After renewed optimism at the start of this year, can earnings deliver over the next few weeks? That is the question on most investors’ minds as we enter reporting season.
We believe the reporting season will be relatively positive. The cyclical sectors may provide more positive results than the market expects after continued strength in the global and domestic economies in the last half. However, management outlook statements will be key for the direction of earnings upgrades.
Consensus expects ASX 200 earnings to grow 7.7% in FY23 (YoY). Trading updates and outlook statements provided this reporting season will hold the key to this expected growth being downgraded/upgraded.
The median EPS growth for FY23 is 5.3%, while the median FY24 EPS growth is 8.1%. Therefore, once discounting the weight of the financials and resources sectors (which represent ~60% of the index), FY24 earnings growth is still expected to be strong for the industrials. More broadly, FY24 earnings may have risk to the downside over the next 12 months.
Key Points
- On balance, the reporting season should be positive as the domestic economy remains buoyant.
- A resilient consumer should support consumer discretionary. However, this is likely peak earnings for many retailers.
- We prefer to hold quality cyclicals like Nine (NEC) or Seek (SEK) that should grow earnings over the cycle but provide protection against a milder than expected slowdown.
- Healthcare should be back on track after COVID.
- Travel could surprise – China reopening adds fuel to the fire.
- CBA has no room for mistakes given its elevated valuation.
- Top Focus Portfolio stocks for reporting season – NEC, SEK, CSL, QAN.
The Aussie Consumer: Strong (but Peaking)
The expected slowdown in consumer spending has been more subdued than anticipated. The sector has seen earnings upgrades in January while outperforming the ASX 200.
Retail trading updates have been relatively buoyant in January. Super Retail (SUL) and JB Hi-Fi (JBH) presented strong updates, albeit relative to a subdued 2022 Christmas due to Omicron. JBH stated that sales growth was driven by continued elevated customer demand for electronics and appliances. Sales in SUL were up 11% across the board on a like-for-like basis and pointed to strong Christmas trade. Both stocks saw broad-based upgrades to earnings after these updates.
We think this may be the last round of upgrades for consumer discretionary before a tougher period over the next 12 months as higher rates take a hold and spending patterns normalise post COVID.
The share prices of retailers have already moved with the inflow of more positive data, so positive updates may not translate into material share price appreciation on the day companies report. The trading updates and outlooks for retailers will be closely watched. Any signs of less than impressive outlooks are likely to be punished. The market typicality dislikes evidence of peak earnings.
We hold a preference to other cyclical sectors with higher quality companies to protect the portfolio against a milder than expected slowdown, like Media and Diversified financials.
Opportunity in Nine (NEC)
A tactical opportunity may exist in media stocks. The resilient domestic consumer has left cash for companies for ad spend. We may see upgrades in the sector over reporting season as higher-than-expected consumer spend corresponds to higher-than expected ad spend. Currently, the market thinks the media sector earnings will contract 6% in FY23.
Nine (NEC) should be a key beneficiary of this opportunity, especially as the stock derated over 2022 and currently sits on a relatively modest PE of ~11x.
Tight Job Market to Support Seek (SEK)
There is still room for Seek (SEK) to surprise the market. The stock has rerated since the beginning of the year. However, we expect a strong showing from SEK as it benefits from a resilient jobs market. FY23 guidance for EBITDA of $560-590m ($575m midpoint) was reaffirmed in Nov 2022, though consensus expectations currently sit below the bottom end of this range at $559m. We are looking for a reiteration of full year guidance and commentary on continued strength in the ANZ labour market. A strong interim result could lead to consensus earnings upgrades for FY23/FY24.
We also like the structural story for SEK (significant upside from dynamic pricing model, strategic initiatives and growth fund), that should mitigate any fallout in a cyclical peak in the job market.
Healthcare: Vital Signs Improving
While the pandemic was challenging for many healthcare stocks, this reporting season should start to demonstrate an improving outlook, which could be a key catalyst for the sector.
We expect CSL's earnings recovery to be a beat, driven by better-than-expected plasma collections.
CSL was impacted by lower plasma collections during the pandemic. Without a key input, CSL's revenues and gross margins were adversely affected. Positively, collection volumes are recovering and now exceed pre-pandemic levels as fears of the virus have faded and stimulus cheques have dried up. The market has typically underestimated these post-pandemic recoveries, and we don’t think this time will be any different.
This, coupled with new product approvals, could lead to a possible guidance upgrade. This could be the start of an earnings upgrade cycle for CSL. We are overweight CSL (8.5% weighting).
Travel Stocks: Qantas to Fly Higher
Qantas (QAN) is set for a bumper earnings season. After being forced to postpone travel plans due to the pandemic, consumers are shrugging off 15-year high ticket prices. The market continues to underestimate the pent-up travel demand that still continues to drive strong cash generation for QAN. The business has the capacity to surprise the market positively, and we do not think the valuation is pricing a further upgrade.
China reopening another tailwind
Qantas (QAN) could be a key beneficiary of a China reopening, which may add another tailwind to impressive earnings momentum.
