Rudi's View | Feb 08 2023
By Rudi Filapek-Vandyck, Editor
As I traditionally like to remind investors: every corporate results season has its own character and dynamics. The overall macro background, including index level and share price moves, plays an important role in understanding the overall context.
This time around, share markets have rallied, and rallied hard. In particular when we look back at the lows in September. That observation still stands if we simply measure returns year-to-date.
The past four-five weeks have witnessed an almost indiscriminate pick-up in global sentiment, driven by macro-related drivers (inflation, bonds, central banks, China). While corporate earnings play a minor role when macro rules the day, at some point investors will be forced to zoom in and price stocks accordingly.
This does not by default have to spell negative news, though there appears to be plenty of room to square off short-term results against further-out uncertainties. History suggests once share prices have had a strong run leading into corporate results, the balance of probabilities shifts towards 'disappointment' with the onus on management at the helm now having to prove why shares in the company should enjoy more upside.
Monday's interim result release by furniture retailer Nick Scali ((NCK)) seems to fit in with this thesis. Similar to the likes of JB Hi-Fi ((JBH)) and Super Retail ((SUL)), Nick Scali's financial report delivered everything a loyal shareholder would want from its investment: strong profit growth, including at the EPS level, stable margins, excellent cost control and synergies kicking in from acquisitions.
Trading in January was so strong, it even took management at the firm by surprise. The dividend declared missed forecasts though, and there was no guidance for the second half.
Traditionally, companies that do provide guidance are being rewarded while those that abstain or move into non-quantifiable gobbledygook ("we see a bright future ahead") will trade at a discount to intrinsic valuation. On Monday, Nick Scali shares sold off by more than -13%.
The local reporting season has hardly started with the true tsunami in corporate releases only commencing from mid-month, but already there are plenty of signals suggesting the harsh assessment of Nick Scali's market release might well become a regular feature this season.
Investors better sit up and take note.
The Opening Eleven
The first eleven ASX-listed companies to release financial updates thus far have mostly seen share prices weaken on the day.
First instant 'punishments' were reserved for ResMed ((RMD)) and Champion Iron ((CIA)), later followed up with similar responses to updates from Pinnacle Investment Managers ((PNI)), Credit Corp ((CCP)) and IGO Ltd ((IGO)), and, on Monday, Nick Scali, Imdex ((IMD)) and Dexus Convenience Retail ((DXC)).
The latter two can possibly be explained by the general risk-off sentiment on the day. Share prices weakened only slightly, while Credit Corp management somehow managed to reverse the initial response while chatting with institutional investors. Hence, the news is not as bad as it looks at prima facie.
This still only leaves three releases with an instant positive response, and only one shot the lights out: beaten-down asset manager Janus Henderson ((JHG)). Its share price is now trading 18% above FNArena's consensus target for the stock, with not one single positive rating from the brokers covering this company.
Centuria Office REIT ((COF)) and Centuria Industrial REIT ((CIP)), two bond-proxies that have had a challenging time over the past twelve months, have both enjoyed a positive market response post interim report.
The one common denominator for these early reporters has been cost inflation, more specifically: whether companies have been able to contain it, or not. The same eagle-eyed focus from investors was already apparent during January when small cap technology companies and commodity producers released quarterly trading updates.
The problem for both analysts and investors is this item is incredibly difficult to forecast. Add much higher share prices and it's not difficult to see why a healthy dose of caution seems but appropriate.
Equally so: great companies with solid growth prospects might still disappoint short-term, offering opportunity for those who can look beyond the immediate market response.
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