ASX Reporting Season Review and Market Outlook

The ASX200 reporting season unfolded against the backdrop of a slightly tougher economic environment. Earnings Per Share (EPS) expectations for 2024 witnessed a modest decline of approximately 2.5%. However, this decline was partly offset by a favourable fall in the Aussie dollar. Despite these challenges, revenue growth remained robust, but companies continued to grapple with cost pressures, putting pressure on profit margins.

Looking forward, the economic background remains relatively benign with Central Banks largely doing a good job so far of lowering inflation and guiding economies toward a soft landing.

Now, let's delve into the specific stocks. We’ve shared our insights into how the companies in our Diversified ASX Portfolio navigated this complex reporting season and our outlook for each one.

We’d also preface this by noting that our view on each stock is based on specific due diligence and valuations that we set internally and are relative to the original prices of the stocks if they’re currently held in our model portfolio.

Performance and Guidance of Our ASX-listed Property Stocks

Garda Property Group (GDF)

The property manager is well positioned with its net asset backing at $1.96, its gearing at 33.7%, the portfolio value is $600m with 91% occupancy and 4.9 years average lease expiry. Two new projects will complete this financial year to add $4.1m to annualized revenue. Interest rate hedging has increased to 50%. Industrial assets will make up two-thirds of assets after these completions. The Botanicca office assets are up for sale. Net asset value is holding up quite well thanks to rents growing strongly in the industrial assets, offsetting higher interest rates. Only 1% of lease income is at risk of expiry this coming financial year. The only negative is distributions will drop from 7.2c per share to 6.3c per share this year due to higher interest costs. That should go up next year as projects complete. Garda has continued trade at a significant discount to NTA. This is in our portfolio as a hold/buy status.

Elanor Investors Group (ENN)

Elanor Investors Group released their yearly results with FUM increasing to $2.97bn (before the Challenger addition). Recurring revenue continues to be strong but is offset by higher costs. MA Financial research shows an estimated dividend yield of 9.9% post the Challenger integration and a share price target of $2.26 this year, representing 40+% upside from current levels. The operating environment for the broader property sector is likely to be challenging in the short term, but we remain long term investors and are confident value will be realised. We are happy to hold/buy at current prices.

Lend Lease (LLC)

The construction, development and property manager reported a net loss after tax of $232m for the year ended June 30, largely due to a $295m provision because of industry-wide action by the UK government relating to residential buildings. Core operating profit after tax – the group’s measure of underlying earnings – was $257m for the year, down 7% on the prior year. Lendlease maintained its full-year distribution of 16c (ex-dividend 18 August). Their return on equity is expected to at least double in the coming 12 months with all divisions expected to improve. We remain happy to hold the stock given the outlook and share price levels. LLC went ex dividend on the 18th of August.

Centuria Capital (CNI)

The property fund manager reported a strong 2023 full year profit result but disappointed on earnings guidance and a dividend of 10c per share for the coming year. Management stated they anticipate receiving lower performance fees & development profits this financial year and expect financing costs to rise. Office is struggling whilst Industrial, healthcare, credit and agriculture are doing well. CNI was around the $3.50 mark less than two years ago and they have a very good business model. The coming 12 months will be difficult but given the share price fall we would be holding.

Performance and Guidance of Our ASX-list Financial Stocks

Macquarie (MQG)

The diversified financial services giant cited weaker trading conditions for delivering first quarter financial 2024 net profit that was substantially down on the first quarter of the 2023 financial year. Macquarie recorded a capital surplus of $10.8bn as at 30 June 2023. Macquarie said its annuity-style businesses Macquarie Asset Management and banking and financial services posted a combined first quarter net profit substantially down on the same period a year ago primarily due to lower investment-related income from green energy. The bank said its banking and financial services contribution was significantly up on the prior corresponding period driven by growth in the loan portfolio and deposits together with improved margins. We like them below $175. Earnings growth will be challenging after their strong 2023 results but return on equity is still around 20%.

Commonwealth Bank (CBA)

Australia's largest bank lifted its cash profits to a record $10.16bn – in line with expectations – for the full year. They did however report that net interest margins had fallen off their late 2022 peak to 2.05% in the six months to June. This is 5 basis points lower than the 2.10% it reported for the half-year to December. Home and personal loans with payment more than 90 days overdue rose, but the bank said the overall quality of lending remained sound and arrears were below long term averages. This is a strong result in a tough operating environment, which shows the strength of the bank and the resiliency of households.

