In these sectors, Morningstar has identified pressure on corporate earnings, as slowing revenue is met with wage and input cost inflation.

[For more information, please visit ASX Company Announcements to search for the company’s earnings result and accompanying presentation and read the information for yourself.]
 

A mixed bag 

For stocks that have reported so far, Morningstar increased its fair value estimates – its intrinsic assessment of each company’s value based on independent research - by an average of 2%. 

Taking the market as a whole, this suggests earnings in aggregate have been close to market expectations. Morningstar’s view is supported by the benchmark ASX200 index trading close to where it started in the month of August. 

However, looking at companies individually, Morningstar analysts have made some material revisions. 

On the positive side, JB Hi-Fi’s (ASX: JBH) earnings result was more resilient than the market expected, despite a tough backdrop for retailers. Morningstar upgraded its fair value estimate for JBH by 9% on higher long-term sales levels and midcycle operating margins. 

Results from Brambles (ASX: BXB) and WiseTech Global (ASX: WTC) were strong in Morningstar’s opinion and we materially upgraded our fair value estimates for both stocks.

At the other end of the spectrum, one of the biggest downgrades during this reporting season was Lendlease Group (ASX: LLC). Morningstar reduced its fair value for LLC by 15% after the result, due to lower long-term revenue assumptions and lower expected investment returns. 
 

Dividends

Several large dividend-paying companies have reported this earning season, including CSL (ASX: CSL), Cochlear (ASX: COH) and Telstra Group (ASX: TLS). 

Commonwealth Bank (ASX: CBA) delivered a record dividend. CBA’s fully franked final dividend of $2.50 brought full-year dividends to $4.64, a 3% increase on last year. CBA’s dividend, however, did not go hand-in-hand with a record profit – rather, the bank lifted its payout ratio.

Broadly though, Morningstar views CBA’s dividend as maintainable. After a record fiscal 2024, Morningstar is anticipating another increase in CBA’s fiscal 2025 dividend, with the full year dividend expected to rise 6% to just under $5 per share. 

Although investors who prioritise yield may often look to Australian real estate investment trusts (A-REITs), the reporting season to date has highlighted challenges for the sector. 

For those trusts with higher leverage, Morningstar has seen rising interest expense drag on A-REIT earnings and distributions. For example, Mirvac Group’s (ASX:MGR) earnings grew 12%, but operating profit after tax was down 5%, primarily due to higher financing costs. 

Banks remain resilient

Commonwealth Bank was the only major bank to announce its fiscal 2024 profit with the other three majors – Westpac Banking Corporation (ASX: WBC) National Australia Bank (ASX: NAB) and ANZ Group Holdings (ASX: ANZ) – announcing trading updates. 

Morningstar views the banks as a bellwether for Australia’s economy. The noticeable trend here was that, while arrears are rising, bad debts are still much lower than expected, highlighting a resilient borrower, in Morningstar’s opinion. Margins also remained steady and the capital position is strong for the banks, according to Morningstar analysis.
 

Green shoots 

For retailers, fiscal 2024 could broadly be characterised as a tough year. But the trading updates, which provide an insight into conditions during the first few weeks of the new financial year, are showing green shoots. 

As noted earlier, Morningstar has seen growth picking up at big retailer JB Hi-Fi, and Super Retail (ASX: SUL) also provided a positive update. 

E-commerce is reawakening, a theme Morningstar is watching closely. On Morningstar’s numbers, online sales, as a share of total sales, rose sharply during the COVID-19 lockdowns. But as the economy reopened, some consumers returned to in-store shopping, and digital penetration cooled off. 

Morningstar is now seeing evidence that e-commerce is growing again. For example, digital-native furniture retailer Temple & Webster Group (ASX: TPW) saw strong sales growth in the year to June 2024. A resumption of the migration to online shopping bodes could potentially be positive trend for other digital retailers like Kogan.com (ASX: KGN), suggests Morningstar's analysis.
 

Economic outlook

So far, fiscal 2024 has proven broadly consistent with what the macroeconomic data was telling the market coming into reporting season. GDP growth slowed over fiscal 2024, and sales growth for many retailers, particularly in the discretionary sector, was challenged. The labour market is also softening. Seek’s (ASX: SEK) result showed a marked deceleration in job advertisements from the elevated levels of the pandemic. 

However, the jobs market is still tight by historical standards, and this means employees can bargain for better wages. This pressured margins for many businesses over fiscal 2024, particularly in labour-intensive industries such as industrials and healthcare. 

Market mismatch 

Overall, the stocks Morningstar covers in the ASX200 on average trade at a 4% premium to Morningstar’s fair value estimates. In other words, the market looks marginally overvalued.

The trading updates from some cyclical stocks provide tentative signs that economic activity might be picking up. In Morningstar's view, Australia’s stage 3 tax cuts and energy bill relief are supportive of corporate earnings growth. 

However, the magnitude and timing of potential rate cuts is a big unknown, and that could prove an important factor for the growth trajectory for earnings and dividends over the coming year. 

DISCLAIMER

This article has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892). It has been provided for information purposes only and does not constitute financial advice. The information is general in nature and is provided without reference to your objectives, financial situation or needs. To obtain advice tailored to your situation, contact a financial adviser.  Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Past performance does not necessarily indicate a financial product’s future performance.