The corporate earnings season has almost wrapped up, with only a handful of ASX-listed companies due to report. 

As expected, the picture has been mixed with current earnings not yet reflecting the full impact of the RBA's nine consecutive interest rate rises. What will that mean for dividends? We will explore this topic in the coming days. 

Here's a wrap of the past week, with energy producers and miners dominating the reporting cycle. 

Morningstar's full coverage of company earnings is available to Investor subscribers.

Energy


Energy producers delivered strong profits, although Morningstar senior equity analyst Mark Taylor says investors shouldn’t be anchoring their future hopes on this year's earnings.

“These have been exceptional times with Russia's invasion of Ukraine. There've been very high gas prices in particular,” he says.

“But next year is going to be a very different story, earnings are going to come back to Earth.”

Santos (ASX:STO)


Shares in oil and gas producer Santos jumped on Wednesday on record earnings—up 160% to US$2.46b—and news of a higher dividend.

The result was in line with Taylor's expectations, who maintained a five-star rating on the nation’s second largest oil producer.

The company is trading at a 42% discount down from Morningstar's fair value estimate of $12.00 per share and remains “materially undervalued”.

"Overall, we see a happier future for Santos now that excess debt levels are addressed, aided via improved margins and earnings driven by Gladstone and PNG LNG," Taylor says.

The company has an uncertainty level of “high”, given the recent price volatility, but Taylor notes all companies in the sector have been tagged a high risk for similar reasons.

“Santos faces environmental and operational risks, which are a given with the oil and gas industry, as well as country-specific risks associated with some of its non-Australian assets.”

  • Star Rating: ★★★★★
  • Fair Value: $12.00
  • Economic moat: None

Ampol (ASX:ALD)


Fuel retailer Ampol surprised investors with the declaration of a special dividend, on top of its better-than-expected full year dividend. 

The company reported a record $712 million in underlying net profit after tax, an increase of 117% on the corresponding period.

The record figure marginally surpassed Taylor’s estimate of just under $700 million. Taylor attributed much of the surge to “extraordinary strong refiner margins” enjoyed recently by Ampol.

“The biggest surprise is Ampol putting the cash to use and rewarding shareholders with a special dividend of 50 cents,” he said.

Despite the bumper result, however, Morningstar has maintained a fair value estimate of $34.50, with Taylor noting the company “read no longer-term implication into the very strong 2022 cash result”.

The company is trading in a range Morningstar considers to be fairly valued.

  • Star Rating: ★★★
  • Fair Value: $34.50
  • Economic moat: None

Mining


Optimism over the reopening of China has driven shares in the major miners to inflated levels, according to Morningstar mining analyst Jon Mills, with iron ore heavyweights BHP and Rio Tinto underwhelming investors last week. 

BHP Group (ASX:BHP)


A 32% drop in BHP's first half net profit, which fell lower than market expectations, hit BHP’s share price alongside news the mining giant will sell two of its central Queensland coal mines.

“No-moat BHP’s first-half fiscal 2023 result was weaker than the same half of fiscal 2022 but still impressive relative to historical profitability levels,” Mills says.

“Lower prices and increased unit costs were the main drivers, partially offset by volumes and foreign exchange.”

As of Friday's close, BHP was trading at a 16% premium to Morningstar's fair value estimate of $39.50 per share.

“While inflation remains a headwind for unit costs, foreign exchange is a tailwind and we make no change to our assumed unit costs over our forecast period,” he said.

  • Star Rating: ★★
  • Fair Value: $39.50
  • Economic moat: None

Rio Tinto (ASX:RIO)


Unsurprisingly, BHP wasn’t the only major player in the materials sector to post a profits slump. Metals and mining multinational Rio Tinto cut its dividend almost in half, following a similar drop in underlying net profit, which fell 41% to $18.1 billion, driven down by lower iron ore prices and higher inflationary costs.

  • Star Rating: ★★
  • Fair Value: $107.00
  • Economic moat: None

Consumer staples


Bumper prices in the supermarket space drew high profits at the listed supermarkets, but the rising profits failed to stem share price dips for both Coles and Woolworths, which both ended the week’s trading in the red.

The chief executives of Coles and Woolworths noted consumers were shifting to more budget-friendly options - like chicken over red meat, and choosing to cook at home over eating out. 

