some companies have been holding higher than normal levels of cash due to the uncertainty, but some of that may now flow back to shareholders.

You can choose to either receive a dividend payment as cash, which gives you the flexibility to invest that money in other stocks if you like, or you can automatically reinvest your dividends in the same stock, growing your shareholding in the company.

Sometimes companies will pay a special dividend, which is a one-off payment and is usually the result of one-off income, such as the proceeds of selling part of the business.

Another way companies might return cash to shareholders is through a “share buyback”, which is literally what it sounds like.

A company will offer to buy back some of its shares, and those who accept the offer will receive cash but lose their holding in the company.

What could happen to stock prices during reporting season?

Unsurprisingly, what’s revealed in a company’s reports can have a major effect on what happens to the price of its shares, and therefore the value of your investment.

But it’s not as simple as profit = share price up, loss = share price down.

Share prices tend to more closely reflect how a company has performed compared to expectations — did it miss or beat its own forecasts, or those of analysts who closely watch it?

Other factors that influence share price movements are what a company’s management is projecting about the months ahead, usually referred to as guidance or an outlook statement.

INVESTSmart head of strategy Evan Lucas says the outlook will be particularly important this time around, given the nature of the COVID-19 pandemic.

“I think all investors, and anybody watching it, needs to be aware that this will be a very, very different earnings season because what actually triggers market movements is going to be very different to what we’ve seen in the past,” Mr Lucas says.

For example, while he expects tourism and aviation stocks to have performed badly thanks to shut borders and restrictions, he still sees the potential for some to deliver a positive surprise.

“The question that will come from their results is what their outlook looks like,” he says.

“They might deliver what looks like pretty terrible numbers … but also their stock goes up because they actually see better times ahead.”

RBC Capital Markets head of equities Karen Jorritsma expects fewer companies to provide guidance, and some to withdraw guidance they’ve already issued, given the uncertainty of the pandemic.

“It’s very difficult if you’re in corporate Australia right now, where you’ve got a situation with potentially an indefinite lockdown period in some of your biggest markets, for you to be able to give quite clear guidance,” Ms Jorritsma says.

Other variables affecting share prices are whether a dividend is announced (and how much that is) and how shares have performed ahead of reporting season.

Will company results justify high share prices?

In the case of the results that will be released this August, they will mostly cover either the period of July 2020 through to June 30 this year, or the first half of 2021.

This coincides with a big rally on the Australian share market, with the ASX 200 gaining nearly 24 per cent over the financial year and hitting fresh highs.

The share prices of some companies are at record highs too, meaning there could be less potential for shares to rise much more, even if their results are strong.

And if a company disappoints, its share price could fall sharply from current highs.

Overall, CommSec analysts expect the current high share prices to match with the results delivered this time around.

“Earnings results in the next six weeks should justify current lofty valuations of the Australian share market,” they say.

However, Ms Jorritsma says if the recent US earnings season is anything to go by, the results may get a pretty lacklustre reaction.

“We’ve definitely seen really muted reactions in the share price on the back of really strong earnings, and I suspect we see absolutely the same in Australia,” she says.

“You’ve had very good numbers already priced in advance into the share prices … and then you are lining up a period here where we’re unlikely to see very strong or definitive guidance.”

How are companies likely to have performed?

To say a lot has happened between July 1 last year and June 30 this year is a pretty mammoth understatement.

Melbourne has endured a second wave of COVID and a months-long lockdown.

That has been followed by a series of snap lockdowns and border closures around the country, including in Sydney, starting in the final days of June.

The JobKeeper wage subsidy program that helped keep companies afloat at the depths of the crisis was withdrawn earlier this year.

Australia’s economy began growing again after its first recession in three decades and unemployment dropped below pre-pandemic levels.

Overseas, Joe Biden was inaugurated as US President following his election in November.

Countries such as India grappled with severe COVID-19 outbreaks, while others such as Israel and Canada vaccinated the vast majority of their populations.

Commodity prices rallied, with iron ore a standout despite ongoing trade tensions between Australia and China, while oil prices recovered from the lows of 2020.

Most analysts say this all bodes well for Australian companies this reporting season.

Citi analysts are tipping positive surprises to outweigh downside surprises by 2:1.

They’re also expecting a high level of dividends to be paid out to shareholders, across the market broadly but led by the miners.

CommSec is forecasting solid earnings, reflecting the bounce-back in the Australian economy over the period.

Given the rise in iron ore prices, miners are expected to be a standout, with strong results and big dividends for shareholders, as Rio Tinto has already demonstrated.

INVESTSmart’s Evan Lucas says companies that have benefitted from the working-from-home trend will have done well again, including retailers such as Nick Scali, Temple & Webster, JB Hi-Fi and Harvey Norman.

But he does think things may have peaked for that sector, and the end of JobKeeper could have also had an impact.

“It’s a question of whether or not they saw a slowdown at the last couple of months,” he says.

RBC Capital Markets’ Karen Jorritsma expects weak results from travel and aviation companies, especially given the renewed uncertainty brought by the coronavirus Delta variant.

And she’s also not expecting a strong performance from childcare providers, which she says remain under pressure despite the government support they have received.

*Stephanie Chalmers is a business reporter with the ABC.

This article first appeared at abc.net.au.

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