SEPTEMBER 2023 – ISSUE 17
The August 2023 Reporting Seasons
Increasing Interest Rates Bite, the Consumer Trades Down and High Costs for Resource Companies Leads to Lower Free Cash Flow.
Over the last 6 months guidance for the ASX 300 FY 2024 EPS growth has slid significantly from an estimate of +2.75% to now -3.00% with this accelerating through the first 3 weeks of the FY 2023 reporting season.
Interest rate expenses have taken a meaningful toll on net profit after tax (NPAT) growth for estimates FY24 with a few FY23 misses as hedges have rolled off, debt has remained high, and analyst struggled to model this line in their models for the FY 2023 results.
The Australian consumer seems to be thriftier early in FY24, but it is not a catastrophe. For retailers – H1FY24 prior corresponding period comparable sales are high which may create some sticker shocks during the trading updates that will be announced during the AGM season. The trend of softer sales in the first seven weeks of FY24 has continued. The task of managing operating costs in FY24 will be tricky for retailers given the 5.75% rise in minimum wages. There may be some relief on utility costs, but these will not outweigh the incremental costs of higher wages. Several companies are exercising discretion in keeping operating costs as % of sales stable (if not lower) heading into the next 12 months. In regards to capital expenditure (capex), many retail companies did not pause investments during covid, and this is a lever that may be pulled to protect margins in a rising cost environment.
In the resources, free cash flow (FCF) has peaked and post results there have been consensus downgrades to FCF expectations for FY24 onwards. Industry wide cost inflation has impacted both the operating costs (opex) and capex. This has been an issue for resource companies in all commodities, be it iron ore, gold, base metals and now lithium which has previously been sheltered from increasing opex and capex costs by extended underlying lithium prices.
As has been the case in recent reporting seasons stocks that disappoint and miss analyst expectations are dealt with harshly and stocks that exceed expectations are rewarded. An example for this has been the share price reactions to the CSL Ltd (CSL) and Cochlear Ltd (COH) FY 2023 results. CSL downgraded earnings expectations on June 13 prior to reporting and the stock has fallen ~11% since, COH reported earnings on August 14 that were ~5% above analyst expectations and have since rallied ~13%.
As always, outlook comments at upcoming Annual General Meetings will give further colour on how FY24 is starting. We will be particularly interested in commentary surrounding interest expenses, consumer trends and operating cost environment for the resource sector.
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