Interview: Winners and losers from reporting season

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Sean Aylmer: Welcome to the Fear and Greed Business Interview. I’m Sean

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Sean Aylmer: Aylmer. Reporting season is a great time of year for

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Sean Aylmer: investors, probably for analysts too, but they work very hard

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Sean Aylmer: on it. So much information about company’s results and importantly,

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Sean Aylmer: insight into where they might be headed. I wanted to

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Sean Aylmer: look at some of the winners and losers from the past

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Sean Aylmer: couple of weeks. Remember, this information is general in nature,

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Sean Aylmer: and you should always seek professional advice before making any

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Sean Aylmer: investment decisions.
Steve Daghlian is a market analyst at CommSec.

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Sean Aylmer: Steven, welcome to Fear and Greed.

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Steve Daghlian: Sean, thanks for having me.

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Sean Aylmer: So we’re a couple of weeks in. We’ve got another

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Sean Aylmer: week to go, but just big picture, what are the

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Sean Aylmer: couple of the themes that you’ve seen emerge from earning season?

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Steve Daghlian: Yeah, so I should probably mention that the expectations were

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Steve Daghlian: quite low heading into the season, which I think is

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Steve Daghlian: important to note when you see the response we’ve had

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Steve Daghlian: from some stocks. There were plenty of companies that had

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Steve Daghlian: downgraded their expectations in June and July. So what this

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Steve Daghlian: means is we were quite well prepared for some underwhelming

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Steve Daghlian: numbers, and that’s what we’ve seen for some. So it

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Steve Daghlian: hasn’t been perhaps quite as bad as some had feared.

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Steve Daghlian: I reckon most companies have been at least meeting the

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Steve Daghlian: low expectations and those that haven’t been, there’s been a

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Steve Daghlian: relatively even split between those that have been beating and

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Steve Daghlian: those that have been falling short of market hopes.
Dividends

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Steve Daghlian: have been quite reasonable overall. The one area perhaps where

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Steve Daghlian: companies have been a bit cautious is the outlook. So there’ve

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Steve Daghlian: been plenty of warnings of slowing revenues, higher cost, higher

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Steve Daghlian: energy bills, higher rents, interest repayments. We’ve had 12 rate

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Steve Daghlian: hikes of course, over the past year. So even though

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Steve Daghlian: we haven’t had rate hikes for the last couple of

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Steve Daghlian: months, we still have had 12. So that’s a lot

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Steve Daghlian: for not only consumers to deal with, but also the

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Steve Daghlian: businesses with higher costs.

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Sean Aylmer: Okay, so just a couple of things. Are there much

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Sean Aylmer: talked about, six months ago everyone was talking about costs

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Sean Aylmer: and inflation. I’m interested in that. Also, everyone was talking

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Sean Aylmer: about staffing and things like that. Those two issues don’t

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Sean Aylmer: seem to be quite as prevalent this time around.

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Steve Daghlian: Yeah, maybe not as much, but they’re still certainly there.

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Steve Daghlian: So most companies are still mentioning that they’ve been hit

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Steve Daghlian: by higher costs. It kind of depends which areas you

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Steve Daghlian: look at. Higher wages, higher costs, high energy bills have

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Steve Daghlian: been discussed by most. Certainly, I think there was probably

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Steve Daghlian: more concern about all of the rate hikes that were

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Steve Daghlian: coming, say a year ago, and now we’ve got most

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Steve Daghlian: or perhaps all of them out of the way. And

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Steve Daghlian: maybe there’s a little more certainty around that is perhaps

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Steve Daghlian: just settling nerves a little. But the outlooks have been

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Steve Daghlian: pretty cautious for many companies, no doubt, regardless.

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Sean Aylmer: Okay, so let’s look at some of the retail stocks.

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Sean Aylmer: And there’ve been a few winners among the retailers. I suppose

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Sean Aylmer: we should start with the biggest of the lot. Well,

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Sean Aylmer: one of the biggest. Wesfarmers, late last week, came out

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Sean Aylmer: a pretty good result all in all.

