The FY22 reporting season was quite positive, where ASX-listed companies met or beat expectations more often than they didn’t. Given concerns about inflation and energy prices, rising interest rates and weakening demand, companies dealt with these headwinds better than they were predicted to.
The FY22 earnings season in August was better than expected
Of 344 companies that FNArena recorded as reporting in August, 30.8% beat expectations, 42.4% reported results in-line with expectations and 26.7% of companies missed expectations. It seems to be the case that sell-side analysts were too bearish about the performance of Australian listed companies, where they showed more resilience to global and domestic conditions than expected. Overall, the FY22 earnings season was quite a successful one.
After sell-side analysts took a deep dive into the results, there was a total of 32 rating upgrades and 79 rating downgrades. This was based on a cloudier outlook that some management teams gave about the macroeconomic headwinds they were facing in FY23.
Out-of-favour sectors outperformed whilst expectations were too high for defensive sectors
The best performing sector relative to expectations was Technology. Rising interest rates tend to impact the Technology sector the most, due to the high-growth, long-duration earnings characteristics of the sector. Analysts turned out to be too bearish on their prospects. Some of our Technology recommendations did particularly well, with printed circuit board software and electronic parts search engine business Altium (ASX: ALU) jumping over 20% after smashing expectations. Cloud connectivity business Megaport (ASX: MP1) jumped over 10% after results showed very strong top-line growth with the business travelling towards profitability in FY24. These results reminded investors that despite valuation headwinds, the underlying companies still had a strong growth story.
On the other hand, Consumer Staples and Utilities fared the worst, due to the high expectations placed on these defensive industries. Although companies in these sectors were able to raise prices and pass on costs, they were a little less defensive than predicted. Although many companies in the Utilities sector have regulated inflation-linked pricing mechanisms, investors found out that there are delays in passing on full price rises, and perhaps not to the extent they had hoped for. Utilities should perform better in upcoming earnings seasons as more price rises come into effect along with analysts having more measured expectations.
Similarly, companies in the Consumer Staples sector were not immune to the challenges that existed in FY22. Unfortunately, this sector faced headwinds from both the normalisation of living with Covid-19 as well as Covid-19 restrictions. With the relaxation of restrictions, consumer left their homes more. This resulted in higher levels of out-of-home consumption, at the expense of groceries. However, isolation restrictions still remained, which resulted in significant Covid-19 related absenteeism costs. Meanwhile, companies such as Woolworths (ASX: WOW) decided to not fully pass on costs in an effort to stay competitive. Moving forward, the outlook for the Consumer Staples sector should benefit from the shortening of the Covid-19 isolation period, out-of-home consumption normalising after the pent-up demand in FY22, as well as easing supply chains.
Opportunities continue to present themselves
Despite some concerns about economic and market conditions moving forward, our philosophy is to always stay invested, especially as higher levels of inflation erode the purchasing power of cash holdings. Even in turbulent markets and uncertain economic conditions, a deeper dive into more specific trends will result in the discovery of more opportunities than you would have thought. This especially holds true after multiple contractions have led to more favourable valuations.
Take automotive aftermarket industry for example. In Australia, the number of vehicles on the roads is set to increase, and the average age of vehicles are rising. More vehicles mean more automotive spare parts that will eventually need to be replaced, and older vehicles support demand for replacement parts as they experience higher wear and tear. In fact, tougher economic conditions will result in consumers holding off on the purchase of newer cars, which will boost the trend of rising vehicle ages. No matter the economic conditions, faulty car parts will generally need to be replaced as people still need to drive to places. It did not surprise us that automotive aftermarket companies such as Bapcor (ASX: BAP) and GUD (ASX: GUD) had released trading updates that have indicated a positive start to FY23.
In general, the team at ASR Wealth Advisers remain bullish on companies that have pricing power or have contracts which pass-through higher costs. Examples of these includes Johns Lyng Group (ASX: JLG), whose building and restoration segment largely uses cost-plus contracts, and Dalrymple Bay Infrastructure (ASX: DBI), in which higher handling costs are passed on to customers of the export facility. We also like companies which have a sticky earnings profile as well as companies that benefit from rate rises, such as those sitting on a large float.
Out of the companies mentioned in this article, ASR Wealth Advisers currently has buy recommendations on Altium (ASX: ALU), Megaport (ASX: MP1), Bapcor (ASX: BAP), Johns Lyng Group (ASX: JLG) and Dalrymple Bay Infrastructure (ASX: DBI).