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The August 2024 reporting season was notable for several themes, some more predictable than others.

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One theme has been the impact of cost-of-living pressures on those companies exposed from a profit and loss perspective.

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For example, JB HiFi experienced lower profit and margins, Aurizon saw a decline in container volumes and Coles pointed to customers buying more in bulk. Woolworths, Flight Centre and Endeavour experienced similar pressures. In contrast, Wesfarmers’ Kmart did well by selling product with a price that resonated with customers in the tougher economic conditions.

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A dominant theme this reporting season has been the importance of balance sheet strength, strong cash flow or a visible pathway to lower debt and a bolstered balance sheet. This has been the case irrespective of possible negatives such as softer dividends and margin pressure. Portfolio management by companies and strong cost management have often been complimentary to this theme.

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A concurrent factor which also appears to be determining the degree of positive share price surprise has been the extent to which the company in question has been undervalued by the market.

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For example, AMP rallied 10% upon release of its results. Even though the dividend was lower, the stock was significantly undervalued. The company made strong progress on costs and debt reduction. Further, it entered into a partial sale of the advice business.

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Similarly, TPG Telecom improved operating cashflow by $247m and free cash flow by $340m. This was particularly important as debt levels had begun to appear elevated, placing in jeopardy the regular dividend payments. With debt levels stabilised and a good outlook for cashflow, growth, cost management and the possible sale of fibre assets to Vocus, TPG Telecom rallied 8%.

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These share price gains are to be contrasted with ARN Media. Here the share price was down 8% upon release of the company’s results. Cashflow was impacted by so called ‘one-offs’ pushing the dividend below expectations. The decision to invest $15m in a risky HK outdoor advertising contract instead of a buy-back (at share price lows) appeared a poor capital management decision when cash was scarce.

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Australia is still seen to have an inflation problem which is causing interest rates to stay higher for longer. This is impacting the consumer so it is expected that cost-of-living pressures mentioned above should continue to be prevalent into the next reporting season. Tax cuts should assist in countering some of these headwinds.

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Over the coming six months, high funding costs will accentuate the outcomes already seen above in the cases of AMP, TPG Telecom and ARN Media. Elevated funding costs curtail economic growth. As sales become harder to come by, undervalued companies that make progress on debt reduction and portfolio management will be rewarded by the market.