Heading into the August 2024 reporting season, earnings expectations are subdued at the ASX 200 index level.
Since the interim reporting season in February, more companies have received consensus earnings downgrades than upgrades, leaving FY24 on track to be the second consecutive financial year of below average growth.
Consensus earnings per share (EPS) growth estimates currently sit at -3.5% for the index for FY24, with a return to positive growth expected in FY25.
Remaining Active is Key in a Benign Market Earnings Environment
Despite the subdued market earnings backdrop, there are pockets of strength in certain sectors, which underscores the value in remaining actively invested.
To navigate this environment, the Focus Portfolio is positioned with overweight exposures to companies that offer ‘growth at a reasonable price’ and consensus upgrade potential this reporting season, particularly within the IT, healthcare, and consumer services sectors.
Meanwhile, the portfolio has an underweight exposure to sectors with lacklustre medium-term earnings growth expectations, excessive valuations, and downside risks to market expectations this reporting season, including the big four banks.
The remainder of this report is focused on three key areas of interest this reporting season:
- Consumer Discretionary – Green Shoots Emerging
- Healthcare – Expect Healthy Fundamentals
- Financials – Insurance > Banks
Consumer Discretionary – Green Shoots Emerging
Recent trading updates suggest there is upside risk to earnings
While the consumer environment remains somewhat subdued amidst cost-of-living pressures and delays to expected interest rate relief from the RBA, recent trading updates have shown a surprising level of resilience from Australian households.
This has likely been driven to an extent by a boost to confidence and a subsequent ‘pull forward’ of spending in advance of (now effective) tax cuts, stimulatory state budgets, and expectations of wage gains.
Trading updates from Universal Store (UNI) and Accent Group (AX1) in recent weeks have demonstrated an encouraging step-up in like-for-like (LFL) sales growth in late FY24. Meanwhile, global household appliance company and Breville (BRG) competitor, Groupe SEB, reported Australian LFL sales growth in the ‘double digits’ for 2Q of CY24.
These data points indicate a stable Australian consumer heading into reporting season, suggesting there is the potential for earnings upgrades given the conservative posture of consensus estimates.
Investor positioning reflects increasingly optimistic market expectations
While recent trading updates provide a positive read through for the consumer discretionary sector, investor positioning has also become more positive.
The sector’s outperformance and valuation re-rate over the last month suggests the market has already started to price in consensus earnings beats and forward upgrades.
On this basis, we are comfortable with our current selective positioning within the retail and consumer goods sectors prior to reporting season (with our only exposure being Breville), albeit we will be actively looking for opportunities that may arise.
| Name | Ticker | P/E - 1 month ago | P/E - current | P/E re-rate | PE 5 yr avg | Premium / discount vs 5 year average | Consenus EPS growth | |
FY24 |
FY25 |
|||||||
| Super Retail Group | SUL | 13.2 | 14.5 | 10% | 12.7 | 14% | -11% | -1% |
| Wesfarmers | WES | 26.2 | 28.7 | 10% | 24.6 | 17% | 4% | 9% |
| Harvey Norman | HVN | 12.3 | 13.3 | 9% | 12.7 | 5% | -20% | 12% |
| JB Hi-Fi | JBH | 16.2 | 17.5 | 8% | 14.7 | 19% | -20% | -1% |
| Nick Scali | NCK | 14.4 | 15.5 | 8% | 13.1 | 18% | -19% | -7% |
| Accent Group | AX1 | 13.5 | 14.5 | 7% | 14.6 | -1% | -26% | 26% |
| ARB | ARB | 27.0 | 28.6 | 6% | 27.2 | 5% | 19% | 8% |
| Premier Investments | PMV | 17.6 | 18.0 | 3% | 18.9 | -5% | -2% | 4% |
| *Breville | BRG | 29.6 | 30.4 | 3% | 30.4 | 0% | 6% | 14% |
| Lovisa | LOV | 32.3 | 33.2 | 3% | 30.1 | 10% | 23% | 32% |
| Average | 6% | 8% | -4% | 10% | ||||
*Breville is held in the Focus Portfolio. Source: Refinitiv, Wilsons Advisory.
