A turbulent macro-economic backdrop and looming election have put an even bigger spotlight on this reporting season, with uncertainty around earnings outlook, growing cost pressures and an accelerating timetable for interest rate hikes.
While companies continue to grapple with the impact of COVID on their supply chains and workforce, they also need to contend with signals that the RBA will start lifting interest rates in 2022. No wonder the brokers are adding an extra dash of caution just as IR teams frantically pen their disclosures.
“It’s going to be a very messy reporting season, probably the messiest we’ve seen in a really long time,” Karen Jorritsma, Head of Australian Equities at RBC Capital Markets
Macquarie is forecasting earnings growth of just over 13% in FY22, half the rate of growth in FY21 at 26%. Their analysts expect the slowing cycle and market volatility will mean any surprise results could lead to knee-jerk market reactions. There are already numerous companies that have suffered disproportionate share price reactions from coming clean on the impact of business disruptions.
Morgan Stanley, meanwhile, thinks the market may have underestimated the financial impact of Omicron given persistent cost pressures, and the fact supply chain frictions and a tight labour market having been emerging issues long before it came into the frame. The broker said expectations for disruption to trading and risk to earnings have increased, while earnings downgrades driven by margin resets are likely to result in deeper and more sustained share price reactions.
So, what does this all mean for companies as they navigate this reporting season?
While investors will be looking for a pulse check on historic performance, their antennae will be primed for second half signals and the ability for companies to navigate the environment longer-term. The clear winners will be those that can demonstrate how they are adjusting their business models to cope and even thrive. Here are three disclosure considerations:
- Managing COVID: With the impacts of the pandemic expected to continue, in addition to articulating how they are proactively managing supply chain and workforce constraints, companies should be transparent about the impact they are having on both performance and outlook.
- Focus on valuation: The market is alert to the valuation impact of rising interest rates. Companies should be clear about how inflation will impact their sector and shift the cost base. In that context they should set out their key differentiators and investment priorities to drive longer-term returns.
- Guidance: While uncertainties remain, sticking one’s neck out can be perceived negatively. It’s often better for companies to talk about their experience to date and the factors likely to impact the second half than to give a wide range peppered with caveats.
There is no ‘one size fits all’ approach, and companies naturally need to consider their unique circumstances and experiences. But transparency and openness can only help the market understand their results and develop an appreciation of how they are building long-term value.
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