The latest reporting season came and went in a very underwhelming fashion, with very few surprisingly strong results stealing the headlines. 

From an investor’s perspective, the results needed to show how companies fared in an environment of rising interest rates, high inflation, and high-costs, while also providing outlook for the second half of FY23. 

The companies that failed to report cost-management measures and any guidance for the remainder of FY23 were heavily punished by investors this reporting season.

The winning sector of February’s reporting season was clearly energy producers as the global energy crisis remains a key challenge in 2023, resulting in an ongoing rally for key commodity prices. 

The losing sector over the February reporting season month was Australian Retail Investment Trusts (A-REITs) and financials stocks, as rising interest rates spell higher costs for companies in both sectors. 

For the big banks this reporting season, the focus from a broker and investor perspective has been on Net Interest Margin, or the amount they generate from lending money out versus the interest they pay on deposit, and the provision for doubtful debts. These are the key indicators of performance expectation heading into the second half of FY23. 

If margin expansion has moderated or stagnated, the banks will have to find other sources of revenue. In a time where loan originations are expected to slow down, investors might fear headwinds for the financial sector. 

Cost focus

Delving into rising costs of operations, investors favoured companies that reported cost-control measures this reporting season, while selling out of those that continue to bear the full brunt of cost increases. 

You may have noticed that your weekly food shop at Woolworths Group (ASX: WOW) or Coles Group (ASX: COL) has increased over the last few months. That’s because both supermarket giants have ended their respective price freezes on more than 200 trolley items – the freeze was imposed when interest rates began rising last year. 

This is a bad thing for our hip pockets, but a good thing for investors as both companies offset rising costs by increasing the prices of their products. Coles and Woolworths both reported their respective price freezes on trolley items had ended and higher costs were being passed onto customers.

Generally, earnings increases were dismal across the majority of the reporting companies, however lithium is still the “it” word for 2023, in Bell Direct’s opinion. Pilbara Minerals (ASX: PLS) reported sales revenue for the first half up 959% to $2.18 billion. 

As the theme went across the sectors, iron ore mining giants like Fortescue Metals Group (ASX: FMG) and BHP Group (ASX: BHP) faced declines in revenue.

Retail companies, such as Cettire (ASX: CTT), posted double-digit revenue growth during the period of record consumer retail spend. 

Dividends

On the all-important dividend front, it was a clear sector theme when it came to adjustments to dividends this reporting season based on the impact of macro factors throughout the first half. 

For the retail space, with consumer spending remaining high throughout the first half of FY23, we saw JB Hi-Fi (ASX: JBH) increase its interim dividend by almost 21% to $1.97/share. 

In the materials space it was a different story as China’s strict COVID lockdowns dampened demand for iron ore and oil which saw mining giants BHP and Rio Tinto (ASX: RIO) trim their respective interim dividends accordingly. 

In the lithium space, Pilbara Minerals declared its inaugural interim dividend of 11 cents per share.  

Travel stocks felt some much-needed relief in 2022, but with demand recovering to an all-time high post-pandemic, investors would be right to wonder for how long such demand can be sustained, in Bell Direct’s opinion.

In the wake of increased cost of living pressures, and with consumers shifting away from discretionary goods and into value retail, the travel sector may face a correction soon. 

And with the real estate sector in the midst of a sharp downturn, the flow-on effect from such a decline in the value of the real estate market stretches beyond just house prices. Retailers that sell discretionary items could face some tough months as consumers reduce spend on key household items, while the construction sector also continues to face headwinds in the form of skilled labour shortages. 

Conclusion 

As a whole, the market is expecting big things from companies in the second half of FY23, especially for those that set and/or reaffirmed quantitative guidance within first half reports. Whether they can meet expectations may be a different story as a recession is still not off the cards just yet. 

In Bell Direct’s view, consumer discretionary stocks may face strong headwinds in the second half as retail spend is expected to decline with further interest rate hikes impending, while materials stocks are expected to feel some tailwind relief on demand from China as the world’s second largest economy ramps up manufacturing and overall operations post pandemic. 

DISCLAIMERS

Bell Direct Disclaimer: This information is for educational purposes only and is of a general nature. It has been prepared without consideration of your specific financial situation, particular needs and investment objectives. This information does not constitute financial advice and you should consider your own financial circumstances in assessing the appropriateness of this information.