Report card for Australasian reporting season
06 March, 2015
If we were writing the report card for the Australasian companies that have reported earnings so far this season, we would probably say something along the lines of "good effort, making steady progress and with a continued effort, should do well."
The Australian reporting season was positive for investors with 13% more companies beating profit expectations than those missing them. The margin of "beats" was smaller when looking just at revenues, illustrating that positive profit growth has been driven largely by companies cutting costs, rather than by growing sales.
Australian companies have responded to more challenging business conditions by becoming leaner, but there is a limit to how much cost they can take out without negatively impacting their capability. Going forward profit growth will increasingly depend on the ability of companies to grow revenues. This is exactly why our Australian portfolio is concentrated in companies with sustainable competitive advantages which we expect will allow them to raise prices or increase sales volumes. Through this results season our portfolio fared comparatively well, with 48% of our companies surprising positively, 28% in line with expectations and 24% of our companies surprising negatively - this was a much better outcome than the market overall. Although the first half results were broadly positive, companies guided full year profit expectations slightly downwards, indicating that general conditions are likely to remain difficult. At such times it is critical to be invested in companies that are distinguished by their strengths.
It was a similar scenario in New Zealand with 40% of our portfolio companies reporting results that exceeded expectations, 40% in line, and 20% that were somewhat disappointing. Dividends have again been an interesting feature of the NZ reporting season with 60% of reporting companies increasing their dividends and none reducing them. This trend provided further evidence of companies' reluctance to disappoint investors in this yield hungry market environment.