The August 2024 reporting season featured a mixed set of results that, overall, were ‘better than feared’ amidst cautious sentiment surrounding the strength of the corporate sector.
The number of consensus NPAT ‘beats’ were broadly in line with ‘misses’ across the ASX. However, company guidance and outlook statements generally featured a tone of conservatism, citing a challenging macro environment and elevated uncertainty around interest rates and the US election.
This unsurprisingly resulted in modest downgrades to ASX 200 consensus EPS growth forecasts for FY25. While the earnings growth outlook remains benign at the index level due to the domestic market’s skew to banks and resources, beneath the surface there is strong growth expected from sectors with structural growth attributes including IT, Communication Services, and Healthcare.
This report summarises some of the key themes from the August 2024 reporting season, with a focus on the retail sector, consumer staples, healthcare, insurance, and the 'Big 4' banks.
Green Shoots Emerging for the Consumer
Positive momentum into FY25
The Australian consumer has shown signs of life this reporting season despite persistent cost-of-living pressures and delays to prospective interest rate relief from the RBA.
The latest trading updates from the retail sector have been particularly upbeat with positive momentum in comparable sales growth in early FY25 demonstrated by the likes of Universal Store (+13%), JB Hi Fi (+5%), Super Retail Group (+3%) and Accent Group (3.5%). This was echoed in the results of mall landlords Scentre Group and Vicinity Centres, which both showed sequential improvements in occupancy rates throughout FY24.
These trends likely reflect a mix of company specific factors (e.g. market share gains), improvements in consumer sentiment from recent tax cuts and fiscal (‘cost-of-living relief’) support measures, as well as base effects given generally ‘easy’ comps in FY23 and early FY24.
A lot is already priced in …
The market has moved well ahead of the earnings recovery we are now seeing early evidence of across the retail sector.
The sector’s impressive total return over the last twelve months has been driven predominately by PE multiple expansion (rather than actual earnings growth), suggesting the market has already ‘priced in’ an acceleration in earnings growth in FY25/26.
Given the sizeable re-rate, valuations across the sector have become increasingly demanding (and hence uncompelling) overall. As such, we are comfortable retaining a selective exposure to the retail and consumer goods sectors, with our sole position being in Breville (BRG).
Key result: Wesfarmers
Wesfarmers (WES) produced a solid result that met consensus expectations, with revenue and EPS growth of +1% and +4% respectively in FY24. Kmart was the standout of the conglomerate’s retailers, with revenue growth of +6% and earnings growth of 25% for the year.
The resilience in top line growth despite cost-of-living pressures reflects the company’s market leadership positions and its strong value offering, which makes it a beneficiary of consumers ‘trading down’.
Meanwhile, margin expansion was underpinned by improving productivity and impressive cost control.
Overall, this was a solid result that has demonstrated the quality of the WES business. However, the company’s valuation is stretched, trading at a forward PE of 30x, which is close to its ten-year high of 31x in 2021. This is unattractive considering consensus EPS growth of 5.7% in FY25 and high single-digit growth in FY26.
Supermarkets – Coles is Eating Woolworths’ Lunch
Coles’ (COL) run of market share gains over Woolworths (WOW) has continued in 2H24 and early FY25, which has been driven by improved in-store execution, the success of value campaigns, and growth in online penetration.
Separately, some of the key themes across the supermarket sector this reporting season included:
- Moderating food price inflation – WOW reported a -0.6% decline in average prices in Q4 vs the pcp (Q3 -0.2%), while COL reported a moderation in inflation to +1.5% (Q3 +2.2%). This represents a headwind (or at least, the removal of a tailwind) for the sector's sales growth.
- Cost-of-living headwinds – the current macro environment is driving value-seeking behaviours from households, which are increasingly 'trading down' to lower priced private label brands, ‘cross shopping’, buying on special , and cutting back on non-essential items. This was a notable headwind to WOW’s basket sizes in 2H24 (particularly in Q3).
- Intense ‘everyday needs’ competition – beyond the obvious competition from Aldi, WOW is seeing increasing competitive intensity from outside of the supermarket sector within non-food categories, including pet products, personal care, home care, and baby products.
Overall, we are comfortable maintaining no exposure to the supermarkets, given their unappealing medium-term EPS growth outlooks (3yr CAGR ~7%) and relatively demanding valuations, alongside ongoing regulatory scrutiny facing the sector which presents downside risks over the medium term.