NAB (NAB)

NAB provided a third quarter update and reported a better than expected $1.9 billion in cash earnings over the three months to the end of June, while reporting a “modest” deterioration in asset quality and lower margins from home loan competition. But the bank has still announced a new on-market share buyback, reflecting its strong capital position, with plans to acquire up to $1.5 billion of its ordinary shares over the next 12 months. The number of loans more than 90 days overdue increased by 0.05% to 0.71%. NAB said this “mainly reflects a modest deterioration in delinquencies across the group’s home loan and business lending portfolios”. The closely watched net interest margin, a key revenue driver, contracted by 0.05% to 1.72% over the quarter, reflecting ongoing home lending competition combined with higher deposit costs.

Westpac Bank (WBC)

Westpac reported net profit for the third quarter of $1.8bn after navigating a modest deterioration in bad debts, higher expenses (up 5% compared to first half) due to inflationary pressures, and a contraction in lending margins from mortgage competition. The core net interest margin contracted to 1.86% for the three months to the end of June, which is down only 4 percentage points on the first half. The number of mortgage customers in Australia more than 90 days overdue on loan repayments rose by 0.07 percentage points to 0.80%, while in New Zealand, this number was up by 0.03 percentage points to 0.32%. Core common equity tier 1 capital, the key measure of bank strength, contracted by 0.42 percentage points to 11.9% over the quarter, which reflected the payment of the interim dividend, and remains well above its target range of 11% to 11.5%. This reflects the very strong capital position of Westpac and the other big three banks here in Australia to withstand any deeper stress to their loan book. We would be comfortable buying here for clients with no exposure.

Suncorp (SUN)

The insurance-banking giant reported cash profits for the full-year of $1.25bn, up $673m on the previous year. Part of the gain was linked to mark-to-market losses hitting the bottom line in 2022. Suncorp went ex-dividend of 27c on the 14 August. Suncorp is still planning on selling the bank to ANZ in a $4.9bn deal. ANZ has appealed the ACCC’s refusal to allow the sale to the Australian Competition Tribunal. Suncorp says the delayed sale of its banking arm is among the reasons for keeping a tight rein on dividends, with its payout at the lower end of its guidance to investors. We are happy holders here after a strong run in share price over the last 12 months.

QBE Insurance Group (QBE)

The Australian insurance company announced profits of $US400m ($612m) for the six months to June, up from $US48m a year earlier. The rise included a big bump in investment returns, mirroring Suncorp's result. The company also reported a 10.2% increase in insurance premiums over the past six months. However, consensus expectations were missed, with earnings and dividends per share being lower than expected although this was mainly due to a higher tax rate. QBE is paying out a dividend of 14c, representing a payout ratio of 35% which is below the company's target range of 40-60%. Despite increased disasters, they have maintained their full-year guidance for gross written premiums and underwriting profitability. We are happy to hold after a strong 12 month run, given the favourable tailwinds.

MA Financial (MAF)

The investment bank delivered record first-half gross fund inflows of $953m, up 66% on the corresponding period. Assets under management climbed 20% to $8.6bn. Annualised recurring revenue climbed 22%, representing 65% of underlying revenue versus 47% in the previous first-half, highlighting an improved composition in earnings. The challenging macro environment led to lower transactional activity impacting performance fees and corporate advisory revenue. MAF declared a fully franked interim dividend of 6c and went ex on the 29th of August. The jump in recurring revenue was a positive result and we are happy holders.

Performance and Guidance of our ASX-listed Commodities Stocks

Rio Tinto (RIO)

Rio Tinto released its half-year profit which fell 34% following weaker commodity prices. The $US5.7 billion ($8.4 billion) underlying profit and $US1.77 per share interim dividend fell short of analyst expectations. It went ex-dividend on the 10th of August. Net earnings were lower at $US5.1 billion after Rio took $US800 million of impairments against its Australian alumina refineries. The dividend payout was lower than in the past two years, but still the third-biggest interim dividend in Rio’s 150-year history. The market was expecting a $US5.85 billion underlying half-year profit and an interim dividend of $US1.85 a share. It is one we have not been adding to with preference for BHP and South 32. We remain happy to hold.