Trading updates may be better than expected due to inbound Chinese tourism. We think the market underestimates the recovery in Chinese tourists as it did for domestic travel over the last 12 months. This could be discussed in trading updates of travel or international education stocks.
We expect companies like EVT ((EVT) QT, Rydges hotel operator) and IDP Education ((IEL), international education placements) to indicate an improving demand picture after the reopening of China.
Banks: Can CBA Keep Defying Gravity?
With a lofty valuation, any negative aspect of the result could be detrimental to CBA in its result on 15 February.
CBA still sits on an elevated premium to the other big 4 banks. Outside of March 2020, the disparity between the price to book of CBA vs the other big 4 has never been larger.
The other big 4 banks saw higher costs and a NIM (net interest margin) outlook that slightly underwhelmed the market. The market will likely punish any indication that CBA is being impacted by cost pressures or that competition is keeping NIMs lower than expected.
We have preference to the other big 4 banks (NAB, Westpac (WBC), ANZ, NAB, Westpac (WBC)) on valuation grounds. We remain underweight the banks relative to the benchmark as we expect higher interest rates to slow housing/the domestic economy and adversely impact housing markets that which will slow likely translate to softer credit growth over the medium term.
| Company Name | Ticker | Result type | Expected report date | 12 mth forward PE | 12 mth forward EV/EBITDA | Chg in valuation multiple - % last 12 months** | Earnings Revisions - 3 mth* | Price chg - 3 mth | ISG view |
| IAG | IAG | Half year | 13/02/2023 | 14.5 | 8.9 | -7% | -3.3% | -5% | Result should be relatively uneventful with IAG's unaudited numbers pre-released. We expect management to reiterate its FY23 guidance for Gross Written Premium growth of ~10% (up compared to prior guidance of 'mid to high single digit') and insurance margins of ~10% (down from previous range of 14-16%). Look for further updates on Auckland flooding costs and a reaffirmation of the medium-term insurance margin goal of 15-17%. |
| CSL | CSL | Half year | 14/02/2023 | 34.8 | 20.8 | 5% | 8.0% | 13% | There is the possibility of a guidance upgrade with new approvals (HEMGENIX), a beat on plasma volumes and a strong seasonal result from Seqirus (as a result of record Influenza and RSV rates in the Northern Hemisphere). Wilsons' healthcare analysts forecast EBITDA of $2,664m in 1HFY23. |
| James Hardie | JHX | Quarterly | 14/02/2023 | 17.3 | 11.4 | -16% | -18.5% | 5% | There is a risk that JHX downgrades its FY23 net income guidance at its Q3 update, after already lowering expectations twice in Aug/Nov 2022 due to a weakening housing backdrop and cost pressures. The latest guidance is for adjusted net income of $650m-710m for the year ended March 2023. Look for updates on the strength of US housing markets and customer demand, cost pressures, and pricing. |
| Netwealth | NWL | Half year | 15/02/2023 | 40.2 | 26.6 | -20% | 6.0% | 11% | We expect a solid result from NWL following its 2Q23 update, which highlighted continued market share gains and FUA growth of $5.8b (+10.2%) over the 12 months to December 2022 despite negative market movements. Margins could be an area of surprise with an elevated RBA cash rate. Look for a reiteration of FY23 net inflow guidance of $11b. |
| NAB | NAB | Quarterly | 16/02/2023 | 12.7 | na | -8% | 0.4% | 2% | We expect further NIM upside to be relatively limited, while rising costs and softer credit conditions will be mounting headwinds through CY23. |
| Telstra | TLS | Half year | 16/02/2023 | 23.4 | 7.7 | -7% | 2.3% | 5% | Earnings should benefit from a more rational mobile pricing environment. We expect management to reiterate its FY23 guidance for underlying EBITDA of $7.8-8.0b. Look for updates on strategic initiatives including InfraCo - fixed monetisation, T25 cost-out target of $500m between FY23-FY25. A key catalyst for a rerate would be an announcement of a InfraCo sale or spinoff. |
| Goodman Group | GMG | Half year | 16/02/2023 | 20.9 | 19.6 | -26% | 1.3% | 25% | Guidance is for operating EPS of +11% pcp and distributions of 30 cps for the full year ended June 2023. We are confident this guidance will be reaffirmed if not upgraded. Look for updates on development activity, construction cost inflation, WIP book ($13.8b currently), and asset valuations. |
| Westpac | WBC | Quarterly | 17/02/2023 | 11.1 | na | -14% | 0.4% | 3% | We expect further NIM upside to be relatively limited, while rising costs and softer credit conditions will be mounting headwinds through CY2023. |
| Healthco Healthcare and Wellness REIT | HCW | Half year | 17/02/2023 | 22.4 | 17 | -22% | 1.2% | 20% | We expect HCW to reaffirm its FY23 guidance for FFO of 6.8 cps and DPU of 7.5 cps. Look for updates on HCW's asset valuations (likely to be revalued lower over the next 12 months on higher capitalisation rates) and its acquisition pipeline. |