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Steve Daghlian: This is the interesting thing. I’ll quickly mention that the

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Steve Daghlian: only sector to be in positive territory at the moment

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Steve Daghlian: this whole month, has been consumer discretionary, which includes, of course,

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Steve Daghlian: the retailers. So they’re up roughly 1.5%.

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Sean Aylmer: How does that work? Isn’t consumer discretionary in a rising

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Sean Aylmer: interest rate, cost of living crisis environment, they’re not supposed

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Sean Aylmer: to outperform?

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Steve Daghlian: That’s very true. I think what has happened is in

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Steve Daghlian: the lead up to the reporting season, we’ve had quite

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Steve Daghlian: a few of these retailers warning that things aren’t hunky-

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Steve Daghlian: dory and they’re not looking great at the moment. They’ve been

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Steve Daghlian: warning, sales slowing down. We’ve had retailer after retailer saying

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Steve Daghlian: that they’re noticing a trend where consumers are getting much

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Steve Daghlian: more cautious and perhaps that’s just set up markets for

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Steve Daghlian: being very well prepared for disappointing results. So when we

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Steve Daghlian: are seeing companies like Wesfarmers, for example, coming out with

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Steve Daghlian: an 18% lift in revenue, a 5% jump in profits, that’s

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Steve Daghlian: been quite well received by markets and there have been

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Steve Daghlian: other examples, of course, of in that retail space that

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Steve Daghlian: have responded quite well to their numbers too.

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Sean Aylmer: Okay, let’s just run through a few. JB Hi-Fi. It

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Sean Aylmer: was a share market darling, probably less so nowadays, but

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Sean Aylmer: everyone likes to watch it.

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Steve Daghlian: So when it released its results, it rose about 3%

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Steve Daghlian: on the day. So it had a 4.5% lift in sales.

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Steve Daghlian: That was actually above what analysts were expecting for the

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Steve Daghlian: most part. Annual profits did drop, but again, I don’t

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Steve Daghlian: think this was really a big surprise and the dividend

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Steve Daghlian: also dropped back. So they did warn that sales have

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Steve Daghlian: started to slow in July. But I think that the

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Steve Daghlian: fact that these are not surprising announcements to make, is

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Steve Daghlian: one reason I think why retailers are bouncing back.

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Sean Aylmer: What about Premier Investments? The former JB Hi-Fi man, he’s

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Sean Aylmer: leaving Premier Investments. Solomon Lew, of course, is a major

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Sean Aylmer: shareholder in that company. Where do you put that one?

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Sean Aylmer: And just for listeners, we’re talking Smiggles, Peter Alexander, those groups.

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Steve Daghlian: Exactly. So Premier rose 12% when it released its results. So

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Steve Daghlian: it was one of those companies that really responded quite

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Steve Daghlian: positively to, not really the numbers, the actual profit results,

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Steve Daghlian: because it will release its profit results in late September.

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Steve Daghlian: But in August it did provide a trading update and

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Steve Daghlian: that seemed to be enough. So it said it expects

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Steve Daghlian: record profits over the year. It said that sales over the

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Steve Daghlian: past 12 months have jumped by close to 10% and

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Steve Daghlian: it is also considering splitting the business in two. So

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Steve Daghlian: it’s looking into that at the moment. And you’re right,

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Steve Daghlian: Peter Alexander, Smiggles, two of the stars for the group.

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Steve Daghlian: And for many years now they’ve been expanding quite aggressively globally.

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Steve Daghlian: And we’ll wait and see what happens with Premier, but

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Steve Daghlian: certainly a very positive response to that update.

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Sean Aylmer: Stay with me, Steve, we’ll be back in a minute.

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Sean Aylmer: My guest this morning is CommSec market analyst, Steve Daghlian.

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Sean Aylmer: Okay, so moving away from retail, one of the ones

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Sean Aylmer: I liked, I’m not sure whether you had much of a look at it,

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Sean Aylmer: was IDP Education.

