The beginning of February marks the start of 1st half reporting for the large majority of ASX listed companies.
Given concerns at the end of last year involving trade wars, Brexit and overall slowing global growth, expectations coming into reporting season are notably low. Add to the mix a slowing housing market here in Australia along with a Banking Royal Commission has resulted in a lot of uncertainty amongst parts of the Australian market. A slowing housing market not only means slowing demand for building material but also consumer-based companies. It has been interesting to see the first half results of both Commonwealth Bank (CBA) last week and the first of the retailers this week, being JB Hi-Fi Limited (JBH).
CBA reported first half cash earnings of $4,768m, being 3 per cent below expectations, with the miss being largely the result of weaker funds management and general insurance income. Interestingly the core banking business performed in line with our expectations. An interim dividend of $2 per share fully franked was declared, being unchanged from the previous corresponding period. CBA’s Tier 1 capital ratio was 10.8 per cent at the end of December and is expected to increase to circa 12 per cent once the divestment of assets has been completed. Given APRA’s requirement for a capital ratio of 10.5 per cent, we believe there is a chance that CBA may decide to return some excess capital to shareholders of up to $2.70 to $3.50 per share.
Based on the recommendations in the Royal Commission Final Report not being anything more than had previously been announced, we expect the flow of credit to improve in coming months. Industry liaison suggests to us that system home lending activity has already improved this calendar year compared with the December 2018 quarter because of APRA removing limits on investor loan growth and interest-only loans. JBH’s first half result was in line with our expectation, reporting sales growth of 4.2 per cent and net profit after tax growth of 5.5 per cent. Like for like sales growth in the second quarter was stronger than expected across all businesses. Given the challenging retail environment at present this was a solid result, and possibly highlights that things are not quite as bad as the market had been expecting, given the heavy sell off across the sector.
Stock markets are forever challenging as they tend to swing between extreme levels of optimism and pessimism, rarely sitting anywhere in between. And at present during the early stages of first half reporting season it seems that the market has been over pessimism about first half results. Obviously, you must be brave when pessimism is in the air, however you will never buy a business cheaply when others are being optimistic. No doubt the balance of reporting will be interesting to see if this trend continues, as it does present opportunities to top up your portfolios.
