As the world emerges from the grips of COVID-19 into an era of geopolitical and economic uncertainty, companies are facing a bitter cocktail of rising inflation and the impacts of action taken by central banks to control it.
Entering the FY22 results season, ASX-listed company boards and management teams should expect the market to be largely focused on the outlook for FY23 given the economic pessimism which is now the consensus view. Investors will intensely scrutinise the resilience and robustness of business models and financial strength to withstand the anticipated worsening operating environment.
With a wave of selling having decimated share prices in most sectors as investors adopted a ‘sell first and ask questions later’ approach to de-risking their portfolios, it is imperative for companies to proactively address the key areas of interest and concern for investors and be clear and transparent in their market communications.
Clearly articulating a company’s strategy and ability to manage through the current economic conditions can be a real differentiator to how investors view not only the business, but importantly management capability, which ultimately determines a company’s market rating. Investors will appreciate frankness and clarity of message in what is certain to be a bumpy reporting season.
So, what are the key issues likely to confront boards and management teams this reporting season?
Inflation and supply chain
Two of the most prominent issues companies will need to address are the potential impacts of inflation (both positive and negative) and the reliability of their supply chains in the face of increasing geopolitical tensions.
Investors will be keenly assessing which companies are likely beneficiaries of inflation and which are most exposed, based on how they can manage input cost increases (e.g. energy, commodities, labour), exercise pricing power, and the levers they can pull to control costs to manage profitability.
On the supply chain side, investors will focus on how companies are managing inventory and controlling costs despite raw material shortages, manufacturing delays and volatile freight markets. While those with increased inventory levels built to help offset supply constraints will need to demonstrate the ability sell through and maintain sales margins.
Cash flow and balance sheet
The idiom ‘cash is king’ rings particularly true in the current risk-off environment, where access to funding may be constrained and investors identify which companies have the financial strength to manage through the anticipated difficult economic environment.
Management teams should be very clear when detailing their cash flow, balance sheet, capital management and investment priorities. While cash flow can be a secondary consideration in a low interest rate environment (particularly for high growth stocks), it is certain to be front and centre as investors favour cash generative companies over those whose outlooks are dependent upon seeking new funding through equity or debt issuance in the near-term.
Dividend paying companies able to return capital while maintaining strong balance sheets with manageable leverage will stand out in this environment.
Consumer confidence and demand
For companies with consumer exposure, investors will want to understand the impact of inflation, interest rate rises and slowing economic activity on consumer demand.
Which companies can adjust their operating models to optimise profitability while still growing market share? Those with dominant market positioning, high recurring revenues, non-discretionary products and diversified customer bases should outperform, while those simply peddling the same old narrative may find themselves wanting.
Investors will also look to history to predict future performance and defer to the experience of strong management teams for insights into customer behaviour and key lead indicators.
Outlook – to guide or not to guide?
With the outlook for FY23 and beyond likely to grab the lion’s share of attention, it’s important to provide the building blocks that form the current view of trading and financial performance through the year, balancing optimism with uncertainty.
How much visibility companies have over the next 6-12 months of trading should underpin confidence in providing guidance, whether directional or quantitative. The market will remember what management teams say during this period, rewarding those who deliver on their promises and punishing those who don’t.
Companies should obviously try to avoid over-promising and under-delivering, however hiding behind the veil of uncertainty and failing to say anything definitive won’t engender much confidence.
Three key principles for effective communication this reporting season
- Understand the key issues and concerns for investors about your company and sector
- Be clear, transparent and concise so investors can digest your materials quickly
- Guide if you can, or at least provide the building blocks and key assumptions and report on them consistently as you go
For more information or to discuss the full suite of investor relations and financial communication services provided by Citadel-MAGNUS, contact Ryan Thompson at rthompson@citadelmagnus.com
