Earnings misses punished in mixed start to profit season

“Appen also pointed to a weaker global macro environment and a slowing in digital advertising spend as driving the downgrade, but this isn’t something we’ve really seen reflected yet in the results from other companies.

“Most small tech firms we see are attempting to reach positive cash flows, but it’s rare we see a profitable company like Appen slip into negative cash flow territory.”

United Malt also issued a profit downgrade triggered by higher barley prices and soaring costs, causing a 17 percent share price slide.

Meanwhile, shares in Afterpay-owner Block fell 6 percent on Friday despite reporting 29 percent growth in gross profits year-on-year. DNR Capital analyst Chris Tynan described the result as “solid” but said gross profit growth wasn’t as high as the market hoped, with some disappointment in the buy now, pay later segment.

He added that shares had bounced “pretty aggressively” heading into the result, up almost 18 percent this past week amid a rotation into growth and duration stocks.

With investors hunting for clues about how companies will cope with shifting economic conditions, Centuria Office REIT fell 8.4 percent after flagging significantly lower funds from operations and distributions in the coming year as debt costs eat into earnings.

UBS warned this sets the scene for conservative guidance across the property sector “particularly relating to debt costs where groups have low levels of financial year 2023 hedging.”

Elsewhere, debt collector Credit Corp joined the season’s victims, warning of lukewarm profits, partly as Australians shunned credit card debt. Investors were spooked, sending shares down 5.3 percent on Tuesday.

Rate debates

The first week of the reporting season was dominated by a third consecutive half of a percentage point cash rate increase from the Reserve Bank to 1.85 per cent. The central bank now expects headline inflation to peak at 7.75 percent this year.

Commonwealth Bank was the first major bank to respond, raising its variable mortgage interest rates. ANZ, Westpac and National Australia Bank followed.

Speaking at an earnings season preview on Thursday, Barrenjoey chief interest rate strategist Andrew Lilley said the season kicks off alongside a debate in the bond market between one side looking to the 1970s to get an idea of ​​central banks’ end game, while others point to hints of slowing growth among the G10 as rate rises.

He believes rates need to go higher than market expectations to bring runaway inflation under control as wage inflation exceeds 5 percent in advanced economies.

Whether companies can pass through rising input costs and maintain profit margins is a key theme that UBS equity strategist Richard Schellbach expects will dominate the season. He is watching for evidence of softer demand as consumers face cost-of-living pressures and falling house prices.

There were some wins for the “not as bad as expected” club. A profit beat from Pinnacle saw shares climb 12 per cent, despite reporting a fall in funds under management (FUM) for the first time in a decade.

Markets were concerned about a reversal in fortunes for star growth manager Hyperion, sending the share price down 37 percent this year. However, its net profit rose 14 percent to $76.4 million ahead of analysts’ consensus forecasts, together with FUM holding up better than expected.

Although it’s early days, Perennial Partners’ Emilie O’Neill says early indications show the market is “rewarding those that have reported an in-line or better than feared result.”

“Companies that have avoided a disaster have seen some share price support, which makes sense, particularly given the depressed valuations that appear to be pricing in a doomsday scenario,” she said.

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