We’re almost halfway through February 2025 reporting season. We cover almost 180 stocks set to report this month, and 73 results are out at the time of writing. There’s still a way to go, but we’re beginning to get a handle on how Australia’s biggest companies—and by extension, the broader economy—fared in the latter part of 2024. Let’s dive into the big results and key themes that caught our eye.

The numbers

As of Wednesday 19th, we’ve upgraded our fair value estimate for 29 companies, or 40% of those that have reported thus far. The average upgrade has been 5%. We’ve left our fair value estimate unchanged for 41 companies and made only three fair value downgrades. What does this tell us? Well, for context, our fair value estimate is a long-term valuation for a business, based on our discounted cash flow model. Our analysts make assumptions about a company and its industry to forecast future cash flows. Recognising that a dollar today is worth more than a dollar tomorrow—the ‘time value of money’—we discount these cash flows to the present and add them together. This gives us a fair value estimate. If we increase our fair value estimate, the sum of all cash flows we expect the business to generate in the future, discounted to today, is greater now than before. An average upgrade of 5%, across 40% of companies that have reported so far, is a touch stronger than recent reporting seasons (in August 2024, February 2024, and August 2023, we upgraded roughly a third of companies). Keep in mind, however, this doesn’t necessarily mean the absolute level of earnings was higher than previous reporting periods— it just means things are tracking better relative to our expectations. I’d call this a positive start, but with the caveat that half our coverage is yet to report. Our take is at odds with the market reaction—the benchmark ASX 200 is off around 2% since the start of Feb—but perhaps this reflects extended market valuations coming into reporting season. With that, onto the big themes.

The big themes

Office property stabilising

The dawn of ‘work from home’ hit office property hard and stock prices across the sector remain well below pre-pandemic peaks. But, as outlined in the last issue of Your Money Weekly, we expect conditions to stabilise. Now that the three major office landlords we cover—Dexus (ASX:DXS), Mirvac (ASX:MGR), and GPT Group (ASX:GPT)—have reported, what did we learn? Firstly, capitalisation rates, used by appraisers to discount rental cash flows, are rising at a much slower pace. Cap rates have an inverse relationship with valuations, so this slowdown suggests the worst of the devaluation losses are behind us. Dexus, a bellwether for the industry, saw its office cap rate lift a mere 12 basis points between June and December 2024, to 6.17%. That compares to a 52-basis point increase in the six months ending June 2024. Leasing incentives, which jumped during covid as landlords attempted to attract and retain tenants, are also moderating. Dexus is now offering an average incentive equal to 26% of gross rents, down from 28% six months ago. And pleasingly, occupancy is holding up. While we think there is downside risk in the second half of the fiscal year, we forecast improving conditions from fiscal 2026 as the trend of ‘flight to quality, and flight to better locations and amenities’ continues to play out. While the market reaction to the landlords’ results was broadly positive, shares still look undervalued. You can find our full analysis for Dexus on page 23, for Mirvac on page 37, and for GPT on page 27.

Cracks appear, but bank shares still defy gravity

Accounting for a fifth of the benchmark ASX 200 index, major bank results are rightly of interest to investors. Commonwealth Bank (ASX:CBA) was the first cab off the rank. As discussed last week, the result was a touch better than we expected, due to stronger revenue growth and lower bad debt expenses, albeit partially offset by higher costs. There’s a lot baked into CBA shares, which trade on a forward P/E ratio above 25, dividend yield of 3%, and price/book of above 3.5 times. It’s hard to square this against a modest outlook for earnings—a five-year CAGR of 6%, on our forecasts. A premium to peers is warranted given the strength of its moat—lower cost of funding and better operating efficiency—but the gap is extreme. Still, last week’s result wasn’t enough to unsettle investors, who’ve pushed CBA’s share price almost 60% above fair value. Westpac (ASX:WBC) didn’t fare so well in the eye of the market. We thought the bank posted a reasonable first-quarter 2025 result, with a modestly lower net interest margin offset by robust loan growth. We upgraded our full year profit forecast by 3%, but the market was clearly expecting more. Westpac shares sold off roughly 5% on the day, though continue to screen as overvalued. National Australia Bank (ASX:NAB) was also punished, its first quarter 2025 result met with an 8% sell down. We didn’t find too many surprises: rising loan impairments, which may have contributed to the correction, are not alarming from such a low base. It was a bit higher than the other majors, so perhaps the market is questioning the bank’s loan quality relative to peers. But loan impairments can be volatile from quarter to quarter, so we’re not reading too much into it. The 2% slip in profit compared with last year leaves the bank on track to hit our 4% full-year growth forecast, and we left our fair value intact. The sell-down isn’t a calamity for NAB and Westpac investors, who sit on 12-month share price gains of 9% and 28% respectively. But it reveals a chink in the armor of major bank valuations, which, aside from ANZ Group (ASX:ANZ), have defied gravity for some time. It also reminds us of the danger of lofty expectations: not much needs to go wrong to suffer the market’s reprisal.

The consumer is bouncing back

On the topic of lofty expectations, we turn to JB Hi-Fi (ASX:JBH), another market darling up almost 50% in 12 months. With shares more than twice our fair value estimate, it’s the second most expensive Australian retailer we cover, behind high-flying Guzman y Gomez (ASX:GYG). We were impressed with JB Hi-Fi’s first-half fiscal 2025 result. So much so that we upgraded our fair value estimate by 7%. Sales growth of 7% across its Australia segment is nothing to be sniffed at, especially when the electronic goods retailing industry grew only 3% over the period, according to the Australian Bureau of Statistics. The retailer is taking share, some of which likely comes from its biggest competitor, Harvey Norman (ASX:HVN) (reporting 28 February). But again, it wasn’t enough to satisfy the market, with shares down 5% on the day. Results day may have been disappointing for JB Hi-Fi investors, but zooming out, we see a bigger message here. Look at the trajectory of JB Hi-Fi’s Australian sales growth: 0.8% in 1H24, 1.0% in 2H24 and now 7.2% in 1H25. It’s accelerating, and this suggests the consumer is bouncing back. JB Hi-Fi isn’t the only retailer posting a rebound. Online pure plays Kogan (ASX:KGN) and Temple & Webster (ASX:TPW) both saw double-digit sales growth in the final half of 2024, as did youth-focussed apparel retailer Universal Store (ASX:UNI). Improving turnover bodes well not only for ASX-listed retailers, but for the broader economy, as household consumption accounts for roughly half of Australia’s GDP. Several big retailers are yet to report, but early signs are encouraging. Keep in mind, though, we’re not expecting anything like the post-pandemic retail boom. That was fuelled by emergency monetary and fiscal policy settings, which are highly unlikely to repeat this time [Exhibit 1]. Nonetheless, we still expect above-average retailing growth in the next few years, providing long-awaited relief for a sector battling cost pressure from many sides: rent, utilities, and most significantly, labour. The RBA’s first rate cut on Tuesday, widely anticipated by the market, offers another pillar of support for this outlook.

Exhibit 1: We see green shoots across the Retail industry

Annual retail sales growth (historicals and Morningstar forecast)

Source: Australian Bureau of Statistics, Morningstar.