Taking stock of inventories
After a period of inventory de-stocking across the global retail sector, we are looking for further evidence that retailer inventory levels have stabilised. This is central to our investment thesis for Amcor, and is relevant to Breville’s earnings outlook to a lesser extent.
Just as de-stocking has been a headwind to both Amcor and Breville’s sales volumes over the last 18 months, the eventual emergence of a customer (retailer) re-stocking cycle will be a key driver of earnings growth over the medium-term.
Therefore, this reporting season we are looking for confirmation that Breville’s customer inventory levels are ‘balanced’ and evidence that de-stocking within Amcor’s healthcare segment is close to complete.
Healthcare – Expect Healthy Fundamentals
This reporting season provides an opportunity for the market to refocus on the strong fundamentals of ‘out-of-favour’ healthcare companies, particularly the portfolio’s large-cap holdings ResMed (RMD) and CSL (CSL), which both trade on meaningful valuation discounts to history.
| Name | Ticker | Valuation metrics | EPS growth | |||
| P/E (NTM) | 5 year average | Discount vs average | FY24 | FY25/26 (CAGR) | ||
| ResMed | RMD | 22.2 | 32.9 | -33% | 20% | 13% |
| CSL | CSL | 28.8 | 35.0 | -18% | 33% | 17% |
| Telix Pharmaceuticals | TLX | 53.5 | nm | nm | >100% | 81% |
Source: Refinitiv, Visible Alpha, Wilsons Advisory.
CSL – looking for progress on Behring’s margin recovery
There is the potential for an upside surprise at CSL’s FY24 result driven by its all-important Behring segment.
- Given expectations around the timing of CSL’s gross margin recovery (to pre-covid levels) have been delayed to FY28 (vs FY25 previously), consensus forecasts are now conservative, providing upside risk for the FY24 result and FY25 guidance.
- Read throughs from Grifols and Takeda have provided added confidence in falling plasma collection costs.
- The rollout of the Rika plasma donation system will drive lower collection costs. We expect early evidence of Rika’s margin benefits, and updates on the timing of its rollout to translate to forward earnings upgrades.
ResMed – focusing back on the fundamentals
With GLP-1 concerns still lingering in the market and weighing on RMD’s valuation following Eli Lilly’s trial read out in June, RMD will be looking to refocus investors on its strong fundamentals this reporting season.
In RMD’s FY24 result, we expect double-digit revenue growth and ~2% of EBITDA margin expansion to be underpinned by:
- Strong growth in higher margin mask/software sales
- The ongoing mix shift towards its higher priced AS11 device
- SG&A cost control and operating leverage
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Financials – Insurance > Banks
Insurance – upside risks from premium re-pricing tailwinds
Given the strength of this premium re-pricing cycle and the benign perils environment, there are upside risks for general insurers this reporting season. The market’s focus will be on two key areas for our preferred exposure, Insurance Australia Group (IAG).
- Profitability inflexion – the strong premium cycle combined with healthy investment returns and easing perils costs is likely to drive a significant uplift in insurance margins. For IAG, we are looking for upside to consensus insurance margins (FY25e: 14.8%) driven by strength in recent re-pricing (which takes a year to ‘earn through’) and easing perils costs.
- Capital management - IAG is well placed to announce further capital returns (likely a buyback) at its FY24 result, given its new reinsurance deals announced in June are set to release $350m of capital. IAG also has $384m in business interruption (BI) provisions, which will be released over time in our view.
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Banks – excessive valuation creates downside risks for the Commonwealth Bank
The Commonwealth Bank (CBA) is the only major bank scheduled to report in August.
CBA is not held in the Focus Portfolio, which makes it our largest underweight exposure (relative to the ASX).
While CBA is a high-quality bank, its valuation premium is excessive. At a forward price-to-book ratio of 2.8x, CBA now trades at nearly double the average price-to-book ratio of Australia’s other majors (1.5x), and a 150% premium to its global peers (1.1x).
The recent momentum in CBA’s share price is disconnected from its benign fundamentals, with negligible changes to consensus forecasts this year which still point to negative EPS growth in FY24 and FY25.
