Reporting season wrap: not outstanding…not disappointing…

19 September 2017

Ebony Bamford, Product Specialist, Australian Equities, Macquarie Investment Management

In this Research Insight we highlight the winners and losers from the August 2017 reporting season, take a closer look at two of the biggest movers within the Macquarie High Conviction Fund, and share insights into the key trends emerging in the Australian share market.

The winners and losers

The August reporting season saw the ASX200 Accumulation Index rise only 0.71% for the month. The first two weeks of reporting season looked dire, with underwhelming outlook statements resulting in lacklustre performance. However, the market pulled back in the final two weeks to finish marginally up at month end.

Overall reporting season was neutral… not outstanding, not disappointing. There were a number of big winners and losers throughout the month with 30% of ASX200 companies beating market earnings expectations by 5% or more whilst 28% of companies missed market expectations by the same amount. This resulted in some sharp share price moves for earnings results that differed to market expectations as highlighted by chart 1 below.

Earnings and share price changes during August 2017

Macquarie High Conviction Fund’s biggest movers

It was a volatile reporting season and a challenging one for bottom up stock pickers. Below we discuss two of the biggest movers in the Macquarie High Conviction Fund in further detail.

Reliance Worldwide (RWC, +9%)

RWC designs, manufactures and supplies a range of water flow and control products for the plumbing industry in the USA, Australia, Canada and parts of Europe. Reliance products are largely used in “Behind The Wall” plumbing applications with Push to Connect (PTC) fitting the key product. 

They came out with a very clean set of results that featured faster than expected roll out of product to US hardware giant Lowes. FY18 guidance was above the market and the outlook for RWC is very bright with multiple growth options and a Tier 1 management team.

At the end of the month, a key shareholder sold down almost 20% of the company and we used that opportunity to increase our position. RWC is currently the largest overweight in the Macquarie High Conviction Fund.1

We have strong conviction in the business, which we believe is one of Australia’s best growth stories.

BlueScope Steel (BSL, -18%)

BlueScope is a global leader in premium branded coated and painted steel products and the third largest manufacturer of painted and coated steel products globally. They have a strong value proposition currently offered across the Pacific Rim from Asia, Australia, New Zealand and to the west coast of North America.

BSL fell sharply during the month resulting from two factors;

  1. Earnings downgrade

    This was a difficult one to pick. The result itself was strong but we, and the market failed to see some material procurement benefits that appeared in FY17. Therefore, when 1H18 guidance was delivered, the benefit unwound. This event does not change the trajectory of the business, but instead just shifts it down.

  2. Chief Executive Officer (CEO) departure

    Paul O’Malley re-shaped BSL and has done a lot for the company. While it is always disappointing to lose a great CEO, as investors we are realistic that sometimes people need a change. We are excited to learn more about the strategy of new CEO Mark Vassella (ex-head of ANZ Steel).

Despite BSL’s disappointing reporting season, we continue to have conviction in the business. In fact, we have since increased our position in BSL.

Key themes emerging from reporting season

Reporting season is a great time to gain an insight into different company’s outlooks for the year ahead. Below we highlight the three big key themes emerging from August reporting season:

  1. The return of capital expenditure (CAPEX)
  2. Electricity costs are pinching
  3. Australian companies need to reinvest

The return of CAPEX

Since the Global Financial Crisis (GFC), increasingly Australian companies have been focused on efficiency, costs and returning capital to shareholders. However, this reporting season saw a shift in company attitudes back towards investing for future growth with a 5.8% (ex-financials)2 increase in CAPEX expectations for the year ahead.

For example, both AGL Energy (AGL) and AMP Limited stopped buybacks to focus on capital-intensive growth opportunities. Despite minimal changes to earnings both company’s share prices fell following the announcement.

Electricity costs are pinching

Rising gas and electricity costs are causing major headaches for Australian companies. The list of companies that referenced higher power prices in the results briefings was too long to count! Most heavily impacted were the energy retailers and manufacturers. 

Both AGL and Origin Energy have been facing increased government scrutiny over power prices as political pressure mounts to find a solution. Meanwhile, many companies are deliberating the impact of power prices causing inflation through the supply chain. This is clearly a key concern for many companies and something we are watching closely.

Australian companies need to reinvest

Many companies, especially those facing threats from global giants highlighted the need to re-invest. Seek, Domain and were a few examples that plan to reinvest, meaning lower earnings in the near term.

JB Hi-Fi and Super Retail highlighted their plans to address the global giant Amazon coming to Australia. JB Hi-Fi communicated its plan to reinvest any synergies benefits into better online logistics. Super Retail announced the restructuring of their sports division to maximise profits. Reinvestment of these profits will help combat the Amazon threat.


Overall, it was a volatile reporting season where we saw some big winners and losers emerging during the month. In the Macquarie High Conviction Fund, Reliance Worldwide was one of the top performing positions whilst BlueScope Steel the biggest loser during the month.

We continue to see material bottom-up opportunities in the Australian share market for high conviction investors that know where to look.