Market moves & insights from the domestic reporting season
10 March 2025
Market moves in February were dominated by corporate profit results, with extreme share price reactions based on much smaller earnings beats or misses. This resulted in an unusually large degree of dispersion with the standard deviation of share price movements of the S&P/ASX300 exceeding 10% during the month. Here we share some insights from the recent earnings season and the key themes being closely watched.
This information has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Concentrated Australian Equities Fund and Warakirri Ethical Australian Equities Fund.
Earnings season in review
The S&P/ASX300 fell 4% in February on a total return basis, erasing virtually all the gains from January. Market moves were dominated by corporate profit results, with extreme share price reactions based on much smaller earnings beats or misses. This resulted in an unusually large degree of dispersion with the standard deviation of share price movements of the S&P/ASX300 exceeding 10% during the month.
A key theme from the domestic reporting season has been renewed strategic focus by companies on their core operations. For example:
- Telstra (owned, +5%) is slimming down and exiting adjacent businesses to become simpler and more efficiently run;
- Ramsay Healthcare (not owned, +2%) announced a renewed focus on its core Australian operations and are looking for buyers for its underperforming French hospitals;
- ASX (owned, +6%) is cutting costs and focusing on process simplification, workforce optimisation and procurement.
On the other hand, the market has punished companies that have made unsuccessful acquisitions outside their core competencies. For example, Viva Energy (not owned, -34%) fell 25% in one day after reporting weak results from its fuel and convenience retailer acquisition.
A number of our portfolio companies have announced share buybacks due to strong balance sheets and the belief that their shares are undervalued, including Ventia (owned, +10%), Worley (owned, +5%), and Telstra.
The market reacted positively to these announcements and sent their share prices higher as a result. Qantas (owned, +1%) declared its first dividend in 6 years (i.e. since before COVID), as well as a surprise special dividend, taking total shareholder returns to $400 million for the half year. The near- term outlook for Qantas is positive in our view, with corporate domestic travel returning and strong leisure demand.
We anticipate double-digit medium-term revenue growth, driven by a recovery in passenger numbers, which remain below pre-COVID levels but are steadily improving.
Corporates refocus on costs and productivity
In general, we have observed anaemic revenue growth for most domestic businesses (e.g. Bunnings sales growth +3%, Kmart sales growth +2% for the half year). This has led corporates to refocus on tightening their cost base to drive profit growth (for example, Transurban (owned, –2%), Woolworths, IDP Education (owned, -25%).
Apart from cost-out, companies have also been driving productivity using technology and AI (for example, Wesfarmers (owned, -3%), Telstra, the big 4 banks). Productivity savings have mostly been reinvested but in some cases, margin improvements are structural.
For instance, Brambles (owned, +6%) reported strong operating leverage and free cash flow attributed to better asset efficiency from its pallet pooling initiatives (including serialised tracking, automated pallet repairs), which has led to a 40%+ rise in its share price over the last year.
Lastly, those companies with strong pricing power (e.g. ASX, Transurban, REA Group (owned, -5%) are retaining these gains due to their dominant market positions. We are well positioned as our portfolio includes a range of these high-quality companies.
Companies that have experienced significant declines in our market are typically not on our approved investment list as they do not meet our quality threshold (e.g. Viva Energy, Johns Lyng Group, Block, Mineral Resources – all down over 30% over the month).
A watchful eye on corporate governance
Poor corporate governance is another key reason for exclusion, as seen with Wisetech (not owned, -28%). Wisetech’s Chairman and three independent directors have resigned due to “intractable differences” over CEO Richard White’s role, who reinstated himself as CEO and Executive Chairman after failing to reach agreement on a contract to move to a consulting role. With the remaining board members being non-independent, Wisetech currently does not meet the ASX’s listing requirements for Audit and Risk Committee independence.
We will avoid investing in those companies that do not provide adequate protections for minority shareholders, regardless of how attractive their share price declines may appear.
The rise of private capital markets
The Australian Securities and Investments Commission (ASIC) is calling for greater transparency in private markets. It released a report on the future regulation of private markets, highlighting several key risks, including opacity, conflicts, valuation uncertainty, illiquidity, and leverage. Over the past decade, private capital markets in Australia have grown significantly, tripling to $150 billion in assets, while the number of publicly listed companies on the ASX has decreased by 4%.
Private capital now represents one-fifth of the assets managed by the country’s largest superfunds, including AustralianSuper and Australian Retirement Trust. Given these risks, ASIC is now taking a more cautious approach towards this segment of the market.
Looking ahead
Global economic uncertainty, including tariffs, persistent inflation and geopolitical tensions, has led to a more subdued outlook for both domestic and global markets compared to last year. On top of this, equity valuations appear stretched, leaving little room for disappointment. The market anticipates two more rate cuts in Australia this year following the RBA delivering its first rate cut in over four years.
Inflation is gradually returning to the RBA’s target range, providing some scope for further easing of monetary policy, although caution is expected in the near term.
We have observed significant divergence in valuations across sectors and stocks, at least in part due to the dominance of thematic and momentum strategies.
Last year, Goodman Group (not owned, -14%) was strongly rerated on the AI/data centre theme and domestic banks benefited from a recovery in US/European bank profitability. However, Goodman Group’s unexpected $4 billion capital raise this month has raised concerns about its higher capital intensity and potential valuation adjustments.
The big four domestic banks have all experienced varying degrees of sell-off this month, particularly NAB (owned, –12%), which is the preferred bank holding among domestic fund managers. Pro Medicus dropped 9% over the month despite delivering a strong result, highlighting that momentum works both ways. Conversely, some stocks/sectors that were largely ignored last year, such as CSL (owned, -7%) and Transurban (owned), may start to gain traction due to improving underlying fundamentals. We have been active in taking advantage of perceived valuation divergences which we believe will pay off over time.
Another noticeable trend in our market has been the impact of investors positioning for index changes. With passive flows increasingly dominating the market, momentum-related flows in selected stocks have emerged, which both traditional players and quant funds are trying to front-run. For example, the recent backdoor listing of Chemist Warehouse transformed Sigma Healthcare (not owned, +2%) into a must-own company over the last six months. However, the popularity of this trade may be its undoing as the balance between arbitrageurs and passive buying requirements is highly fluid and unpredictable.
Conclusion
We remain of the view that focusing on quality and defensive companies with durable competitive advantages that are likely to generate steady long-term returns will remain a source of alpha over the medium-term, rather than pursuing short-term market trends that are difficult to predict.
For more information, please contact us on 1300 927 254 or visit Our Funds.
The information in this document is published by Warakirri Asset Management Limited ABN 33 057 529 370 (Warakirri) AFSL 246782 and issued by Northcape Capital ABN 53 106 390 247 AFSL 281767 (Northcape) representing the Northcape’s view on a number of economic and market topics as at the date of this report. Any economic and market forecasts presented herein is for informational purposes as at the date of this report. There can be no assurance the forecast can be achieved. Furthermore, the information in this publication should only be used as general information and should not be taken as personal financial, economic, legal, accounting, or tax advice or recommendation as it does not take into account an individual’s objectives, personal financial situation or needs. You should form your own opinion on the information, and whether the information is suitable for your (or your clients) individual needs and aims as an investor. While the information in this publication has been prepared with all reasonable care, Warakirri and Northcape do not accept any responsibility or liability for any errors, omissions or misstatements however caused.
