As the dust settles on a mixed earnings season in Australia, one key takeaway has emerged: things are only going to get worse.
(Bloomberg) — As the dust settles on a mixed earnings season in Australia, one key takeaway has emerged: things are only going to get worse.
About 41% of the 158 companies on the benchmark S&P/ASX 200 Index that reported half-year results in February posted negative earnings surprises, according to data compiled by Bloomberg. That’s up from 28% a year ago, as macro conditions decline and the threat of recession grows.
“Overall, it was not a great earnings season,” said Hebe Chen, an IG Markets Ltd. analyst based in Melbourne. “I am afraid it could be the best one in 2023.”
Cracks are beginning to form in Australia’s A$2.2 trillion ($1.5 trillion) economy, with data last week showing a surprisingly sluggish end to 2022 as economists boost the probability of a recession. Still, government officials have expressed confidence that the nation will dodge a downturn.
“We are at that turning point, some sectors have felt the economic slowdown and others haven’t yet,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners in Sydney who oversees A$1.2 billion in funds. “But in six months they will probably all be in the same boat.”
Here are some of the key takeaways from earnings season:
Inflationary Pressures
The world’s largest miner BHP Group Ltd. said mounting energy and labor costs crimped its results, while Commonwealth Bank of Australia set aside more capital cushions as consumers feel the pinch from price pressures. Shares of the nation’s biggest lender are down 4.7% this year, underperforming the benchmark index’s 3.5% rise.
Food producers were also hurt by higher expenses. Domino’s Pizza Enterprises Ltd. plummeted the most on record after the pizza chain operator’s earnings dropped as customers spurned price increases. Meanwhile, poultry processor Inghams Group Ltd. said elevated labor, packaging and fuel costs would persist after its profit dampened.
Read: Domino’s Sinks as Pizza Price Inflation Hits Europe, Japan Sales
Mining Sector Woes
Miners went into a challenging results season facing weaker commodity prices, inflation pain and big capital expenditures.
Iron ore producers BHP, Rio Tinto Group and Fortescue Metals Group Ltd. slashed their dividends as costs for projects, acquisitions and decarbonization ate into potential payouts. Companies are also still waiting for any demand from China’s reopening to show up in orders.
Still, lithium firms were a bright spot. Pilbara Minerals Ltd. and Allkem Ltd. both said profit jumped more than 10-fold in the last six months of 2022 from a year earlier, though falling prices and supply concerns have clouded the metal’s outlook. The two stocks have each climbed more than 9% in 2023.
Softening Housing Market
Stocks tied to real estate were hit by dwindling demand as the RBA’s tightening cycle drags on Australia’s housing market.
While backlogs supported building materials makers and steel suppliers, they are “increasingly aware of the risks associated with a housing market hard landing,” UBS Group AG analyst Richard Schellbach wrote in a note. The country’s residential construction industry is reeling from materials and labor shortages and an unwinding of government subsidies.
Consumer Spending Shifts
The housing slump and economic concerns are turning shoppers away from property-related purchases and toward holidays and lower-ticket items like apparel.
Shares of household goods retailer Harvey Norman Holdings Ltd. slid the most in about three years when it reported slowing sales, while Corporate Travel Management Ltd. rallied after flagging a strong travel rebound. Qantas Airways Ltd. also pointed to robust demand, but higher-than-expected spending on planes disappointed investors as the airline tries to keep up with passenger growth. Its shares are up 8.3% this year.
Read: Australia’s Plunging Confidence Underlines RBA Rate-Hike Dilemma
Given the changes in spending habits, Morgan Stanley reinforced its preference for offshore earners such as Treasury Wine Estates Ltd. and Aristocrat Leisure Ltd. over domestically-exposed consumer stocks, analysts led by Melinda Baxter wrote in a note.
–With assistance from Swati Pandey and James Fernyhough.
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