| Northern Star | NST | Half year | 20/02/2023 | 24 | 7.2 | 19% | 32.9% | 47% | Unlikely to be eventful with Q2 update already released in Jan 2023. |
| Seek | SEK | Half year | 21/02/2023 | 34 | 17.8 | -18% | -0.9% | 18% | We expect a strong showing from SEK as it benefits from a resilient jobs market. FY23 guidance for EBITDA of $560-590m ($575m midpoint) was reaffirmed in Nov 2022, though consensus expectations currently sit below the bottom end of this range at $559m. Look for a reiteration of full year guidance and commentary on continued strength in the ANZ labour market. We think a strong interim result could lead to consensus earnings upgrades for FY23/FY24. |
| NEXTDC | NXT | Half year | 21/02/2023 | na | 24.6 | -5% | 0.0% | 22% | We are confident that NXT will reiterate its FY23 guidance for EBITDA of $190-198m, although we are also cognisant of the recent share price appreciation heading into the result. Look for updates on hardware supply, energy costs, and the strength of hyperscaler demand after a mixed US reporting season. |
| BHP | BHP | Half year | 21/02/2023 | 11.2 | 5.6 | 25% | 8.6% | 26% | No major surprises are likely with Q2 update already released in January 2023. |
| Telix Pharmaceuticals | TLX | Full year | 22/02/2023 | na | 60.2 | -89% | na | 0% | Full year result should be uneventful with Q4 update already pre-released. |
| Santos | STO | Full year | 22/02/2023 | 7.6 | 4 | -16% | -10.8% | -11% | Result should be relatively uneventful with STO providing a Q4 update in January 2023. We are looking for positive strides on the capital management front, where STO has disappointed relative to WDS and global peers in recent reports. |
| Lottery Corp | TLC | Half year | 23/02/2023 | 30 | 17.1 | na | 4.5% | 14% | We expect TLC to meet consensus expectations (1H23 EBITDA $392m), but are cognisant of recent share price strength. We are looking for updates on Powerball subscription pricing, commission structures with retailers, digital penetration, and the resilience of lottery spend into CY23. |
| Qantas | QAN | Half year | 23/02/2023 | 7.3 | 3.4 | -87% | 12.7% | 8% | We expect a strong showing from QAN in 1H23 as operational performance continues to improve on strong travel demand. QAN's most recent guidance from November 2022 is for 1H23 underlying profit before tax of $1.35-1.45b. After 2 upgrades since the FY22 result, we think there is scope for further upward revisions to expectations for FY23. Look for updates on cost-out initiatives ($1b target by FY23), capital management, domestic/international capacity. |
| Cleanaway | CWY | Half year | 23/02/2023 | 30.9 | 10.8 | 2% | 1.7% | 1% | The 1H23 result will be impacted by a number of one-off costs related to flood related damage. Look for updates on cost pass-throughs and colour on the M&A pipeline given CWY still has ~$175m of balance sheet capacity from its August 2022 raise. |
| Nine | NEC | Half year | 23/02/2023 | 11.4 | 6.9 | -25% | -6.6% | 3% | In Dec 2022, NEC lowered its 1H23 EBITDA guidance to $370m from $380m-400m, driven solely by NEC's 60% stake in Domain (DHG). We expect NEC's 1H23 result to demonstrate resilience in the core wholly owned group driven by a degree of resilience in ad spend, market share gains and cost discipline. Look for updates on digitalisation and subscription volumes (Stan, AFR). |
| Mineral Resources | MIN | Half year | 24/02/2023 | 7.1 | 4.3 | -58% | 25.2% | 26% | Result should be uneventful with a Q2 update already provided in January 2023. We will look out for and signs of M&A activity and indications of a lithium business spin-off. |
| Allkem | AKE | Half year | 24/02/2023 | 8.2 | 4.5 | -46% | -2.3% | -7% | Result should be uneventful given AKE provided a Q2 update in January 2023. |
| Woodside Energy | WDS | Full year | 27/02/2023 | 9.1 | 4.3 | 3% | -19.4% | -3% | Unlikely to be an eventful update with Q4 update already released in January 2023. |
| ANZ | ANZ | Quarterly | TBA | 10.8 | na | -12% | 0.0% | 3% | We expect further NIM upside to be relatively limited, while rising costs and softer credit conditions will be mounting headwinds through CY23. |
| Lynas Rare Earths | LYC | Half year | TBA | 15.2 | 11.1 | -6% | 0.0% | 10% | Result should be uneventful given LYC provided a Q2 update in Jan 2023. Look for updates on the expected closure of LYC's Malaysian cracking and leaching plant and the opening of the new Kalgoorlie Rare Earth Processing Facility (opening mooted for July 2023). |
*12 mth forecast EPS revisions, except for NXT, XRO, TLX which use 12 mth forecast EBITDA revisions.
*change in 12 mth forward PE, except for NXT, XRO, TLX which use change in 12 mth forward EV/EBITDA.
Source: Refinitiv, Wilsons.
Written by
Rob Crookston, Equity Strategist
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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