With the approach of the 2025 earnings season, the ASX has taken the opportunity, in its most recent Compliance Update, to remind listed companies of their potential obligations under ASX Listing Rule 3.1 (in parallel with section 674(1) of the Corporations Act 2001 (Cth)) to update the market in relation to earnings surprises.
Listing Rule 3.1 requires entities to immediately disclose market sensitive information – that is information that a reasonable person would expect to have a material effect on the price or value of its shares. In practice, this means that if an entity’s earnings are expected to differ materially from market expectations, the entity must consider the potential for a so-called 'earnings surprise' and whether it has a legal obligation to notify the market. Market expectations are generally informed by earnings guidance the entity has issued (if any), sell-side analyst forecasts (which may deliver a 'consensus' outlook) and the entity’s prior corresponding period (PCP) earnings.
The ASX has flagged a heightened focus on earnings surprises this year, warning that it will scrutinise large-cap (ASX200) entities whose share price moves by 10% or more on release of their results. In the absence of other factors that provide a plausible explanation for the price movement, the ASX has warned it will issue 'aware letters', requiring entities to explain the measures taken to manage continuous disclosure obligations in the lead up to the announcement of their results.
Factors that entities should consider when determining materiality
The ASX’s update does not affect any change in official guidance (set out in its Guidance Note 8) on the operation of Listing Rule 3.1, summarised below.
The ASX continues to recommend that entities consider several factors when determining whether a potential earnings surprise is market-sensitive, including but not limited to:
The extent of the earnings surprise (see further below).
The market’s expectations regarding the entity’s earnings.
Whether near term earnings are a material driver of the value of the entity’s securities.
Whether the earnings surprise is attributable to a one-off or non-cash item.
Whether the earnings surprise is already known and factored into the price of the entity’s securities.
The ASX suggests that an entity treat an expected variation in earnings compared to its published guidance of greater than or equal to 10% as material and requiring a guidance update, less than or equal to5% as not being material and not requiring a guidance update.
Where the entity’s earnings variation is between 5% and 10%, judgement must be made as to whether the variation is material. The ASX considers it prudent for entities in the ASX300 or with stable earnings to apply a lower materiality threshold (in other words 5% rather than 10%), given that even minor variations may have a greater impact on the price of their securities than for entities with more volatile earnings.
For an entity without published guidance, the ASX recommends an entity consider notifying the market of a potential earnings surprise when it expects there to be a greater than or equal to 15% difference between its actual or projected earnings for the period and its best estimate of the market’s expectations for its earnings based on sell-side analyst forecasts.
In the absence of both published earnings guidance and sell-side analyst forecasts, the ASX recommends the entity refrain from using any percentage guidelines on when it should consider announcing a potential earnings surprise regarding PCP earnings. The entity should instead consider (in addition to the factors mentioned above):
Whether the entity’s PCP earnings are regarded as reflecting 'normal state' earnings.
Whether the entity has made any announcements that would lead the market to expect that its earnings will differ materially from its PCP earnings.
These figures are benchmarks only and entities should generally take a cautious approach. Any doubt about materiality should lead to disclosure, or at minimum, a well-documented internal discussion.
Practical implications
Most companies that have been operating in the listed environment for some time will be familiar with Guidance Note 8 and the ASX’s approach to earnings surprises. All listed companies should be monitoring their expected performance against market expectations.
If an entity’s results are tracking more than approximately 15% below market consensus, or more than 5-10% below any previously issued earnings guidance, management should be actively assessing the entity’s disclosure obligations. That means either preparing to update the market or having a well-documented, defensible reason for not needing to do so (that is a sound basis for a view that the divergence would not be considered market sensitive). This might be genuine uncertainty around where FY25 earnings will ultimately land (that is there is not a reasonable degree of certainty that there will be such a difference from market expectations) or difficulty in establishing a reliable market consensus such as limited analyst coverage or outdated analyst reports (such that it is unclear that there will be an ’earnings surprise’). In either case, boards should assume that the ASX will expect a clear rationale and timeline if asked to explain a material post-results share price movement. In advance of results day, entities may consider recording their basis for determining market earnings expectations as well as their rationale for not pre-drafting responses and gathering supporting material to streamline the process.
What has changed – or perhaps become clearer – is the criteria that the ASX has chosen to adopt for the issuance of ’aware’ letters around earnings surprises. Listed companies in the ASX200 are now on notice to expect an inquiry if there is a 10% or greater movement in the share price on the day of a results announcement. That is unless, to use the ASX’s words, there are other factors that 'readily explain' the movement in share prices.
What those other factors may include is unclear. There are a multitude of matters beyond earnings figures, including things like 'outlook' statements, changes in dividend policy or announcement of capital management initiatives, or organisational changes, made in results announcements, that may also cause significant changes in share prices. Listed entities may wish to consider whether enhanced disclosure on these matters in their results announcement is worthwhile to provide context in the event of any ASX inquiry.
For the coming results season, it seems likely that the practical impact of the most recent update will be higher levels of disclosure on the earnings outlook ahead of time, particularly for companies in the ASX200, given there is little to be gained from making a fifty-fifty call in favour of non-disclosure and the likelihood of close attention being paid to the rationale for any such call. That the ASX has decided to issue this guidance and create those conditions is perhaps unsurprising given that in recent earnings reporting periods they have expressed concerns about the magnitude of price movements in response to results by various companies.