Australia’s biggest firms flash warning signals on recession

AS the dust settles on a mixed earnings season in Australia, one key takeaway has emerged: things are only going to get worse.

About 41 per cent of the 158 companies on the benchmark S&P/ASX 200 Index that reported half-year results in February posted negative earnings surprises, according to data compiled by Bloomberg. That’s up from 28 per cent a year ago, as macro conditions decline and the threat of recession grows.

“Overall, it was not a great earnings season,” said Hebe Chen, an IG Markets analyst based in Melbourne. “I am afraid it could be the best one in 2023.”

Cracks are beginning to form in Australia’s A$2.2 trillion (S$2 trillion) economy, with data last week showing a surprisingly sluggish end to 2022 as economists boost the probability of a recession. Still, government officials have expressed confidence that the nation will dodge a downturn.

“We are at that turning point, some sectors have felt the economic slowdown and others haven’t yet,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners in Sydney who oversees A$1.2 billion in funds. “But in six months they will probably all be in the same boat.”

Here are some of the key takeaways from earnings season:

Inflationary pressures

The world’s largest miner BHP Group said mounting energy and labour costs crimped its results, while Commonwealth Bank of Australia set aside more capital cushions as consumers feel the pinch from price pressures. Shares of the nation’s biggest lender are down 4.7 per cent this year, underperforming the benchmark index’s 3.5 per cent rise.

Food producers were also hurt by higher expenses. Domino’s Pizza Enterprises plummeted the most on record after the pizza chain operator’s earnings dropped as customers spurned price increases. Meanwhile, poultry processor Inghams Group said elevated labour, packaging and fuel costs would persist after its profit dampened.

Mining sector woes

Miners went into a challenging results season facing weaker commodity prices, inflation pain and big capital expenditures.

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Iron ore producers BHP, Rio Tinto Group and Fortescue Metals Group slashed their dividends as costs for projects, acquisitions and decarbonisation ate into potential payouts. Companies are also still waiting for any demand from China’s reopening to show up in orders.

Still, lithium firms were a bright spot. Pilbara Minerals and Allkem both said profit jumped more than 10-fold in the last six months of 2022 from a year earlier, though falling prices and supply concerns have clouded the metal’s outlook. The two stocks have each climbed more than 9 per cent in 2023.

Softening housing market

Stocks tied to real estate were hit by dwindling demand as the Reserve Bank of Australia’s tightening cycle drags on Australia’s housing market.

While backlogs supported building materials makers and steel suppliers, they are “increasingly aware of the risks associated with a housing market hard landing”, UBS Group analyst Richard Schellbach wrote in a note. The country’s residential construction industry is reeling from materials and labour shortages and an unwinding of government subsidies.

Consumer spending shifts

The housing slump and economic concerns are turning shoppers away from property-related purchases and towards holidays and lower-ticket items like apparel.

Shares of household goods retailer Harvey Norman Holdings slid the most in about three years when it reported slowing sales, while Corporate Travel Management rallied after flagging a strong travel rebound. Qantas Airways also pointed to robust demand, but higher-than-expected spending on planes disappointed investors as the airline tries to keep up with passenger growth. Its shares are up 8.3 per cent this year.

Given the changes in spending habits, Morgan Stanley reinforced its preference for offshore earners such as Treasury Wine Estates and Aristocrat Leisure over domestically-exposed consumer stocks, analysts led by Melinda Baxter wrote in a note. BLOOMBERG