The third week of earnings saw Australian companies continue to post record results and shower investors with higher dividends. But as we enter the tail end of the results season, the major headwinds are becoming clearer.

The spread of the delta variant and the accompanying lockdowns are having a significant economic impact—both locally and overseas. The effect of this disruption will be reflected in earnings for FY22—likely to be well below the numbers being reported now.

The busiest week of earnings featured big banks, major miners and energy companies as well as market favourites such as Treasury Wine Estates and CSL. It also served up one of the most impactful M&A deals on the ASX.

JB Hi-Fi

Electronics retailer JB Hi-Fi (ASX: JBH) kicked off proceedings, announcing a 67 per cent jump in full year profit and a solid final dividend of $1.07 a share. But that was the end of the good news. The company flagged a 15 per cent slump in same-store sales in the first two months of FY 2022 due to spreading lockdowns.

Morningstar director of equity research Johannes Faul says the no-moat stock is significantly overvalued at its current $49 market price.

“Current lockdowns in New South Wales and Victoria create volatile and highly uncertain retailing conditions for early fiscal 2022. Near-term we expect the group to face more challenges than opportunities,” he said.

CSL

It was a similar story for biotech giant CSL (ASX: CSL), which reported a better-than-expected 13 per cent rise in full-year profit, largely on the back of surging revenue at its flu vaccine business Seqirus. The company expects to lift revenue, but has forecast profit to remain flat this year due to rising costs at its main Behring business.

It prompted equity analyst Shane Ponraj to cut his FY22 profit forecasts on the narrow moat stock, with “elevated plasma collection costs expected to weigh on CSL in the near term.”

Cochlear

Hearing implant maker Cochlear (ASX: COH) swung back to a $327 million annual profit. Revenue lifted 13 per cent, boosted by the resumption of elective surgeries and tax gains. While it is expanding market share after last year’s slowdown, the company failed to impress analysts with a tepid net profit guidance for FY22. Its shares slid 5.5 per cent on the news.

BHP and Woodside

Meanwhile, sterling results by BHP (ASX: BHP) were overshadowed by news the Australian giant would merge its global petroleum business with Australia's biggest oil and gas producer Woodside (ASX: WPL) and delist its shares from the UK’s FTSE.

BHP posted a record $US11.3 billion annual profit as the iron ore division again dominated its earnings. The company will also pay a hefty $US2 a share dividend, bringing the full year payout to $US3.01. This could be as good as it gets, with iron ore prices sliding below the $US150 a tonne mark. The key steel making ingredient has now lost more than a third of its value in less than a month.

Investors were more focused on the collapse of the dual-listed structure and the oil and gas deal that will give BHP shareholders a 48 per cent holding in the expanded Woodside.

The merger has got a vote of confidence from Morningstar analysts.

“Overall, the logic around the merger looks sound,” director of equity research Mathew Hodge said. “It also aligns with BHP's desire to exit fossil fuels—while ensuring shareholder value is retained. Hodge has maintained his fair value estimate of $41 on BHP shares for now.

Woodside analyst Mark Taylor has also retained his $40 fair value estimate for Woodside, pending further scrutiny. “The deal certainly has merits and Woodside could become even more a master of its own destiny,” he said.

“Woodside shareholders are to end up with 52% interest in a company with more than double the reserves and resources, double the production, an even stronger balance sheet, a clearer path to development, increased asset diversification and retaining majority control of long-life, low-cost assets.”

Woodside also swung back to a half-year profit of $US317 million following a rebound in oil and gas prices. Revenue for the six months to June 30 rose 31 per cent to $US2.5 billion.

Santos, Oil Search and Beach Energy

Smaller rival Santos (ASX: STO), which earlier this month agreed to merge with Papua New Guinea focused Oil Search (ASX: OSH) in a $21 billion deal, also swung back to a $US354 million first half profit. Its revenue revenue jumped 22 per cent on the back of record sales volumes of nearly 54 million barrels of oil equivalent.

Rounding off the spate of results in the energy sector, Beach Energy (ASX: BPT) reported a 12 per cent decline in full year profit to $US271 million. Beach also lowered guidance for FY 22 production, leaving the market unimpressed and pulling down shares nearly 10 per cent. The stock currently trades at $1.07, far below Morningstar’s $2.50 fair value estimate.

Treasury Wine Estates

Australia’s top winemaker Treasury Wine Estates (ASX: TWE) managed to hold on to its full-year profit despite losing a big chunk of its key China market. Earnings were largely maintained on the back of strong sales growth in the mid-range portfolio in the Americas, EMEA and ANZ markets. Morningstar analyst Angus Hewitt kept his $11.50 fair value estimate on the stock amid continued uncertainty.

“While the company enjoys solid brand intangible assets at the very high end of its wine range—particularly Penfolds—we expect pricing pressure to persist at critical midrange price points…volatile annual demand limits Treasury's ability to generate sustainable economic profits,” he said.

Magellan Financial Group

Among other major results this week, global funds manager Magellan Financial Group (ASX: MFG) suffered a 33 per cent fall in annual profit amid lower performance fees and higher costs due to new products and strategies such as its 40 per cent stake in the Barrenjoey investment banking start-up. Magellan shares slid more than 10 per cent on the news.

Equity analyst Shaun Ler said the stock remains undervalued even after factoring in the small cut in fair value to $55.50. “Unlike the market, we believe the results are not reflective of Magellan’s future earnings potential, with greater prospects of earnings growth from several avenues,” he said.

Next week will be the last major one of this earnings season. Top companies that we will be watching include:

  • Woolworths (ASX: WOW)
  • Endeavour Group (ASX: EDV)
  • Qantas (ASX: QAN)
  • Seek Ltd (ASX:SEK)
  • Wesfarmers (ASX: WES)
  • Link (ASX: LNK)
  • G8 Education (ASX: GEM)
  • A2Milk (ASX: A2M)
  • Medibank (ASX: MPL)

See here for our full reporting season calendar