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With another financial reporting season upon us, we thought it an opportune time to consider what the investment community will likely be focusing on as they contemplate how best to position their portfolios over the next 6-12 months.
There is little doubt that the onset of the COVID pandemic in March 2020 has created tectonic shifts within and around industries and more specifically companies. Consumer trends that were previously anticipated to play out over decades are now playing out over years. Previously considered operating efficiencies garnered from changes to operating processes including outsourcing of manufacturing; third party distribution channels; and just-in-time inventory management to name a few, are now being re-evaluated and re-calibrated based on their perceived level of business risk.
Whilst we would expect that there will be numerous company/industry-specific issues that investors will be seeking guidance and insights on, we have outlined below what we believe to be some of the more general issues potentially affecting many companies:
Supply chain disruption: Whilst the world reaped the benefits of outsourced manufacturing, third party distribution channels, and just-in-time inventory management processes, the pandemic provided a wake-up call to the operational risk of supply chain disruptions. Moreover, it highlighted the shortcomings of single country and supplier risk.
For companies exposed to these dynamics, we would expect the market will be looking for an update around the level of disruption still occurring, expected timelines for resuming normal operations and risk mitigation measures adopted. Remember not to over-commit as the ASX has warned against companies being too quick to provide guidance in what can be a dynamic and unpredictable, pandemic environment.
Labour: With borders closed, the reduced inflow of skilled and unskilled migrants, students, and travellers on working visas has created labour shortages across numerous sectors, such as agriculture, tourism, and construction. At the same time, industries like retail, travel and hospitality are still laying off staff due to the impact of lockdowns and the end to JobKeeper payments.
How companies are dealing with these juxtaposed conditions and the extent to which the unemployed and underemployed have been prepared to relocate, retrain and re-deploy will be of interest to investors. Equally, those companies who took measures to weather the COVID storm and have subsequently rebounded will have a story to tell.
Inflation: A by-product of these supply-side and labour market issues has been the resurgence of inflation in various products and services.
Corporate insights on whether this is a structural or temporary issue and the potential flow-on effects to funding costs will be of great importance through the coming reporting period.
Structural trends: COVID has brought movement restrictions, as governments attempt to reduce outbreaks and caseloads in the country, while for others it has provided the impetus to re-evaluate long-term work and lifestyle priorities. This has had profound impacts, both positive and negative across many business sectors including bricks and mortar retail, travel, office leasing, technology, telehealth, and others. Trends that were previously expected to develop over decades are now occurring over years. Questions will be asked as to whether these accelerated trends appear structural, or whether we should expect a reversion to our old ways, once things settle down.
Business model pivots and technology adoption: The reduction in foot traffic, particularly to most parts of the bricks and mortar retail sector, and the introduction of work from home orders have forced numerous industries to adjust their business models almost overnight. Retailers have adopted e-tailing models, whilst service providers are adapting to the risks and opportunities of a diversified workforce, trying to stay on strategy whilst juggling the challenges of managing home based technologies and human resourcing. Comments around how companies are meeting these challenges and the long-term pros and cons of these new normals will be informative.
June quarter FY21 Profit & Loss: With JobKeeper ending in March 2021 and other assistance programs tailing off, plus signs of inflation creeping into the system, the financial impact to the June quarter FY21 and outlook statements for FY22 will be under the microscope. CEOs should be armed with knowledge of how government grants and support packages have been supporting their businesses and their potential to survive longer term. Those businesses showing the ability to thrive in a post COVID environment are being favoured by investors.
Balance Sheet/Cashflows: Again, the impact of cycling off JobKeeper and other cashflow relief measures; inflation; and working capital movements due to disruptions will be closely scrutinised.
Dividends: Many companies sought to cancel or delay dividend payments during the height of the pandemic in calendar 2020. Dividend payments were largely reinstated during the February reporting period, albeit on more conservative payout ratios. The level of dividend payout ratios during this reporting period should provide a guide to the level of confidence throughout corporate boardrooms, around expectations for the new financial year.
So let the reporting season begin and let’s see what insights we can glean from our corporate sector as we head into FY22.