Reporting season is over and Australian companies delivered strong profits to shareholders in the face of inflation, labour shortages and snarled supply chains. Management teams across the ASX struck a cautious tone, emphasising the uncertainty ahead as Australia recovers from the pandemic.

We’ve spoken to analysts and collected eight major themes for investors, ranging from resilient margins and mining dividends to the record performance of the energy sector.

Strong showing despite hard times

Despite six months of border closures and covid restrictions, companies that beat analyst profit estimates outnumbered misses by a ratio of 4:3, according to data from UBS for the half year to 31 December.

“Although this beat rate represents a deceleration versus what was seen in the previous two result seasons, we believe it’s actually an even more impressive showing given the complex set of conditions businesses faced over the period,” wrote Richard Schellbach, a UBS strategist, in a note last month.

The bank now expects earnings growth of 14.9% in fiscal 2022, up from 13.1% in January. Financials and energy companies drove the earnings upgrades as economic growth and strong commodity prices boosted fortunes.

Many analysts had conservative expectations going into reporting season, says Peter Warnes, head of equity research at Morningstar. Resilient consumer spending, a rebound in iron ore prices and strong cost controls helped the surprise performance, he says.

Inflation is under control (for now)

Many firms were able to offset the impact of rising prices by passing them along to consumers or cutting costs elsewhere in the business, says Warnes.

“Cost inflation was commonplace, but stringent cost control measures and price increases generally limited damage to margins,” he says.

Inflation resilience was on display at a swathe of businesses ranging from supermarket Coles to steelmaker BlueScope, property group Goodman and four-wheel drive accessory maker ARB, according to analysts at Martin Currie, UBS and Morningstar.

Pre-tax profit Margins at ARB grew to 26%, up from 24% in fiscal 2021 thanks to “extremely tight cost control”, says Morningstar equity analyst Angus Hewitt.

However, Reece Birtles, chief investment officer at Martin Currie says some industrials will likely to suffer most from rising prices because revenue growth is slower and less able to match inflation. Ansell and Inghams also struggled to raise prices in response to covid disruptions and higher costs, he added.

Economic recovery on display

Strong results at Wesfarmers and Seek signal strength in the Australian economy, UBS analysts say. The sprawling Wesfarmers conglomerate, which owns Bunnings, Kmart and Target, reported increased trading momentum despite supply chain disruptions and labour shortages. Management at Seek, an online jobseeker portal, lifted revenue guidance by 10% amid a tight jobs market.

Financials, another sector dependent on the broader economy, saw big upwards revisions in profit forecasts as Commonwealth Bank and National Australia Bank reported higher profit and loan growth.

Almost two-thirds of the financials sector saw earnings upgraded.

Supply chains and labour markets are still scrambled

UBS analysts were “hard pressed” to find a company not mentioning labour shortages or supply chain issues during reporting season.

Worker shortages hit labour-intensive firms hard with acute shortages of truck and delivery drivers as well as skilled trades, says the investment bank. White-collar workers were also hard to find. ASX, Computershare and Accent Group all reported that they were struggling to fill jobs.

UBS noted management at firms across the ASX used their outlook statements to flag that supply chain problems showed no signs of fading in the short term. Several firms, including Wesfarmers, have built up large inventories to weather supply chain issues.

Russia’s invasion of Ukraine, which began after the bulk of reporting had ended, is likely to add to these issues, says Warnes.

“Supply chains issues will lengthen considerably and could disrupt the global economy for years,” he says.

Miners leery of big investments return money to shareholders

As commodity prices hit record highs again, Australian miners scarred from the commodity bust of 2016 are choosing to return cash to shareholders rather than build new mines, says Morningstar mining analyst Jon Mills.

“When the price goes up, supply should go up too. That happened during the last boom in the late 2000s, but when the bust came in 2016, the big miners got into financial strife,” he says.

BHP and Rio Tinto will distribute US$34.5 billion in dividends for 2021, more than half the ASX’s total.

Reluctance to invest will slow new supply for a time and keep upwards pressure on prices, says Mills. However, he believes the lure of super-profits will ultimately prove too strong.

“Capitalism will work its magic and new supply will eventually come online.”

Is Australia’s energy sector breaking out of its rut?

The Australian energy sector’s underperformance relative to global energy stocks may finally be turning after the sector reported the biggest jump in earnings revisions on the ASX.

Consensus forecasts for fiscal 2022 earnings per share were upgraded 20.7%, compared to 1.8% for the broader index, according to UBS data.

Share prices responses were initially mixed with Santos down and Woodside Petroleum up following reports. Russia’s invasion of Ukraine, which occurred days after reporting season ended, has sent the S&P/ASX 200 Energy Index up 11% between since 25 February.

The sector remains the most undervalued under Morningstar coverage.

An end to covid restrictions bodes well

Winding down of Covid-19 restrictions and reopening of borders were cited as reasons for cautious optimism about Australian corporate earnings in fiscal 2022 and 2023, say analysts at UBS and Ausbil.

Management teams struck a cautious tone while remaining hopeful that open borders could ease labour shortages and the end of covid restrictions would add momentum to the economic recovery, said UBS in its review of outlook statements.

“Outlook statements were overwhelming prefixed with the word ‘uncertainty’, with CEOs acknowledging that the rest of 2022 could still be bumpy,” said the bank.

Australian businesses across the spectrum should benefit from a growing economy and an end to pandemic restrictions in 2022 and 2023, says Paul Xiradis, chief investment officer at Ausbil. He favours cyclicals, especially those in energy and materials.

But the economic rebound is far from certain

Hopes for a strong economic recovery rest on Australian consumers spending the hundreds of billions in savings stashed in deposit accounts, says Warnes. A more conservative response could undercut any expansion, he cautions.

“The million-dollar question is the sustainability of the economic expansion. The lessons of the last two years around the virus were that it makes consumers more conservative and hold more savings than they once did,” he says.

Warnes says capital preservation is “key” amid the uncertainty, calling the war in Ukraine a “wild card” that could push the Eurozone into recession with implications for the global economy and supply chains.

“Tell me when the last normal six-month period was,” he says. “You need to go back 3 or 4 years. There was the trade war with China, then covid, and now Ukraine. There hasn’t been time to settle. There’s been no place to hide.”