Rising inflation is also pushing more shoppers towards discount supermarket Aldi, a recent UBS report shows. 

Coles Group (ASX:COL)


Coles' half-yearly earnings showed an 11% jump in net profit after tax to $616 million alongside a 3.9% bump in total sales revenue growth, which came in at $20.8 billion.

The solid interim report prompted Morningstar Director Johannes Faul to bump the company’s fair value estimate up a slight 3% to a flat $14.00 a share.

However Coles shares remain materially overvalued, trading at around a 29% premium to Morningstar's fair value estimate.

“Shares in Coles continue to screen as overvalued. We anticipate the next six months to be more challenging for Coles,” Faul said.

  • Star Rating: ★
  • Fair Value: $14.00
  • Economic moat: None

Woolworths Group (ASX:WOW)


Morningstar raised its fair value estimate for Woolworths by 2% to $27.00 per share following a better-than-expected half year result. Sales and underlying earnings per share were up 4% and 16% respectively.

However the company trades at a 37% premium to its intrinsic valuation.

Faul says inflation was driving up food retail industry sales by more than had been anticipated and supermarket chains hadn’t seen customers meaningfully cutting back on their shopping.

“We anticipate the next six months to be more challenging for Woolworths, despite a solid start to the second half with food sales up 7%. We expect the benefit from the removal of COVID-19 costs to be less impactful in the second half.” He added.

  • Star Rating: ★
  • Fair Value: $27.00 
  • Economic moat: Narrow


Costa Group Holdings (ASX:CGC)


Avocado producer and general food retailer Costa Group posted a slight 2% drop in underlying EBITDA to $215 million, just shy of the $220 million forecast by Morningstar Equity Analyst Angus Hewitt.

The underperformance was attributed in part to poor weather conditions, impacting the group’s citrus growing business.

No-moat Costa is trading at a 15% discount to Morningstar's fair value estimate of $3.10.

“We expect earnings to gradually improve over the next two years as weather normalizes, elevated input costs moderate, and growth projects come online,” Hewitt says.

  • Star Rating: ★★★★
  • Fair Value: $3.10
  • Economic moat: None


Real Estate


Rising interest rates have hit Australian real estate investment trusts (REIT) hard over the past year. 

Minutes from the RBA's February meeting — released last week — revealed the bank’s board even considered a return to double-sized interest rate hikes in an attempt to get inflation back under control. No pause was considered.

Still, Morningstar equity analyst Alexander Prineas says several names in the REIT sector screen as undervalued. He recently unveiled his top picks in the sector. 

Stockland (ASX:SGP)


Property Developer Stockland was hit hard in its half-year report by lower sales in its residential segment, largely attributed to the knock-on effects of the rising cash rate on potential buyers, as well as the impact of poor weather on major projects.

The company posted a statutory profit for the first half of 2023 of $301 million, down from $850 million in the last year’s first half. 

Stockland settled only 1,872 housing lots over the half, but management estimates about 5,500 settlements for the full year, anticipating a strong second-half skew.

Prineas says Stockland remains on track to meet its full year guidance, lifting Morningstar’s fair value estimate by 1% to $4.35 due to the time value of money.  

“Stockland’s commercial property business is performing well on the whole. Retail has largely recovered from COVID-19 impacts, office looks to be at or near the low point, and industrial is experiencing incredibly strong rental growth, which bodes well for Stockland’s substantial development pipeline,” Prineas said.

  • Star Rating: ★★★★ 
  • Fair Value: $4.35 
  • Economic moat: None 

National Storage REIT (ASX:NSR)


Self-storage provider National Storage REIT remained sheltered from the wider woes of the real estate sector to post what Prineas called a “cracker” first half result. Revenue from storage was up 26% which more than offset the rise in operating costs hitting most sectors.

The strong result lifted Morningstar’s fair value estimate by 5% to $2.10 a share, but the company remains overvalued, trading at a 19% discount to its intrinsic value.

“Despite NSR’s ongoing expansion plans, this has only modest impact on our fair value estimate, because competitive tension resulting from rival bidders means we assume the assets are purchased at roughly fair prices, generating returns about in line with cost of capital,” Prineas said.

  • Star Rating: ★★
  • Fair Value: $2.10
  • Economic moat: None