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Steve Daghlian: That was a really interesting one. You’re right, the education group,

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Steve Daghlian: it rose in the order of 10% when it released

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Steve Daghlian: its results. And one of the reasons was a post-

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Steve Daghlian: COVID pickup in international students basically. That was a real

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Steve Daghlian: key driver. So 84,000 student placements over the year to

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Steve Daghlian: colleges and universities, 53% higher than a year earlier. Obviously

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Steve Daghlian: border closures and COVID and the fact that planes are grounded,

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Steve Daghlian: not going anywhere, makes it difficult for there to be

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Steve Daghlian: significant international student flows going around the place. So that’s

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Steve Daghlian: getting to more normal levels now. But it also conducted

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Steve Daghlian: close to 2 million IELTS (International English Language Testing System) tests, that key English test

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Steve Daghlian: for non-native speakers, both students and for visa proficiency testing

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Steve Daghlian: as well. So they’ve had a 24% lift in revenue, a 40%

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Steve Daghlian: jump in profits and almost a 50% lift in dividends. So

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Steve Daghlian: very well received by investors.

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Sean Aylmer: And it’s another couple which seem to have done okay. In the healthcare sector, CSL, which of course

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Sean Aylmer: is the third largest company in the country. And Cochlear

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Sean Aylmer: the hearing implant group.

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Steve Daghlian: Both actually responded quite well to their results. Having said

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Steve Daghlian: that, they’ve been some of the worst performers on the

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Steve Daghlian: market since the start of this year as a group. But

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Steve Daghlian: CSL, you’re right, 4% high when it released its results.

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Steve Daghlian: Profits and the dividend came in a little ahead of

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Steve Daghlian: expectations. Sales up about 30%. One of the reasons why

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Steve Daghlian: it did okay was actually plasma collections. And this is

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Steve Daghlian: how it makes, of course, a pretty big chunk of

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Steve Daghlian: its money. It collects plasma from donors and then turns

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Steve Daghlian: that into its highest selling products for its business. And

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Steve Daghlian: during COVID costs were going through the roof. They had

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Steve Daghlian: to pay donors a lot to basically get their plasma.

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Steve Daghlian: Costs have been dropping back a little now. So 14%

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Steve Daghlian: lower over the year for their cost and about almost

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Steve Daghlian: 20% down from the peak that we saw back in

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Steve Daghlian: March last year.

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Sean Aylmer: So let’s move on to the big miners and maybe

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Sean Aylmer: we’ll just park Fortescue for the now because that’s pretty

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Sean Aylmer: much pure iron ore, but Rio and BHP, which are

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Sean Aylmer: mostly, well, not mostly, large chunks of them are iron

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Sean Aylmer: ore, but they’ve got lots of other commodities as well,

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Sean Aylmer: how do you read their results?

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Steve Daghlian: Yeah, so you’re right, Rio and B H P, I

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Steve Daghlian: mean they were interesting ones when they handed down their numbers.

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Steve Daghlian: Both of them actually saw declines in their share prices

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Steve Daghlian: on the day that they released their results. Now Rio

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Steve Daghlian: had a 10% drop in revenue, about a 40% fall in profits,

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Steve Daghlian: and the dividend fell by about a third. And in

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Steve Daghlian: BHP’s case, 17% fall in revenue and a 58% fall in profits.

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Steve Daghlian: And all importantly as well, the dividend over the course

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Steve Daghlian: of the year was basically half what had paid a

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Steve Daghlian: year earlier. Now, the big reason, of course, lower commodity prices.

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Steve Daghlian: So we keep hearing in the media and we talk

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Steve Daghlian: about it all the time, that things in China have

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Steve Daghlian: been slowing down. Week after week, we’re getting quite disappointing

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Steve Daghlian: updates on the state of its economy, that things are

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Steve Daghlian: slowing and it’s not looking great, and the stimulus that they’re

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Steve Daghlian: providing doesn’t seem to really be enough to get investors

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Steve Daghlian: excited at the moment. Now having said that, so if

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Steve Daghlian: I’ll just give you an example with BHP, iron ore

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Steve Daghlian: prices 18% lower. This is what was realised for the group,

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Steve Daghlian: what it actually earned. Coke and coal prices, so the coal,

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Steve Daghlian: of course used to make steel, 22% lower. And copper

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Steve Daghlian: was down 12%. So that’s a real negative for the group,

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Steve Daghlian: and also for Rio, higher cost as well. So you

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Steve Daghlian: mentioned cost at the outset, and both of them kind

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Steve Daghlian: of are still flagging that costs are quite significant at

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Steve Daghlian: the moment.

