Soaring inflation has delivered some big winners this company-reporting season.
Rising prices have seen margins improve for some consumer-facing businesses, such as Woolworths and Qantas, higher interest rates have boosted CBA's coffers, mother nature has helped insurers such as Suncorp, and energy producers such as Woodside have benefited from the war in Ukraine.
"Corporate Australia is still in a pretty good spot," noted UBS Australia equity strategist Richard Schellbach.
With the cost of just about everything going up, from milk to electricity to home loans, could it be argued that the biggest losers this profit-reporting season are consumers?
The tourism sector has been a big winner
Despite higher fuel prices, labour costs, and flight capacity not yet getting back to pre-pandemic levels, the tourism sector, led by Qantas, has seen its profits soar.
Qantas (ASX:QAN) reported a $1 billion profit, with revenue of almost $10 billion.
Perhaps most telling, though, is its operating margin, or the amount of money it made on every dollar consumers spent with the airline, which rose to 15.6 per cent.
That margin was a loss of 36.7 per cent in the previous corresponding half, which isn't a surprise because of the COVID travel restrictions.
But notably its operating margin in the December 2018 half, before COVID-19, was just 10 per cent.
Thus the latest result represents more than a 50 per cent improvement on the margins it had before the pandemic.
"Absolutely, there have been additional costs passed on to the consumer," Tribeca Alpha Plus portfolio manager Jun Bei Liu said.
"Before the profit update a few months ago, everyone thought Qantas was going to make $1 billion for a whole year — and they made it in six months."
She said a lack of competition and pent-up demand for 'revenge travel' was good for tourism businesses.
"For Qantas, it's just been an incredible operating environment where they just couldn't find enough empty seats to meet the demand, so the prices went through the roof," she said.
"We were all seeing the stories about it."
Ms Liu said the good news for consumers was those prices would come down.
"That clearly, in the next six months, is going to revert … ticket prices will fall," she said.
Qantas is not the only business in the tourism sector that has seen an increase in its profits.
As business travel increased, Corporate Travel Management (ASX:CTD) saw its profit swing from a loss in the first half of the previous financial year to a $15.7 million profit in the six months to December 2022.
Revenue was up 79 per cent to $291.9 million and the company's forward guidance predicted "significantly higher revenue/EBITDA margin in the second half".
HelloWorld Travel (ASX:HLO) also swung from a loss to a profit of $1.6 million as its revenue rose 150 per cent to $73.18 million.
Flight Centre (ASX:FLT) posted a loss of $20 million in the half.
But its revenue was up 217 per cent to $1 billion, with its revenue margin up to 10.1 per cent. That's higher than the 9.7 per cent it was six months ago.
We all still buy milk, bread and … Vegemite
Retail, especially groceries, is one sector where inflation is most noticed because people are buying things every week and most tend to have a rough idea of their typical expenses.
When handing down their results, supermarkets Coles and Woolworths denied they were profiteering from inflation, saying their higher numbers were because of a fall in COVID-related costs.
But many analysts were not expecting Coles Group (ASX:COL) to announce such a large increase to its net profit, which was up by 17.1 per cent to $643 million.
The increase in its sales was a much more modest lift of 4.1 per cent, and Coles' gross margin, which increased from 26.1 per cent to 26.5 per cent, revealed it made more money on every dollar customers spent in its stores than in the July to December period in 2021.
When questioned about increased margins at a Senate Committee hearing into the cost of living last week, Coles' government and industry relations manager, Vittoria Bon, said the supermarket had cut the prices of some of its products.
"That's why we've got the campaigns that we have, [such as] Dropped and Locked," she told the hearing.
"We've got 5,000 products at any point in time that represent value for our customers because they're on special … and we have a whole range of products that customers can buy that are less than $1, for example canned tuna, canned vegetables.
"We're very conscious of the cost of living pressures faced by our customers, and that's why we're responding with those sorts of value campaigns."
Mr Schellbach told The Business supermarkets and other retailers were increasing prices simply because they could.
"The consumer, who in Australia is still benefiting from a very strong job market, has the funds to wear these cost increases, so the companies are passing it on because they realise that their customers will ultimately pay for it," he said.
Woolworths Group (ASX:WOW), which includes businesses such as Big W, as well as the supermarket, posted a 14 per cent jump in profit to $907 million.
The margins on its Australian food business increased from 30.2 per cent to 30.7 per cent, showing it also improved the return it made from every dollar customers spent.
Betashares chief economist David Bassanese said demand for groceries remained high.
"We need to eat, and that doesn't change all that much, and so we're not that price sensitive," Mr Bassanese said.
"We hate paying more for Vegemite and peanut butter, but ultimately we're still going to buy it even at higher prices.
"So what we've seen is businesses in those cases have been able to pass on the cost increase to prices, and sales in the main have been maintained."