To justify its valuation, CBA will need to see significant consensus upgrades, which are unlikely to occur in our view.
In line with consensus estimates, we expect CBA’s FY24 result to show:
- Deteriorating asset quality – bad debts are likely to follow arrears higher (albeit from a low base).
- Sound credit growth
- Broadly stable net interest margins
- Cautious outlook statements – reflecting uncertainty in the economy and delays to expected RBA rate cuts into 2025.
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| Company | Ticker | Period | Release date | Annual / interim EPS (cps) | EPS growth for period (vs pcp) | FY24 revisions - last 3 mths | FY25 EPS growth (YoY) |
| Focus Portfolio companies - industrials | |||||||
| Resmed | RMD | FY24 | Fri 02 Aug | 0.77 | 20% | -3% | 16% |
| Healthco REIT* | HCW | FY24 | Mon 12 Aug | 0.08 | 16% | 0% | 8% |
| CSL | CSL | FY24 | Tue 13 Aug | 6.01 | 33% | -1% | 16% |
| Netwealth | NWL | FY24 | Tue 13 Aug | 0.35 | 28% | 0% | 25% |
| Amcor | AMC | FY24 | Thu 15 Aug | 0.70 | -5% | 2% | 6% |
| Goodman Group | GMG | FY24 | Thu 15 Aug | 1.07 | 14% | 1% | 12% |
| Insurance Australia Group | IAG | FY24 | Wed 21 Aug | 0.37 | 136% | 6% | 7% |
| Lottery Corp | TLC | FY24 | Wed 21 Aug | 0.18 | 19% | 5% | 0% |
| Breville | BRG | FY24 | Wed 21 Aug | 0.81 | 6% | 0% | 14% |
| Telix Pharmaceuticals | TLX | 1H24 | Thu 22 Aug | 0.10 | nm | 107% | 91% |
| Worley | WOR | FY24 | Tue 27 Aug | 0.73 | 10% | -1% | 23% |
| Steadfast | SDF | FY24 | Thu 29 Aug | 0.26 | 8% | 0% | 8% |
| Focus portfolio companies - resources | |||||||
| Arcadium Lithium | LTM | 1H24 | Tue 06 Aug | 0.06 | -92% | 2% | 53% |
| Evolution Mining | EVN | FY24 | Wed 14 Aug | 0.19 | 70% | -21% | 79% |
| BHP | BHP | FY24 | Tue 27 Aug | 2.73 | 3% | 1% | -4% |
| Woodside Energy | WDS | 1H24 | Tue 27 Aug | 0.59 | -36% | -8% | -8% |
| South32 | S32 | FY24 | Thu 29 Aug | 0.08 | -58% | 8% | >100% |
| Mineral Resources | MIN | FY24 | Thu 29 Aug | 0.62 | -84% | -28% | >100% |
| Sandfire Resources | SFR | FY24 | Thu 29 Aug | -0.04 | nm | nm | mm |
| Other key stocks (not held) | |||||||
| Transurban | TCL | FY24 | Thu 08 Aug | 0.16 | nm | -1% | 22% |
| Commonwealth Bank | CBA | FY24 | Wed 14 Aug | 5.80 | -1% | 1% | -2% |
| Telstra | TLS | FY24 | Thu 15 Aug | 0.18 | 6% | -1% | 7% |
| Coles | COL | FY24 | Tue 27 Aug | 0.81 | -2% | 1% | 5% |
| Woolworths | WOW | FY24 | Wed 28 Aug | 1.38 | -2% | -3% | 3% |
| Wesfarmers | WES | FY24 | Thu 29 Aug | 2.26 | 4% | 0% | 9% |
Focus Portfolio companies that are excluded from this figure because they are not reporting this month include MQG, NAB, WBC, ANZ, ALL, XRO, WEB, TNE and CKF.
*HCW figures refer to FFO (funds from operations) rather than EPS.
Source: Refinitiv, Visible Alpha, Wilsons Advisory.
Written by
Greg Burke, Analyst
Greg is an experienced analyst in the Investment Strategy team. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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