BHP (BHP)

The mining conglomerate released its FY23 results yesterday announcing a 37% decline in total profit to US$13.4b. Revenue declined by US$11.3b to US$53.8b largely due to a decline in commodity prices over the year. Sales volumes of Copper, Iron ore, & Nickel all increased over the year however it was not enough to offset the decline in commodity prices. Net Debt of the group increased to $11.2b over the year, still within guidance of its range of US$5b - $US15b. The company flagged that demand for commodities in the developed world has slowed substantially due to anti-inflationary policies and interest rate hikes reducing consumer demand. BHP declared a final dividend of US$0.80, slightly below consensus of US$0.82. They go ex-dividend $1.20 fully franked on September 7. We think they are attractive in the low $40s.

South32 (S32)

The mining and metals company posted a loss of $267m after tax following a big write-down on the value of its Hermosa base metals project in the US. The company's underlying earnings fell 65% to $US916m which was largely in line with guidance. South32 boosted production in aluminium by 14%, base metals by 17% and manganese by 4%. Earnings took a hit as commodity prices fell from record 2021-22 levels. They declared a fully franked dividend of US3.2c a share. The company announced it was adding $US50m to its existing $US300m share buyback program but reduced the size of the dividend. We are happy to buy S32 at current prices.

Mineral Resources (MIN)

The mining company reported a 40% increase in revenue to $4.8b in FY23 while its EBITDA increased 71% to $1.8b after record lithium earnings from higher volumes and prices.

MinRes posted a net profit of $244 million, down by $107 million on its FY22 results, after a $552 million write down on its iron ore division. The company announced a dividend of $0.70 and goes ex-dividend on the 8th of September. We recently added some exposure to MIN in the Diversified ASX Portfolio.

Woodside (WDS)

The Energy company posted a 6% increase in its first half profit, fuelled by strong production in oil & gas and stronger than anticipated commodity prices. Net profit rose to $2.71b in the six months ending June 30, a record after the merger with BHP's petroleum business in June last year. The producer declared a dividend of US$0.80 or $1.20 fully franked and went ex on August 31st. The company has many large projects under construction at present, such as a $16.5b WA project. We are hesitant to chase here.

Performance and Guidance of Our ASX-listed Healthcare Stocks

ResMed (RMD)

The sleep and respiratory device maker ResMed reported an 18% increase in revenue to $US4.2bn (A$6.41bn) for the 2023 financial year and net of income of $US897m, up 15%, but gross margin declined by 80 basis points to 55.8% thanks to higher component costs, warranty increases and freight costs. The CEO said early testing of its new AI products was “very positive” and ResMed planned to introduce several AI-powered data products for doctors and patients over the next several quarters. The company declared a US4.8¢ quarterly dividend. They went ex-dividend on the 16th of August and yield 1%. Although it is a good result, the market was disappointed by the margin contraction. We are happy to buy more on this weakness. They offer a quality/innovative product and are expected to grow earnings strongly.

CSL (CSL)

CSL had preannounced their FY23 results with underlying profits up 10% to US$2.61bn after a surge in sales of its core immunoglobulin division. Earnings per share grew just 6.0% to $US5.41 (17.0% at constant currencies) and the company declared a final dividend of $US1.29 (it goes ex on the 11th of September), making $US2.36 in total dividends (up 6.0%), or $3.59 a share for Australian shareholders. The rise in earnings was a strong rebound from pandemic troubles in relation to blood collections in the US and immunoglobulin sales. For FY24, revenue growth is anticipated to be approximately 9-11% over FY23 at constant currency. We have been buying at recent levels and are happy to hold given the strong revenue growth.

Ramsay Health Care (RHC)

Australia's largest healthcare provider reported a 3.6% decline in net profit for the year of $365.5m and their dividend fell 48%. Net profit attributable to shareholders increased 8.8% to $298.1m. The final dividend of 25c gave a total of 75c for the year, down from 97c. Ramsay continues to experience slow margin recovery on costs and digital investment. We remain happy to hold despite the disappointing result. It may take some time for Ramsay to turn around but it is trading 28% below broker consensus and $36 below its recent takeover approach and is a high-quality business. RHC is ex dividend on the 6th of September.

