ASX earning season analysis: Datt Capital on standouts that catch the eye
Emanuel Datt
The current earning season points to a rocky road ahead for the Australian economy, according to Datt Capital, an Australian equities investment manager.
Datt Capital chief investment officer Emanuel Datt says: “Whether Australia experiences a recession or not, the message we take from the current reporting season is one of unevenness in opportunities and obstacles to performance going forward.
“Labour shortages, inflation and an increasing cost of capital are three of the most visible take aways from the current crop of company postings.
“Capital intensive industries such as mining have an advantage in terms of being able to support higher salaries and accordingly appear to be attracting staff from other sectors, albeit at a higher cost than usual.
“Labour intensive industries such as logistics, construction and contracting, continue to struggle with high labour costs and lower than typical productivity. This is leading to high levels of financial distress amongst industry participants.
“Service industries and SMEs with more flexible working conditions continue to muddle through. Though with international student numbers and immigration rising, it is providing relief to these sectors after a problematic three years.
“Labour price inflation continues to be a huge issue across sectors. In many cases the escalation has been in the double digits, especially in traditional blue-collar roles. Productivity overhang is another issue. It is a symptom of higher employee turnover due to the time lag involved in shifting roles.
“Inflation in materials, particularly rises in raw material costs driven by increased labour and shipping costs along with lower productivity, was also a common reporting theme.
“On the capital front, significantly increased interest rates, along with further projected rises, are likely to continue to adversely affect the cost of business funding. Limited ability to pass on costs due to shrinking discretionary spending power is a further squeeze from another direction for many businesses particularly in the consumer sector.”
For example in retail, both Temple and Webster (ASX:TBN) and Baby Bunting (ASX:BBN) had exposure to escalating costs without the ability to pass these onto customers.
Both missed guidance, says Datt.
On the other side of the ledger QBE Insurance (ASX:QBE) and Woolworths (ASX:WOW), in insurance and non-discretionary respectively, demonstrated the ability to pass on costs, preserving margins.
Both exceeded earnings guidance, he notes.
He adds: “The market outlook is one we believe favours the Datt Capital approach to investing. We are industry and market cap agnostic and simply seeking the best opportunities utilising our proprietary research resources and an investment process based on creativity and independent thought.
“In our view the domestic investment scenario is less likely than ever to favour a passive approach in the near to medium term,” Datt notes.
