Calls on costs surprise investors

INVESTORS and analysts tracking Western Australia’s listed companies over the past 12 months had likely pencilled in cost pressures as a headlining theme for the 2023 reporting season.

But just how much of a theme it would become, as the companies rolled out earnings results in August following an inflation-riddled financial year, came as a surprise to many.

Described by investment bank UBS as “the most prevalent headache” of Australia’s earnings season, cost-management-related issues were present across WA’s biggest companies.

Developers and miners building projects in the state in the past 18 months bore the brunt of this, materialising through consistently revised project budgets as labour costs and inflationary pressures took hold.

Goldman Sachs noted increases in capital expenditure budgets as a “consistent feature”.

The global investment bank said consensus forecasts for cumulative capex spending had increased by $11 billion over the 2024 and 2025 financial years.

Most of this was coming from resources companies, Goldman Sachs said.

“Very little of this increased capex is seemingly coming from new growth projects, it more reflects the impacts of significant cost overruns where an increasing number of projects are now forecast to cost significantly more than originally budgeted for,” it said.

With mined volumes and financial performance reported regularly throughout the fiscal year, Barrenjoey head of resources research Glyn Lawcock said capex for the coming year was typically the big-ticket item markets would be waiting for.

“A number of companies surprised us with increases in their capex,” Mr Lawcock told Business News.

“I think if you reflect back, we probably shouldn’t have been as surprised as perhaps we were.

“Generally speaking, it’s been a consistent theme for a while now but I think we were still quite a bit caught off guard by the magnitude of the cost inflation.”

He suggested this could go some way to explaining why share prices reacted erratically as results were released to the market.

“The fact that you got such large reactions to announcements on the day tells you it wasn’t quite expected,” Mr Lawcock said.

Goldman Sachs pointed out the share-price reactions during the period were “abnormally large”, with one out of every eight stocks moving more than 10 per cent to the up or downside after releasing results.

The investment bank’s FY23 earnings seasons recap observed that the reactions were despite results being largely in line with expectations and that earnings revisions had been no larger than normal.

UBS said the reporting season had been the ASX 200’s weakest since February 2020. Photo: Attila Csaszar

Investment bank UBS noted an “unusual number of outsized share price moves” but suggested that may have been reflecting crowded positioning among investors and an unpredictable economic cycle.

One example, Mr Lawcock said, was the share market’s positive response to Mineral Resources’ 2023 results, which had been unexpected following a few tough quarters for the company and a big spike in planned spending revealed on the day.

Chris Ellison’s multi-commmodity miner outlined capital expenditure guidance in the order of $2.7 billion for FY24, which sets aside a large potion for its new Onslow Iron operation, compared with a $1.8 billion spend in FY23.

Despite this, shares in MinRes rose nearly 8 per cent overnight on the back of its results.

Perhaps one of the most dramatic days during the reporting period was Monday, August 28, which kicked off with a bang when Fortescue Metals Group dropped the bombshell that chief executive Fiona Hick would be leaving the company after just six months.

Her replacement, iron ore chief operating officer Dino Otranto, and Fortescue Energy boss Mark Hutchinson were left to field a volley of questions from analysts regarding the sudden change at the company’s executive level that morning.

It was later suggested by executive chairman Andrew Forrest the exit related to the group’s energy transition plans.

In keeping with several post-market analyses, the market reacted aggressively to Fortescue on the day of its results, with multiple factors at play.

As well as a significant write down on its Iron Bridge magnetite mine, Fortescue abandoned a previous capital framework policy stipulating the group would divert 10 per cent of profits from its iron ore business to energy pursuits.

“The expenditure they outlined was a bit more excessive than people thought but part of that is to decarbonise the existing iron ore business … that’s going to take time and money,” Mr Lawcock said.

“Fortescue is very different to a lot of other large, listed companies in that they move fast …they look to approve fast and move ahead faster than I guess what other companies will do.”

The full-year update from Fortescue’s bigger and older competitor, BHP, looked more to broader macro-economic concerns, chiefly how China’s appetite for iron ore was not immediately clear in the short to medium-term.

BHP copped weaker profits from a particularly solid previous corresponding year.

After being thrust into the spotlight following what’s arguably been the biggest year in the company’s history, investors were left seemingly dissatisfied with Pilbara Minerals on results day.

Net profits after tax leapt more than 300 per cent to $2.2 billion, crystallising another year of stellar growth for the lithium developer.

But it was, again, questions around planned spending and a large tax bill that cast a shadow over Pilbara’s otherwise strong financials.

Shares in the company plummeted about 8 per cent on the day and at time of writing are still yet to make up the ground lost since before its results came out.

At the time, analysts were of the mind that capital expenditure of a conservative $875 million across mining, growth and sustaining capital, had been higher than anticipated.

Industrials

Companies sitting outside the resources sphere enjoyed some strong performances despite the new operating and cost environment that took shape in the past 12 months.

Euroz Hartleys executive director and head of research Gavin Allen, whose remit is largely across mid-cap WA-based industrials, said numbers out of the sector had been good during the period but had not necessarily translated to strong share price performance.

“The numbers themselves, in absolute terms, were broadly in line,” he told Business News.

“In industrials the way [market] skittishness has played out is if there’s been any problem at all, [the] markets tended to react to it a little bit and then and then figure out what it meant later.”

He said a period clear of COVID, backed by solid demand fundamentals and an ability to keep a lid on costs had also started to see margins improve for companies in the sector.

“In a strong demand environment when they understand the cost, they can price it properly,” Mr Allen said.

“When you can price it properly, you generally make better margins.”

Reports out of the state’s largest contractors, such as NRW and Monadelphous, were largely underpinned by faith in the raft of work available in the resources sector in both old and new-world commodities.

Labour shortages were still seemingly present for Monadelphous, which said its capacity would remain constrained amid heightened demand.

Its global workforce was reduced significantly to 5,674 after axing the operations of Chile-based construction and maintenance division Buildtek.

Monadelphous delivered an increased profit of $53.5 million for the year.

At the top end of town, WA heavyweight Wesfarmers closed out the year having benefitted from the economy’s growing cohort of consumers that had become more value conscious amid a higher inflationary environment.

Typifying this observation was the performance of its star retailer Kmart Group, which recorded more than 50 per cent growth in earnings during the past 12 months to $769 million.

Kmart was closely followed by Wesfarmers Chemicals, Energy and Fertilisers in terms of earnings but Bunnings was still by far and away the group’s largest income stream, delivering $2.2 billion in earnings for FY23.

Another WA-based public company staking its claim in the world outside of resources has been employment services provider APM, led by chief executive Michael Anghie, which made its debut on the ASX in November 2021.

APM has pursued inorganic growth since then, acquiring three businesses.