Performance and Guidance of Our ASX-Listed Industrials Stocks

Amcor (AMC)

The global packaging group reported a 11% fall in net profit after tax to $US1.089bn due to bulk buying by consumers seeking value. Despite implementing price rises of $1.1bn to counter inflationary costs in raw materials and transport, revenues remained steady at $14.7bn. Chief executive Ron Delia expects profit growth to resume again in the June half of 2023-24. Guidance suggests Amcor will experience ongoing volume pressures through the next financial year. AMC is ex div on the 6th of September. We are happy to hold.

James Hardie (JHX)

The world’s biggest manufacturer of fibre cement building tiles and siding continued its share price rise after announcing fourth quarter earnings which showed profit margins increased to an all-time high despite a slowdown in housing construction and the renovation markets in both the US & Australia. Its profits were 18% above market expectations with margins well ahead of the company’s previous guidance coming in at 31% in the US. The higher margins were achieved by increasing prices to customers and cutting costs. Asia Pacific (APAC) and Europe segments saw strength in net sales — rising 12% and 22%, respectively. Although, both regions recorded declines in sales volumes. It was a strong result which highlights the company’s ability to increase margins even when sales are lower. It is one we trimmed in the model portfolio given the strong rise in the share price. We see at reasonably fully priced in the short term on 20x profits.

Telstra (TLS)

Australia's largest telecommunication company reported a 13% increase in annual net profit to $2.05bn. The company said it will hang onto its InfraCo Fixed Business in the medium-term as management cited its contribution to sustainable growth. Their revenue and earnings results were largely in line with guidance. Telstra announced a final dividend of 8.5c, totalling 17c for the year. This is up 3% from last year. TLS went ex-dividend on the 30th of August. We think there is room for capital growth and are comfortable accumulating for clients after this pullback.

Performance and Guidance of Our ASX-Listed Consumer Discretionary Stocks

Wesfarmers (WES)

Wesfarmers $2.6 billion full-year profit beat expectations. The conglomerate also lifted its total dividends to $1.91, an increase of 6.1%. The final dividend declared was $1.03 and it goes ex on the 30th of August. WES reported an 18.2% surge in full year sales to $43.55 billion – ahead of market expectations – with strong earnings from its two key retail banners Bunnings and Kmart Group, and also boosted by its Chemicals, Energy unit, WesCEF. Kmart Group, which also includes discount chain Target, posted sales of $10.635 billion, with sales jumping 16.5% as the cost of living squeeze drove shoppers to the discount store. The results were stronger than expected and we remain happy to hold.

Bapcor (BAP)

The automotive parts group which runs 1,000-plus stores across brands including Autobarn, Burson and Autopro reported a 9.7% increase in revenue to $2.02bn and a 15.4% fall in net profit to $106m. There was reduced margins in the retail arm of 15.9%, down from 16.9% a year ago. BAP says there’s an uncertain trading environment ahead in its retail stores, but its trade business which supplies auto parts to mechanics’ workshops is on solid ground. The result beat market expectation & the company kept its final dividend steady at 11.5c (ex dividend 30 August). We are happy to hold at this stage but will review research as it comes in.

Performance of Our ASX-Listed Infrastructure Stocks

Transurban (TCL)

The Australian toll road operator reported average daily traffic volumes reaching a record of more than 2.4 million trips. Company earnings jumped 29% to $2.45bn. Traffic rose year-on-year on all roads except the A25 in Montreal. The company has indicated it will pay a record full-year dividend of 62c a share in the coming financial year. Transurban is benefiting from high inflation, which enables it to raise toll fares on most of its roads, boosting group profit margins to 71%. We are happy holders and would look to accumulate at slightly lower levels.

Atlas Arteria Group (ALX)

The toll road operator reported a 17% increase in interim net profit to $136.5m, benefiting from higher inflation and increased toll road income. Traffic rose on all the company's roads in France, the US and Germany compared to a year earlier. Its newest acquisition, the Chicago Skyway, had traffic numbers fall 2.4%. The company expects to pay a first half dividend of 20c and a second half dividend of 20c, in line with guidance. The result was largely in line with market expectations. ALX’s cash flows and distributions are defensive and the current yield of ~6.5% is attractive, backed by continuing traffic volume recovery. We remain happy to hold it in the model portfolio.

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Disclaimer: The information in this document is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.