Top line magic, bad tax blood ?

The amazing Q2/H1 earnings delivery is confirmed as a top-line epiphany owing to strong pricing here and there, powerful FX positives and presumably a degree of hysteresis in client behaviour as not all have walked away from surging prices.

However, it looks as if the windfall top-line positives are not transmitting to Ebitda or Ebit margins. There are beats but rather modest ones at ebit level which implies that costs are surging just as fast. An interesting indicator is that of Capgemini with an 18% organic surge in revenues leading to little operating margin progression. As this is a labour intensive business, it ensues that wages have also increased by 18% (most likely as the churn is a phenomenal 27%);

So higher sales are already being amply shared by staff and suppliers. 2022 may well pan out as a rare year in which top-line growth is not leveraged at the bottom line (normally the multiplier is 3x to 4x). 

The tax scythe cometh

Sharing the windfall price effect may not stop with staff. Governments, including supposedly liberal ones are deeply afraid of what is to come this fall with energy shortages, are keen to raise fresh resources at the expense of shareholders. The bloody windfall tax music was an Oil industry hymn initially, before rapidly spreading to Utilities (generation excess profits whether Italian, German or British) and spilling over to Banks starting with Spain.

Spain wants to levy a tax on net interest income, a rather arresting initiative as top-line taxes don't make any economic sense. The political dimension is as clear as it is irresistible when one looks at the amazing explosion of NII at Spanish banks. Surging NIIs is obviously true for the  whole banking sector in Europe. The Spanish initiative, if not nipped in the bud, will spread. 

Voters are likely to get their way. Attempts by a TotalEnergies and an Engie in France to avoid windfall taxes by handing back surplus earnings to French households are now likely to look politically insufficient even if they are effective for purchasing power. More will be required i.e. a windfall tax top up, sort of.

Thinking of it, Maersk, TotalEnergies, RWE inflated earnings or Centrica’s dividend resumption cannot go down well in a context of belt tightening. Nor will any dividend increase on the back of explosive earnings in any sector. Markets are probably getting a sense of unsavoury developments such that there is no dancing on this particular H1 beats volcano.

Below is a telling chart about the oddity of 2022 earnings.

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