Key Themes from the February 2022 Reporting Season

The February 2022 company reporting period, that concluded this week was more muted than previous periods, coming after the doom and gloom of 2020 and then the recovery and optimism of the August 2021 season. The dominant themes of 2022, moving share prices on the ASX, have not been profitability and dividends, but rather inflation and the invasion of the Ukraine. Frequently over the past month, a great or poor result from a company has been largely ignored in favour of market despair or euphoria.

In this week’s piece, we look at the key themes from reporting season that finished last week, along with the best and worst results and the corporate result of the season.

Better than expected

As a result of the uncertainty from further lockdowns in late 2021 and concerns around inflation in January 2022, general expectations were cautious going into reporting season. The market expected profits to fall sharply from those companies that benefited from CV-19 and a muted outlook from most companies due to an inability to pass through rising input costs. However, February 2022 revealed that 43% of companies reporting beat expectations and only 20% missed guidance and that for the ASX 200 in aggregate earnings per share are expected to rise by 15%! The most significant increases came from energy and financials due to sharp increases in the oil price and solid lending growth in an environment of low bad debts.

Supply Chain Issues/Inflation

After the market sell-off in January on concerns around global supply chains and inflation,  in February, questions around cost control dominated the analyst calls with management. The miners all reported strong headline results courtesy of surging commodity prices but are experiencing higher costs. BHP discussed record diesel prices, high ammonia nitrate prices (explosives) and labour shortages in Western Australia impacting production. Similarly, Fortescue reported a 20% increase in their per-unit cost to mine a tonne of iron ore in the December quarter, though with this cost at US$15 per tonne, profit margins remain high.

Retailers Woolworths, Coles and Wesfarmers saw profit margins crimped by rising costs. Woolworths noted that the grocer had seen $150 million in direct COVID-19 costs from daily rapid antigen tests for warehouse and distribution centre staff, as well as increased absenteeism from around 18,000 staff being forced to isolate over the half. Given the moves in oil over the first two months, we expect cost pressures to continue through 2022 based on the cost increases in moving goods through global supply chains.

Conversely, Westpac had a very positive February after delivering $1.6 billion in first-quarter cash earnings; this was ahead of market expectations due to cutting costs and rationalising its operations reducing expenses by close to $1 billion. Woodside saw sharply expanding profit margins in February, benefiting from stable production costs (US$5.30 per barrel of oil) and rising revenues. A feature of offshore LNG plants is the eye-watering upfront construction costs in the billions and a low ongoing marginal cost of production requiring minimal inputs and labour.

Show me the money

The main theme of reporting season was the significant increase in dividends being paid to shareholders. February 2021 saw a record $36 billion in dividends being declared by Australian companies to be paid to investors over March and April. This was a record for the interim dividend period and only marginally below August 2021, which saw $40 billion being paid out. This corporate largess is due to a combination of record iron ore prices (BHP, Fortescue and Rio), lower-than-expected bad debts (Commonwealth Bank) as well as a dramatic recovery in energy prices (Woodside)

Commonwealth Bank’s result is always one of the most closely scrutinised, not only because it is Australia’s second-largest company (losing its mantle as the largest company after BHP collapsed its listing in London), but also due to the nature of its business. With 15 million individual customers and businesses, the health of CBA often mirrors the health of Australia, and the bank provides investors with a very detailed report into the financial health of their customers. We were pleased to see CBA lift its interim dividend from $1.50 to $1.75 per share and almost back to the $2 per share paid pre-CV-19.

In addition to higher dividends, buy-backs were a feature of this reporting season, with CBA, Sonic Healthcare, JB Hi-Fi, Sims Metal and Amcor announcing measures to reduce their share count and boost future earnings per share. Due to the range of off-market buy-backs in 2021 that reduced franking account balances, most of these will be conducted on-market as direct purchases. However, JB Hi-Fi will conduct theirs off-market, where their investors will receive a combination of a tax-efficient capital return and a fully franked dividend which will see excess franking credits transferred from the electrical retailer’s balance sheets into the hands of investors.

Best and Worst

Over the month, the best results were delivered by S32, Northern Star, Challenger, Woodside and Endeavour. Despite the uncertain macroeconomic background and rising cost pressures, these companies reported strong earnings growth ahead of expectations and an optimistic outlook for 2022. 

Looking at the negative side of the ledger, we will ignore travel-related companies such as Qantas, Corporate Travel and Flight Centre as their financial results are impacted by government-mandated lockdowns and rising oil prices, rather than poor management decisions. Appen, Dominos Pizza, Mineral Resources, Xero and Reece reported results that were poorly received by the market. The common themes amongst this group are high price to equity (PE) companies that delivered profit results below expectations, combined with forward profit guidance not consistent with high growth companies. Additionally, some Australian tech companies were sold off along with tech companies in the USA, despite meeting guidance.

Our Take

Overall, we were reasonably pleased with the results from this reporting season for the Atlas Concentrated Australian Equity Portfolio. In general, the companies that we own reported improving profits and indeed, for a number of companies in the portfolio, February 2022 saw record profits, dividends and new buy-backs.  

February Monthly Newsletter

  • February proved to be a very eventful month initially dominated by Australian corporate earnings, which were much better than expected and revealed that corporate Australia is recovering from Covid-19 faster than expected. In the second half of the month, the focus was on the events in the Ukraine rather than corporate earnings
  • The Atlas High Income Property Fund had a solid month gaining +3.3% after the companies held in the Fund showed a continued improvement in their financial results. Additionally, management teams guided to higher distributions through the rest of 2022.
  • Due to the Fund’s focus on distribution and earnings stability, the February reporting season held few surprises for the companies we own. This is due to rent-collecting trusts offering greater earnings visibility with average lease terms between five and twenty years, whereas trusts with development earnings can be volatile and were sold down.

Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2022

AFR:Investments to avoid in 2022

Investments to avoid in 2022

While history doesn’t exactly repeat itself, the lessons from these two time periods can help investors avoid repeating the mistakes of the past. Hugh Dive, chief investment officer at Atlas Funds Management, believes investors should look to avoid tech stocks and growth stocks on high price earnings multiples, as rising interest rates will be unkind to them.

January Monthly Newsletter

* January proved to be a very volatile month dominated by macroeconomic news predominantly around global central banks raising rates rate rises, rather than company fundamentals as companies were in blackout before the February reporting season. Australian listed property was hit hard and declined by close to -10% over the month.
* The Atlas High Income Property Fund declined by -6% in January on general market sentiment rather than investment fundamentals, effectively giving up the gains from December 2021. Atlas is looking forward to the February profit season which we expect will show both a continued improvement in the financials of the Trusts that we own and that management will guide to higher distributions through the rest of 2022.
* The first week of February has seen the Fund recover a significant portion of January’s falls after several large holdings have reported solid profit results for the six months ending December 2021.

Go to Monthly Newsletters for a more detailed discussion of the listed property market and the fund’s strategy going into 2022

ASX: “My biggest investment mistake and what I learnt from it”

My biggest investment mistake … and what I learnt from it

Multiple authors, Magellan Financial Group, Atlas Funds Management , Firetrail Investments, Intelligent Investor, Burman Invest Vihari Ross is Head of Research, Portfolio Manager, Magellan Financial Group Hugh Dive is Chief Investment Officer, Atlas Funds Management Kyle Macintyre is Investment Director, Firetrail Investments Nathan Bell is Portfolio Manager, Intelligent Investor Julia Lee is Chief Investment Officer, Burman Invest