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Sean Aylmer: I’ve got to ask you about WiseTech Global because this

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Sean Aylmer: logistics software company, it got hammered on the day it

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Sean Aylmer: came out. It then jumped the following day, and then

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Sean Aylmer: last Friday it was back down 4 or 5% I

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Sean Aylmer: think. What’s happening?

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Steve Daghlian: Yeah, WiseTech, it did not do well. I mean it

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Steve Daghlian: fell 20% on the day that it released its results

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Steve Daghlian: and it actually had a 29% jump in revenue and a 9% lift

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Steve Daghlian: in profit. So face value that looked like a decent

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Steve Daghlian: improvement. The problem with WiseTech and also many of the

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Steve Daghlian: other tech stocks this reporting season, has actually been how

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Steve Daghlian: well they’ve done in the lead up to the reporting

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Steve Daghlian: season. So WiseTech was up something like 60% from January

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Steve Daghlian: to July, and it’s pretty hard to impress investors when

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Steve Daghlian: you’ve done that. And I can mention a number of

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Steve Daghlian: tech stocks that have been in the same boat. It’s

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Steve Daghlian: CargoWise Platform, which is used by some of the world’s

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Steve Daghlian: largest logistics and delivery companies like DHL, UPS and FedEx.

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Steve Daghlian: That’s actually been the driver of this result. But it

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Steve Daghlian: was a little shy of expectation and it did also

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Steve Daghlian: disappoint a little with its guidance or its outlook for

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Steve Daghlian: 2024.
So those three things combined, the fact that it

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Steve Daghlian: did so well in the lead up, the fact that

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Steve Daghlian: guidance was a bit disappointing and below consensus for the

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Steve Daghlian: results for the past year, probably played a part in

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Steve Daghlian: how it responded.

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Sean Aylmer: The last couple, Steve Daghlian from CommSec that I need

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Sean Aylmer: to ask you about, and I’m very impressed that you’ve

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Sean Aylmer: got these numbers at the tip of your tongue. It’s

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Sean Aylmer: very impressive. Woolies and Coles. The consumer staples, how do

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Sean Aylmer: we read their results?

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Steve Daghlian: Yeah, so both Woolies and Cole’s, there were interesting responses.

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Steve Daghlian: Coles came out first with its numbers and it fell

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Steve Daghlian: about 7% when it released its results. Profits were largely flat.

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Steve Daghlian: Cost did increase though over the past six months. It’s

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Steve Daghlian: been forking out more in wages. It said that margins

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Steve Daghlian: have been a bit lower. And Woolies, which came out

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Steve Daghlian: soon after, actually rose when it released its results, but

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Steve Daghlian: it had already fallen in response to how Coles did.

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Steve Daghlian: So that tends to happen. If one comes out earlier,

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Steve Daghlian: you see a similar response in the other major supermarket

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Steve Daghlian: chain. But look, Woolies warned of wage increases as well.

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Steve Daghlian: It warned of higher energy prices. And both actually warned

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Steve Daghlian: that they’ve noticed a lift in theft across their stores,

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Steve Daghlian: which is quite sad. But it perhaps is telling us

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Steve Daghlian: something about that people are struggling with the high cost

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Steve Daghlian: of living and all the rate hikes, which obviously don’t

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Steve Daghlian: only impact the third of households that have mortgages, but

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Steve Daghlian: the third that are renting as well. Because rents have

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Steve Daghlian: been going higher and it’s been tough for many.

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Sean Aylmer: Steve, thank you for talking to Fear and Greed.

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Steve Daghlian: My pleasure. Thank you.

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Sean Aylmer: That was CommSec Market analyst, Steven Daghlian. This is the

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Sean Aylmer: Fear and Greed Daily Interview. Remember, this information is general

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Sean Aylmer: in nature and you should seek professional advice before making

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Sean Aylmer: any investment decisions. CommSec’s not a bad place to start I’d

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Sean Aylmer: suggest. Join us every morning for the full episode of

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Sean Aylmer: Fear and Greed, Australia’s most popular business podcast. I’m Sean

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Sean Aylmer: Aylmer. Have a great day.