The ASX reporting season saw many companies with robust balance sheets, regardless of size. But what they are choosing to do with their excess funds differs considerably. Our Australian Fundamental Equities team explores this and other themes.

The Australian Fundamental Equities team highlight below four key themes to come out of the most recent ASX Reporting Season.

Strength in numbers

Many companies have enjoyed a strong reporting season. As Senior Portfolio Manager Madeleine Beaumont says, “Balance sheets have really been shored up, not necessarily through capital raisings, but also through cutting costs.”

What’s particularly interesting, however, is how boards and management teams are employing these excess funds. Among the larger companies, there has been a tendency to return the money to shareholders through buybacks or dividends. For Portfolio Manager Nick Corkill, that’s a positive. As he notes: “A lot of that will be reinvested into the market, providing a level of support for it.”

However, the fund is more interested in management teams that are reinvesting surplus funds into their companies – either into R&D or through suitable acquisitions. As Corkill says, it is these teams that are “ensuring these companies are future-proofed and growing”.

In fact, there has been a wave of mergers and acquisitions, and Head of Fundamental Active Equities Charlie Lanchester believes this will continue over the next 12 months due to low interest rates and costs.

He is less convinced, though, that one of the fund’s holdings will be acquired. “Because of their strong management teams, they are the ones that are making the acquisitions and potentially strengthening their positions in a particular sector.”

The spectre of inflation

Inflationary pressures have also been a theme this reporting season. But while the fund’s team talked to a lot of companies that were mindful of this, the fact is, margins have remained solid for all 11 sectors. The consensus is this will continue for nine out of the 11 sectors – with only healthcare flat and utilities going down.

The reason? “Obviously there’s a lot of demand; consumer balance sheets are strong and companies have quite good pricing power at the moment,” Corkill says.

However, risks remain. “What happens if we end up with weaker demand, high inventory levels and these sticky, persistent input costs?” Corkill says. “That could cause some margin pressure down the track.”

The rise and rise of E-commerce

E-commerce was another theme to re-emerge, having enjoyed incredibly strong growth last year.

As Lanchester points out, many companies were effectively running on the smell of an oily rag. “While they made fantastic profits last year, the operating expenses had to catch up this year. You saw that in some of the results in August.”

However, the fund hasn’t changed its long-term view of the sector. “We think that these companies have many years of structural growth ahead of them,” Lanchester says.

Share price plays

One barometer of how well a company is doing can be short interest levels. Traditionally, high levels indicate negative sentiment towards a company. However, it is these companies that saw their share price outperform the market this reporting season due to influential shorts covering, says Lead Portfolio Manager Sam Theodore.

“Short covering was a big issue this reporting season. Quite high short-interest stocks, on average, had a more than six per cent positive Day 1 move versus the market. Since then, that’s increased to 12 per cent outperformance, which is obviously very large.”

To find out more about how Australian companies have performed, the replay of our – CPD accredited – ASX Reporting Season webcast is now available on demand.

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What the market will often miss is the compounding effect of really good management teams.

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Charlie Lanchester, Head of Fundamental Equities
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