With reporting season over, Ausbil have released a reporting season wrap up highlighting the main developments that advisors can pass onto their clients during client meetings and take into consideration when position portfolios for the year ahead.
Even though most of Australia was stuck in pandemic forced lockdowns, the FY21 reporting season demonstrated just how much Government stimulus helped companies return to some form of normality via a rebound in earnings and recapitalised balance sheets.
The question now is “What does the market expect on FY22 earnings?”
Looking at the Ausbil’s consensus expectations paths table above, FY21 reporting season closed with earnings growth at around 27 per cent a bit below an expected 29 per cent. Expectations have been pulled back to around 16.7 per cent in FY22 and -0.1 per cent in FY23.
Why such a fall in FY23?
Ausbil says, “This current outlook is highly impacted by the market’s view on lockdowns and the path to vaccination targets. If these are achieved in good time, consensus is likely to move up significantly, assuming inflation remains benign and the economy continues on its expected growth path to trend.”
FY23 earnings will turn positive supported by a post-Delta variant rebound towards the latter part of the year. What Ausbil did notice was the lack of company guidance. Despite this, Ausbil says “a lead indicator for future earnings was the bullishness in which companies described their operating outlook beyond the COVID-19 Delta strain.” Insights from meetings showed a willingness to invest into the company’s future post-Covid.
“We believe earnings growth is likely to surprise again,” says Ausbil.
Looking at the market in terms of EPS growth (above table), Ausbil sees positive growth in cyclical sectors (steel, energy, chemicals and diversified metals & mining), together with post-covid sectors (hotels, restaurants & leisure), quality (general insurers and infrastructure trusts) and quality growth (in high-quality software and services and online services) as primary beneficiaries.
Ausbil says, “overall, the market is expecting positive growth in 25 of the 32 functional GICS sectors (or 80% of the market by market cap). Of these sectors, 11 are expected to generates EPS growth over and above the market average, representing 28 percent of the S&P/ASX 200 market cap.”
A list of key developments Ausbil has listed from the recent reporting season:
- Metals and mining break records, fundamentals remain in place for FY22 earnings growth
- Insurers on the cusp of an upgrade cycle, potential for capital release
- The health care sector remains strong, embraces digitisation
- Inflation is not yet a material threat to company earnings
- Pandemic-impacted supply chains are producing some challenges
- Consumer staples face some challenges adjusting to their success
- Construction materials continue cyclical growth, driving M&A
- Telco competition is rational, for once, with asset realisations underway
- Media – stronger revenue but matching with content investment
Overall Ausbil is positive on the year ahead. The fund manager says, “With stimulus in place, low interest rates, and inflation that is not threatening to monetary policy in the near term, we see stronger company balance sheets ready to deliver another strong year of earnings growth in FY22, with consensus EPS growth at +16.1% (S&P/ASX 300).”