When releasing Woolworths' first-half results, chief executive Brad Banducci said he was concerned about both the dairy and baby products sectors, pointing to more price rises to come.
Bega Cheese (ASX:BGA) said it had passed on price increases worth $260 million on more than 1,000 product lines, but its profits were still down 74 per cent as it initially absorbed a big jump in farmgate milk prices.
The full extent of raw milk increases, which Bega boss Pete Findlay says is 30 per cent in a two-month period, is yet to fully make its way through to consumers, so retail prices for milk, yoghurt and cheese may not have peaked yet.
Milk and baby formula maker A2 Milk (ASX:A2M) saw its profits jump 22.1 per cent to $NZ68.5 million ($63.4 million) in the reporting period.
Its gross margins rose to $NZ371.9 million, reflecting a 1.3 percentage point increase to 47.6 per cent.
But the New Zealand company, which is listed on the Australian stock exchange and sells its products here, also sells its products in China, so its results do not just reflect conditions in Australia.
What about other retailers?
"I think the likes of Super Retail Group, JB Hi-Fi and Nick Scali, all of which are very well-run businesses, have seen not only revenue growth, but profit growth as well," Robert Miller, portfolio manager at NAOS Asset Management, said.
"Not necessarily just [due] to raising prices, but also just because of the way they manage their costs within their own businesses, they've been able to generate reasonably strong margin improvements despite the environment."
JB Hi-Fi (ASX:JBH) saw its margins improve from 21.89 per cent in the previous corresponding half to 22.77 per cent, meaning it was making more profit from each dollar in sales.
Though its cost of doing business also rose 53 basis points to 11.54 per cent, an 8.6 per cent increase in sales to $5.28 billion delivered the company an almost 15 per cent profit increase to $330 million.
Super Retail Group (ASX:SUL) whose businesses include BCF, Rebel and Supercheap Auto, saw its margins fall by 50 basis points to 46.2 per cent, though that was still higher than pre-COVID levels and its profits rose by 30 per cent to $144 million.
"They've been able to generate reasonably strong margin improvements despite the environment," Mr Miller noted.
"How that looks going forward is a whole other question and we've seen some of the CEOs of those companies say they're not going to be immune to what comes.
"We certainly, even to some degree, are seeing deflation in some of these businesses now."
Wesfarmers (ASX:WES), the owner of Bunnings, Officeworks, Kmart and Target, saw its overall profit after tax rise 14.1 per cent to $1.38 billion.
Much of that was delivered by Bunnings, which posted a 6.3 per cent increase in its revenue to $9.79 billion.
But, as a low-cost retailer competing in a high-inflation environment, it cut its earnings margin before tax from 13.2 per cent to 12.7 per cent.
Contrast that though with the Kmart group, which includes Target, and is also a low-cost retail business.
Its revenue was up 24.1 per cent to $5.71 billion and had an 8.3 per cent earnings margin before tax. That was almost double the 4.8 per cent recorded in the prior corresponding half.
The banks are growing their own accounts
With 10 Reserve Bank rate rises making the cost of having a mortgage more expensive each month, the businesses lending borrowers their mortgages are reaping sizeable benefits.
Australia's biggest lender, the Commonwealth Bank (ASX:CBA), saw a 10 per cent lift in its net profit after tax to $5.22 billion as its net interest margin (which is the amount of money it earns on loans compared to the amount it pays to borrow funds, known as the NIM) rose to 2.1 per cent.
Chief executive Matt Comyn told The Business the higher interest rates set by the RBA and passed on in full by CBA to its home loan customers (and not always in full to its savings accounts) helped lift that margin.
The RBA more than trebled the cash rate in the first half of financial year 2023, lifting it from 0.85 per cent in July to 3.1 per cent by December.
That's 2.25 percentage points worth of increases.
Speaking at the AFR's Business Summit in Sydney this week, Mr Comyn told the gathered crowd the bank's 2.1 per cent NIM was lower than what it posted in 2018 when the RBA's interest rate was 1.5 per cent (CBA'S NIM was 2.18 per cent in the first half of FY18).
"Frankly, if we didn't have some degree of profitability in a period of very strong economic conditions going into an area of much more challenging circumstances, and certainly our expectation is we want to support our customers through that, that would be a real problem," he said.
"Of course, owners, like any owners in a business, will expect some rate of return and we've got to strike that balance."
The three other "big four" banks do not report their half-year results at this time.
But Bendigo and Adelaide Bank (ASX:BEN) does. It saw its NIM increase too — up 19 basis points to 1.88 per cent.
Its profit after tax was up 22.5 per cent to $249 million.
"You've seen some of the best results or best growth numbers posted by the banks," Ms Liu said.
"It's probably the best it ever got, so incredible growth because of the high interest rate.