That said, our preference within the sector remains towards COL over WOW, given its less demanding valuation (forward PE of 22x vs 25x), and slightly stronger EPS growth outlook (FY25/26 EPS CAGR of 7% vs 5%), which is underpinned by continuing market share gains and expected margin benefits from its new automated distribution centres.
Healthcare – Still on Track for Strong Growth in FY25
The healthcare sector had a mixed array of results, with heavyweight index constituents CSL and COH being the key drivers of the sector’s earnings downgrades. Key results included:
- CSL (CSL) – weakness from Vifor and Seqirus overshadowed Behring’s positive underlying gross margin trends, which is expected to be the key driver ‘double-digit’ earnings growth over the medium term (as reaffirmed in CSL's guidance).
- Resmed (RMD) – a standout result, with strong top-line growth coupled with significant margin expansion driven by the mix shift benefit associated with the ‘catch up’ of higher margin mask and software sales. Gross margin guidance was also well ahead of consensus.
- Cochlear (COH) – result and guidance disappointed relative to ‘overheated’ consensus expectations, with FY25 downgrades driven by gross margin headwinds and COH’s decision to ratchet up R&D expenditure. This has effectively ‘capped’ NPAT margins over the near term in line with long-term targets.
Notwithstanding the mixed bag of results (relative to consensus), the healthcare sector demonstrated impressive above-market earnings growth in FY24, which is expected to continue over the medium term.
We are comfortable staying overweight the sector and still have conviction in our core large cap exposures RMD and CSL. Both companies continue to have strong medium-term earnings growth outlooks and trade at undemanding valuations.
Insurance – Pricing Power Drives Margin Recovery
Key result: Insurance Australia Group (IAG)
The general insurance sector has continued to demonstrate pricing power, which allowed focus portfolio holding IAG to impress on margins in its result.
FY24 marked a return to ‘normal’ levels of profitability for IAG, with insurance margins now back above its ‘through the cycle’ target as premium rate increases have now ‘caught up’ with higher reinsurance, natural disaster and claims costs. Margin expansion underpinned a 79% increase in IAG’s insurance profit in FY24.
Looking forward, premium price inflation has now seemingly peaked, albeit IAG’s guidance of ‘mid to high single-digit’ gross written premium growth in FY25 points to a continuation of supportive fundamentals over the medium term.
However, after a strong earnings upgrade cycle, the scope for further upside to consensus estimates over the medium term appears more limited for IAG.
Key result: Steadfast (SDF) – more than just a premium cycle winner
SDF had a strong result featuring EPS growth of +16% in FY24, which was in line with consensus. SDF also provided guidance of 12-16% EPS growth in FY25, driving ~6% upgrades to consensus estimates.
Pleasingly, the result and guidance were driven by a healthy combination of premium cycle tailwinds and the traditional structural growth drivers (bolt-on acquisitions, organic growth in broker networks) that have made SDF a consistent earnings compounder over time.
The company trades on a forward PE of 21x, which is in line with the five-year average. This is attractive considering its guidance towards ‘mid-teen’ EPS growth in FY25, and high single-digit consensus EPS growth over the medium term (with upside risks from accretive acquisitions).
Banks – Minor Upgrades from Easing Margin Pressures
The Commonwealth Bank’s (CBA) full year result (and quarterly updates from ANZ, Westpac, and NAB) showed incrementally positive net interest margin (NIM) trends, suggesting that headwinds from intense mortgage competition are easing. The stabilisation of NIMs has overshadowed the more recent pick-up in non-performing loans, driving minor upgrades to consensus EPS estimates over the medium term.
However, minor EPS upgrades are not enough to change our negative stance (and underweight exposure) towards the ‘Big 4’ banks, which overall continue to trade on significant valuation premiums (particularly CBA). This is despite their lacklustre earnings growth outlooks, with only mid single-digit EPS growth expected over the medium term.
