The S&P/ASX 200 (ASX: XJO) is expected to rise when the market opens on Monday according to the latest SPI futures. Here’s what investors need to know as we head into a big week for ASX reporting season.
ASX 200 finishes the week in the red, lockdown 3.0
The ASX 200 finished 0.6% lower on Friday, dragging the market to a 0.5% fall for the week. The news of the day was the snap five-day lockdown in Victoria, which naturally sent the industrials sector to significant losses. The Qantas Airways Limited (ASX: QAN) share price fell 4.8% and Webjet Limited (ASX: WEB) 3.9%.
Over the week it was the telecommunications sector that delivered, adding 2.2% with Telstra Corporation Ltd (ASX: TLS) surprising the market by retaining its dividend and Vocus Group Ltd (ASX: VOC) receiving a takeover offer.
Baby Bunting Group Ltd (ASX: BBN) was the report of note on Friday, announcing a 54.7% increase in profit to $7.5 million on the back of a 16.6% jump in sales in the half. Management reiterated that it had not received any JobKeeper or rental assistance throughout the pandemic – the company simply seems to be benefitting from the associated ‘baby boom’. For the six weeks of 2021, sales are up a further 18.5% and the profit margin continues to improve on the back of a 95.9% increase in online sales. The dividend was increased by 41% but shares finished 6.6% lower.
US markets stronger, Walt Disney delivers shock profits
All three US indices finished at record highs on Friday, the Nasdaq and S&P 500 up 0.5% for the session, finishing 1.7% and 1.2% higher, respectively, for the week.
The positive momentum came from the approval of another round of US$1,400 stimulus cheques and half of President Biden’s plan, as well as confirmation that some 26 million vaccine doses had already been administered.
With discussion once again focusing on the valuation of US markets, the current reporting season has been considerably stronger than expected, with profit moving ahead of prior-year levels, meaning corporate earnings may actually be catching up to their ‘inflated’ prices.
Walt Disney Co (NYSE: DIS) was the major report on Friday, falling 1.7%, despite announcing an unexpected US$29 million profit. The quarterly report once again proved that ‘content is king’ with management announcing Disney+ now had 95 million subscribers and the group had obtained 146 million subscribers in total across its various platforms. The owner of brands ranging from Marvel to Star Wars and Pixar reported 100% growth in users, which triggered a 73% increase in ‘Direct to Consumer’ revenue to US$3.5 billion.
This wasn’t enough to offset weakness in Disney’s parks and cruise division, falling 53% to US$3.58 billion and sending group revenue down 22%. Despite the weakness, the company has proven to be one of the most successful at ‘pivoting’ during this time of crisis, setting up its business for decades to come and rewarding shareholders in the process.
My three key takeaways from the week
Cost-cutting takes precedent
My first takeaway this week isn’t a positive one for income-starved investors, being that cost-cutting has clearly taken precedent over dividends on the ASX. Half-yearly reports this week were littered with comments about delivering ‘efficiencies’ and ‘transformation’ programs, but were all clearly focused on one thing: maximising profits through lower costs.
Dividends outside of Telstra and Commonwealth Bank of Australia (ASX: CBA) have disappointed, with the likes of Boral Limited (ASX: BLD), Challenger Ltd (ASX: CGF) and AMP Ltd (ASX: AMP) making no payout at all. This shouldn’t always be viewed as a negative though, as it means companies are reinvesting in themselves after years of failing to do so.
Board responsibility in the spotlight
The debacle that has been Crown Resorts Ltd’s (ASX: CWN) Barangaroo casino license application in Sydney has redirected attention to the role of boards in large listed companies. With the inquiry suggesting poor processes, weak governance and a general lack of oversight may have contributed to money laundering and other concerns, the board and CEO has naturally been in focus.
With ASX board members often holding positions at multiple companies, it seems difficult to impact much long-term change, but it must begin at the top and more responsibility needs to be taken.
Be willing to reassess
Finally, the recent retraction of AMP and Link Administration Holdings Ltd’s (ASX: LNK) unexpected takeovers provides an insight into the need to reset expectations when circumstances change.
At Wattle Partners, we had held both on the view they were undervalued but advised clients to sell after learning of the takeover offers on the basis that they reflected today’s fair value – both have fallen significantly since.