"However … they have warned that this margin is not likely to be maintained because it's just too high and there's competition for mortgages picking up."
Suncorp (ASX:SUN), which is both an insurer and a bank (though it's planning to sell its banking business to ANZ), delivered a 44.3 per cent jump to its net profit after tax to $560 million.
Most of that was driven by its insurance business, which posted a 142.1 per cent jump in profit to $276 million as natural disasters turned many people's lives upside down.
Suncorp's bank business profit was up 28 per cent to $256 million with a NIM of 2.03 per cent.
"Some of the areas where we noticed companies having a surprising degree of comfort, in terms of passing on costs, were the insurers with respect to their premiums," Mr Schellbach said.
Energy companies are winning as the war rages on
Mining and energy companies are less consumer facing, but their profits also impact those down the supply chain.
Woodside (ASX:WDS) delivers its full-year results at this time, not its half-year numbers, and its profit for 2022 catapulted 228 per cent to $US6.5 billion ($9.85 billion).
The demand for its product, as Russia's war in Ukraine raged on, saw prices rise which, coupled with the purchase of BHP's petroleum assets making it a much bigger company, helped deliver the jump.
"The energy sector has been one of the strongest performers in terms of profits over the past year on the back of higher gas prices, higher oil prices, so we've felt that in terms of the electricity prices in Australia," Mr Bassanese said.
Origin Energy (ASX:ORG), which is both an energy producer and retailer, saw its profit swing from a $131 million loss in the same half a year ago to a $399 million profit this half.
But while it cashed in on rising gas prices from its production, its electricity profit margin dropped sharply from 6.4 to 1 per cent amid the surging cost of fuel for its power stations.
Whitehaven Coal (ASX:WHC) posted a 423 per cent jump in profit to $1.78 billion.
The EBITDA (pre-tax, pre-interest earnings) margin on sales of its coal, measured as dollars per tonne, quadrupled from $102 million to $414 million.
BHP's (ASX:BHP) profits were affected by a fall in commodity prices. But a net profit after tax of $US6.46 billion is still a huge amount of money made in a six-month period, even though it is down 32 per cent on the profit for the same period a year ago.
The company was also trading without its petroleum division, which is now part of Woodside.
Rio Tinto (ASX:RIO), which also reports full-year results, was also impacted by falling commodity prices, with its profit down 41 per cent on the previous year to $US12.4 billion.
Are all these numbers a sign of profiteering?
"I wouldn't use that word," Mr Miller said.
"I'd certainly say some are navigating the challenges from a cost point of view better than others.
"You've seen the profit-growth numbers rebound to normal levels. Whether that's profiteering or not, I certainly don't necessarily think it is.
"I'd say, overall, it's a pass mark just to be able to maintain margins in this current environment."
Mr Bassanese agreed.
"It's not so much profiteering, it's more being able to maintain their profits and pass on those costs to consumers," he said.
Mr Schellbach said the impacts of COVID-19 were still flowing through and skewing some results.
"What that means is the comparables that we look to compare against are distorted, as are the current numbers," he said.
"With respect to some of the profit margin stories and stories of over-earning coming from certain sectors, I would probably take a step back and just firstly remember that these are often cyclical sectors to start with and we're currently in an economic environment where the cycle has been even exaggerated further.
"So I would largely view the move in some of the profit margins of these sectors as a reflection of where we are in the economic cycle."
Not all businesses are in front of inflation
The economic downturn caused by back-to-back rate hikes and the risk of recession has hurt many businesses that are now underperforming — and the outlook isn't so rosy either.
"There certainly was a skew towards disappointment," Mr Schellbach said.
"Something we know through this results season versus previous was that there were less earnings beats than previously.
"Clearly, earnings momentum has softened."
UBS analysis showed more companies missed expectations than beat them.
While consumer-facing companies are among the winners this reporting season, not all retailers saw high prices produce better profit margins.
"A lot of retailers that benefited from the COVID-related increase in goods demand — you know, furniture, clothing, the big increase in online shopping — that is being wound back, so those retailers have been hurt, profits have slowed, or sales have slowed," Mr Bassanese explained.
Ms Liu said that could present good news for consumers, who had started to rein in their spending.
"With the consumer environment falling away, that discount is going to increase, and we have already observed it in the last couple of weeks and there'll be more in the next four to five months," she said.
Discounts like that could help contribute to a fall in the inflation rate, which is currently 7.8 per cent.
A recent study by the Australia Institute found increasing profits going to corporate Australia had accounted for more than two-thirds of the country's inflation problem.
But Mr Bassanese said this profit season signalled a shift in the economy.
"Profit margins are going to come under pressure as the economy slows, and as commodity prices globally come down as well on the back of a slowdown in the global economy," he said.
"So it's almost as good as it gets, I think, in terms of corporate profits."