| Company | Ticker | Period | Earnings Comment |
12 month forward EPS revisions - last 30 days |
| Amcor | AMC | FY | In line. Key highlights were AMC's strong cost control and the 5% sequential improvement in group volumes in Q4. In line with AMC’s guidance, in FY25 we expect the normalisation of volumes from an end to de-stocking to underpin a return to mid to high single digit EPS growth in FY25/26. | 1% |
| BHP | BHP | FY | Beat. A slight beat to consensus NPAT/EBITDA expectations driven by impressive cost control, while FY25 production guidance was unchanged across the board. The overarching focus of BHP's messaging was on its copper production growth plans across projects in Chile and Australia. | -4% |
| Breville | BRG | FY | Beat. EBIT growth of 7-9% in FY24 beat BRG's guidance of 5-7.5% growth. The highlight was the strong acceleration in top-line growth in the Americas (+12% vs pcp) and EMEA (+12% vs pcp), which shows positive momentum heading into BRG's key trading period. | 3% |
| CAR Group* | CAR | FY | In line. CAR reported impressive NPAT and proforma EBITDA growth of +24% and 17% respectively, broadly in line with consensus expectations. Pleasingly, management’s outlook pointed to robust trading conditions across key segments supporting ‘good’ group EBITDA growth in FY25. | -2% |
| Collins Foods | CKF | NA | Consensus downgrades. In a trading update, CKF guided that margins would decline in 1H25 driven by the deferral of menu price increases and increased promotional activity. Importantly, we remain confident that margins will recover as the consumer environment improves. | -14% |
| Evolution Mining | EVN | FY | Better than feared. This was a strong beat to consensus earnings in FY24, while production and capex guidance for FY25 was in line with expectations, which is a key positive for EVN after a period of successive guidance downgrades over the last 12 months. | -4% |
| Goodman Group | GMG | FY | Broadly in line. FY25 guidance for EPS growth of +9% (vs consensus of +12%) should be viewed as broadly in line with expectations given GMG's tendency to upgrade through the year. However, we are disappointed by the lack of visible earnings benefits from GMG’s data centre strategy. | 1% |
| HealthCo REIT | HCW | FY | In line. Overall, this was a positive update with 100% rent collections and 99% occupancy maintained. Pleasingly, management is proactively addressing its ~30% NTA discount by extending its asset recycling program and through its ongoing $50m on-market buyback (14% complete). | -1% |
| James Hardie | JHX* | Q | Consensus downgrades. NPAT growth of +2% in Q1 was +6% ahead of consensus. JHX also reaffirmed its FY25 guidance of "+/- low single digit %" growth in North American volumes, although management flagged ongoing softness in US housing which triggered modest sell-side downgrades. | -2% |
| Arcadium Lithium | LTM | HY | Beat. Notwithstanding weaker lithium prices (which drove consensus downgrades), this was a positive update with LTM tracking towards the higher end of its cost savings guidance range as well as announcing a pause in two expansion projects, reducing capex by ~$500 million over the next 24 months. | -18% |
| Mineral Resources | MIN | FY | Miss. MIN reported capex of A$3.36bn in FY24, which was higher than MIN's latest guidance of A$3.32b. FY25 capex guidance of A$1.95bn was also above consensus of A$1.55bn, which has raised market concerns around the health of the balance sheet. MIN has guided that its balance sheet will de-lever as low-cost iron ore ramps up at Onslow, supported by prudent changes to its capital allocation. | 0% |
| Sandfire Resources | SFR | FY | In line. An unsurprising result given FY24 revenue, EBITDA, cash, and net debt figures were pre-released with SFR's Q4 operational update in July. Guidance was also in line with expectations. Overall, the result reaffirms SFR's strong track record of project delivery. | -1% |
| The Lottery Corp | TLC | FY | In line. Revenue and EBITDA growth of +14% and +16% were both in line with consensus. The highlight was stronger than expected momentum in its digital sales penetration, which helped drive margin expansion and is central to our investment thesis for TLC. | -3% |
| Telix Pharmaceuticals | TLX | HY | In line. Formal 1H24 results were broadly in line as TLX maintained its FY24 outlook for revenues and R&D expenses. Consensus 'downgrades' reflect stale/erroneous forecasts from some analysts regarding revenue growth, R&D expenses, and interest costs associated with TLX's recent convertible issuance. | -41% |
| Woodside Energy | WDS | HY | Beat. 1H24 NPAT was +18% ahead of consensus (which was arguably stale given WDS' line item guidance on 16 August). DPS of 69cps was well ahead of consensus of 55cps, implying a payout ratio of 80% at the top of WDS' payout policy. FY24 production and capex guidance remains unchanged. | 1% |
| Worley | WOR | FY | In line. A slight miss to revenues was more than offset by better than expected EBITA margins, while guidance for 'low double digit' EBITA growth in FY25 was in line with consensus. Positively, WOR's guidance points to continued margin expansion over the medium-term in line with our investment thesis. | -5% |
*JHX and CAR were added to the Focus Portfolio during the month after their results. Source: Refinitiv, Wilsons Advisory.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. 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.
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