This August earnings season has shown how strong the front half of 2021 turned out to be for corporate Australia. It has also proven to be among the most rewarding for investors - with a bonanza of dividends and share buybacks.

Strong numbers announced this week have reinforced that trend. But they have also set the ground for moderating investor expectations as companies outline the nature of the headwinds they face amid continuing lockdown in the major cities.

The last major week of earnings turned out to be busy with most of the focus on consumer-focused sectors such as retailers, travel-related companies and health insurers.

Retail delivers a mixed draw

Woolworths (ASX: WOW) results are among the most anticipated and the supermarket giant certainly did not disappoint. Full-year profit rocketed 78 per cent to $2.1 billion, while overall sales were up a healthy 5.7 per cent despite the ongoing pressures of the pandemic.

Underlining its confidence in the future, the retailer lifted final dividend 14.5 per cent and showered investors with a $2 billion off-market share buyback.

“The results came in slightly ahead of our expectation due to a stronger outcome in supermarkets,” Director of equity research Johannes Faul said.

“What was really a surprise was Woolworths plans to invest more in the business to build a better online platform, and that really means a lot more capital spend in the medium term,” he added.

Results at the beverages-focused Endeavour Group (ASX: EDV), which emerged from Woolworths in June, were also strong.

The newly listed company, which owns the Dan Murphy’s and BWS retail chains, wine auction site Langton’s as well as several wine assets reported a maiden net profit of $445 million as sales rose 9.3 per cent to $11.6 billion, despite Covid-19 restrictions and the closure of pubs.

Erstwhile rival Wesfarmers (ASX: WES) also underlined the strength of its conglomerate model through the pandemic, as cash cow Bunnings helped deliver a 40 per cent jump in annual net profit to $2.38 billion. Sales rose 10 per cent to $33.94 billion, thanks to solid contributions from Officeworks and department store chains Kmart and Target.

Wesfarmers also rewarded shareholders with a 90 cents a share final dividend and a proposed return of capital of $2 per share. But the retail powerhouse also flagged a weak start for the new financial year, saying sales at each of its retail arms had dropped since July as lockdown restrictions weighed on trading.

Online retailer Kogan’s (ASX: KGN) results set it at the other end of the spectrum.  Its full-year profit crashed 87 per cent to just $3.5 million, largely thanks to too much stock in the warehouse that the retailer was forced to clear at razor-thin margins. Gross sales still jumped 52.7 per cent to $1.18 billion.

It prompted the company to cancel final dividend to preserve cash and investors reacted by sending its shares 16 per cent lower.

Morningstar’s Faul was nonplussed by the response, noting that while the dividend decision was a big surprise, he wasn’t opposed to Kogan reinvesting its capital if it generates a return greater than the cost of capital.

Meanwhile, buy now-pay later leader Afterpay (ASX: APT) - another key beneficiary of the pandemic’s online shopping boom - saw its full year loss balloon to $159.4 million.

The market favourite, which is gearing up for a takeover by US payments titan Square, lifted underlying sales by 90 per cent and revenue by 78 per cent, prompting equity analyst Shaun Per to retain his $113 a share fair value estimate.

China-focused dairy company A2 Milk (ASX: A2M) also reported a collapse in profit amid lower demand and trade tensions between Australia and China. Its full year net profit dived 80 per cent to $NZ80.7 million, while, revenue fell 30 per cent to $NZ 1.21 billion. Its stock slid to $6.05, well below Morningstar’s fair value of $9.30 a share.

Travel sector pegs hopes on vaccines

National carrier Qantas (ASX: QAN) stumbled to a full year loss of $1.73 billion, narrowing it slightly from last year’s $1.9 billion despite what chief executive Alan Joyce termed as “diabolical trading conditions” through the last 12 months.

But Australia’s biggest airline is hoping to resume international flights by December if vaccination rates reach 80 per cent and allow borders to open up. It is already preparing to operate services to the UK, the US, Canada, Singapore, Japan, Fiji and New Zealand by Christmas.

Morningstar equity analyst Angus Hewitt maintained his $5.20 fair value estimate on Qantas shares, despite lowering his fiscal 2022 domestic travel forecasts because of persistent Australian lockdowns

“We maintain this is a short-term issue. While we expect the first half of fiscal 2022 to be challenged, we continue to forecast domestic capacity exceeding pre-Covid-19 levels as the year progresses,” he said.

Travel compatriot Flight Centre (ASX: FLT) also showed signs of a recovery as global markets open up, narrowing its full year loss to $602 million. The international travel company said sales revenue recorded a 48 per cent jump in the second half of the year, compared to the first half, on the back of reviving corporate travel demand.

“The foundation remains in place for Flight Centre to benefit from the release of pent-up demand,” Director of equity research Brian Han said. “The cost structure has been slimmed. Critically, the fast recovery of the corporate unit reduces Flight Centre’s reliance on the more erratic leisure unit.

Meanwhile, childcare and early education group G8 Education (ASX: GEM) returned to the black after a horror 2020. Half year profit came in at $25.1 million, while revenue rose to $421.5 million. But it warned occupancy rates could come under pressure again if lockdowns persist.

Morningstar strategist Gareth James cut his fair value estimate for the ‘no-moat’ company by 9 per cent to $2 a share, expecting some of G8’s recent expenses growth to be permanent, which would impact profit margins in the long-term. He expects G8’s occupancy rates to recover in 2022 as the pandemic subsides. 

Shares in Link Group (ASX: LNK) tumbled more than 12 per cent as investors fretted over lower revenues. The company posted a full year loss of $163 million and 6 per cent drop in revenue to $1.16 billion as its European business took a hit from Covid-19 and regulatory changes dampened income in its superannuation business.

Gareth James cut his fair value estimate by 8 per cent to $6.35 per share, but still expects Link to recover from its challenging past few years.

Health stays front of mind

The coronavirus pandemic seems to have delivered Australia’s beleaguered health insurance industry a much-needed shot in the arm. Market leader Medibank (ASX: MPL) extended its dominance of the industry, signing up 82,500 extra policyholders during the year. That, and a sharp reduction in claims expense due to deferred surgeries helped it post a 40 per cent jump in annual profit to $441.2 million. Revenue firmed up 2.1 per cent to $6.69 billion.

“The proportion of Australians with hospital cover increased almost 100 basis points to 44.5% in the year, a positive tailwind for the private health insurance industry as healthcare needs were put front of mind,” equity analyst Nathan Zaia said.

He has lifted his fair value estimate on Medibank shares by 6.5% to $3.30 per share on the assumption of lower medium-term growth in claims, but still sees Medibank as modestly overvalued.

It proved to be a similar story for rival NIB Holdings (ASX: NHF), with the extended lockdowns in Sydney and Melbourne prompting delays of surgeries and resulting in lower claims.  The health insurer added 26,000 policyholders in the year, helping boost revenue 2.9 per cent to $2.6 billion. Net profit surged nearly 85 per cent to $160.5 million.

“Older cohorts not claiming as frequently is having the largest impact on claims, but we suspect the accelerating vaccination rollout will begin to eat into NIB’s profits in the second half of fiscal 2022,” Zaia said, after lifting NIB’s fair value estimate by 9% to $6.10 per share.