After another busy company reporting season during a period of significant economic uncertainty around the world, AFIC Managing Director Mark Freeman and Portfolio Manager Kieran Kennedy look at some of the companies and sectors in the AFIC portfolio that continue to deliver solid returns.

The overall tone of the 2021/22 company reporting season was one of resilience.

Unsurprisingly, rising inflation and continuing supply chain challenges were among the common economic themes felt by businesses, alongside cost pressures which have driven price rises.

Pressure on supply chains appears to be easing a little, however for companies that are holding a higher volume of inventory, investors are focusing on how that position may unwind.

Availability of workers also remains a real issue, with the lingering effects of COVID causing widespread absenteeism. There are still more job openings than the number of people looking for work, so the labour market is tight both in Australia and overseas and presents a challenge for many companies.

Companies are generally resilient

Overall Australian businesses are holding up quite well despite the challenging conditions. While businesses are wary of what might be coming next, demand for their products and services appears steady.

Some negativity does surround equity markets and various economies, however this negativity hasn’t been reflected to a great extent so far in company results. That’s not to say it won’t be coming; we don’t know when inflation might ease and increases in interest rates may affect consumer demand and the outlook for businesses in the next six months. But for FY22, the outlook comments were along the lines of “We’re not sure what’s going to happen” rather than “We’re seeing a lot of negatives here now”.

Key metrics such as revenue, profit and dividend were generally in line with or slightly better than market expectations but not meaningfully better.

Revenues were quite strong compared to historical numbers as companies passed on higher costs by increasing prices. This ability to pass on cost increases is an important element in having selected companies in the AFIC portfolio.

Once again, against a negative backdrop, it was not a message of strength but of resilience.

Our quality stocks stand out

This reporting season reinforced the quality companies in AFIC’s portfolio.

Online real estate advertising company REA Group and online automotive marketplace Carsales.com both delivered pleasing results.

REA reported significant growth in revenue, profit and dividend and said it enters the new financial year with a clear strategy for future growth. Carsales.com’s Australian and international assets generated a strong financial performance and expectations are for continued strong growth as well.

Two other companies in the AFIC portfolio that showed their quality were automotive accessories supplier ARB Corporation and plumbing and bathroom products supplier Reece.

ARB had a big profit jump during COVID, and the market was expecting profit to start to come off. This hasn’t happened, and profit has been resilient.

Reece made a large acquisition in the US at a time when concerns about the US economy emerged. Despite the risk, the acquisition has delivered according to plan and Reece is performing well.

We also have stocks in the AFIC portfolio which we refer to as ‘stalwart stocks’ which we invest in for their consistent performance and earnings resilience.

One of them, packaging giant Amcor, is showing its global strength in challenging times. Supermarkets Woolworths and Coles remain steadfast, with a solid outlook, despite the impact of COVID-related workforce absenteeism and higher costs. Sleep and respiratory care device manufacturer ResMed impressed us with its commentary around trends within its market and exemplifies our approach to investing in companies that can develop a leadership position in their industry.

Other stocks in our portfolio worthy of mention are electronics retailer JB Hi-Fi and conglomerate Wesfarmers. While consumer spending is holding up for now, consumer sentiment is weak, and the market has some concerns over how earnings may be impacted if spending softens. However, we take comfort in the leadership positions of both companies. As a long-term investor, we will consider appropriate opportunities to acquire more of these stocks for that reason.

The results for energy stocks Woodside and Santos were well flagged but reminded people of the value in producing and supplying gas from Australia rather than Russia. Demand for LNG has surged because of the war in Ukraine, resulting in a benefit to both Woodside and Santos. Both companies are also now markedly different compared to two years ago. Woodside’s merger with BHP’s oil and gas assets has made it a far more robust company with a stronger balance sheet and an improved ability to allocate capital to the best opportunities.

These are factors that we consider in making our investments across our portfolio and help define its strength. It’s a similar story for Santos following its takeover of Oil Search.

Our approach is cautious and patient

Given the economic background suggesting a challenging time ahead for company earnings, uncertainty around company outlooks and consumer spending, we’re cautious in our outlook.

We believe that the margins of some businesses may come under pressure, so such an approach is prudent.

But as a long-term investor, we’re patient and will seek to take advantage of opportunities that we believe will add value for our shareholders. That’s how AFIC invests.