Australian blue-chips capped off the 2021 financial year with a 26 per cent surge in earnings per share, which is expected to slow to growth of 13.6 per cent in 2021-22, and 4.5 per cent in 2022-23, according to consensus estimates measured by Morgan Stanley.
Consensus is measured on an earnings per share basis, or EPS, arriving at an estimated $4.11 of profits for the average ASX 200 company as of January 28, 2022, compared to $3.73 at December 31, 2019, both on a 12-month ahead view.
Iron ore miners will make only a small contribution to overall market EPS growth in 2021-22 as the sector faces the reality of reduced spot prices half-on-half based on current estimates, and production challenges in the period underway.
The iron ore stocks, which make up 25 per cent of the ASX 200 profit base, will then pose a 5 to 8 percentage point drag on the benchmark’s EPS growth for 2022-23 on current commodity price forecasts, but MST Marquee suggests that’s too bearish on present pricing.
All about margins
Fund managers are on the lookout for how inflationary pressures are affecting margins, particularly given the shock 3.5 per cent jump in annual consumer prices in the December quarter reported last week.
“It’s going to be a very messy reporting season, probably the messiest we’ve seen in a really long time,” said head of Australian equities at RBC Capital Markets, Karen Jorritsma.
“The cost issues facing companies are problematic because it impedes management’s ability to provide guidance at a time when markets are wanting stability, particularly given the volatility seen last week caused by central banks and the prospect of rising interest rates.”
On Monday, medical gloves and protective personal equipment maker Ansell reported margin compression due to higher-than-expected increases in freight and labour costs, adding that logistics disruptions have led to order delays.
The company was forced to reduce its EPS guidance by between 26 per cent and 28 per cent, leading to a sharp decline in its share price of 14 per cent to $26.76 at the close.
It follows concerns raised by Fortescue Metals Group earlier in January that cost inflation was running at 20 per cent, and similar warnings from Bega Cheese.
Whitehaven Coal told the market last month that diesel fuel prices and workforce absenteeism, as part of labour shortages, were each adding $3 a tonne and $1-to-$2 a tonne to unit costs, respectively. Demurrage costs due to disrupted production and supply was adding a further $2 a tonne, plus another $2 attributed to historical flooding.
All up, Whitehaven’s projected unit costs climbed from $79 to $84 a tonne.
And while Bega is faced with inflated farm-gate milk prices, companies such as NZ co-op Fonterra are enjoying record prices for dairy as global supply tightens. When Fonterra upgraded its milk price forecast last week for financial 2022 to $NZ9.20 a kilo, it remarked that high feed costs were curtailing US dairy industry output.
High stakes
Last week, broker Macquarie warned that a slowing business cycle combined with hawkish central banks could see stocks that fail to meet consensus “disproportionately punished” by shareholders.
It means strategists are looking for companies that are best placed to pass on rising costs to consumers and customers.
“The enduring bright spot for ASX 200 profits promises to be the COVID recovery stocks,” agreed Hasan Tevfik, investment strategist at MST Marquee. “While these companies will face rising cost issues, we expect much of this will be passed through given the considerable level of pent-up demand in some instances.
“The coming reporting season will be an early indicator on how the profits recovery could eventuate for these companies.” He pointed to Qantas Airways and the casino stocks as examples.
Macquarie underlined companies with offshore earnings as having the strongest growth outlook, with international industrials forecast to experience a near 29 per cent jump in EPS in 2021-22.
The resources sector is also expected to see high EPS growth of 19 per cent this year, before a material fall in 2022-23.
