The record 2007-08 result and profit report from industrial products conglomerate, Alesco Corporation sums up the past year very well.
As Bruce Teele, the chairman of Australian Foundation said on Monday, 2008 was a year in two halves: one good and one bad.
On a larger scale the Alesco profit report confirms that 2008 was good, a record 12 months for earnings and revenues, but 2009 is going to be really tough.
So tough in fact that repeating the 2008 performance looks next to impossible.
That’s going to be a message we will hear more of in coming weeks in the 2008 June 30 reporting season.
Readers of our weekly AIR last Friday might recall that’s what analysts at Citigroup were telling us to expect; and this week analysts at Macquarie Bank suggested something similar.
"Last year’s bad news is already priced in, so the risk of disappointment on those numbers is small, Citigroup analysts wrote.
"On the positive side, top-line economic activity was extremely strong in Australia right through to the end of February 2008 – and even beyond that for a significant number of companies. Companies still squeezing strong profitability from ongoing cyclical strength include Downer EDI and JB Hi-Fi.
"Resources stocks can do well, notwithstanding rising costs and a strong currency, and high quality companies with successful business models such as CSL are able to deliver robust earnings notwithstanding a rising $A.
"We expect the tone will be downbeat however, particularly with bigger risks surrounding guidance and trading updates."
Mr Teele and his investment company might also be looking very cautiously to the next 12 months. Alesco, like GUD Holdings last Thursday, says matching the 2008 result will be ‘challenging’.
We are going to be hearing more of the word ‘challenging’ plus ‘headwinds’ and any manner of euphemisms to say indirectly that 2009 earnings for a lot of Australian companies operating in parts of the domestic and export economies, will be hard-pressed to match 2008’s levels.
GUD shares were sold off in the wake of its less than fulsome outlook statement. Alesco was a bit more direct yesterday and saw its shares plunge more than 13% to $6.75, a drop of $1.06.
The key to the reaction from investors yesterday was to be found right at the end of the profit statement in the Outlook section.
"The outlook for FY09 is challenging.
"A softening of consumer demand was noticeable towards the end of FY08 and this has continued into the first two months of FY09.
"Organic growth opportunities and continuing improvements in operating effectiveness will be pursued across all divisions, but are expected to be offset by increasing input costs and fuel prices and subdued demand patterns in some of our end markets as a result of higher interest rates.
"In the absence of acquisitions, it will be challenging to match the record operating results achieved in FY08.
"The full year effect of the 2007 capital raising combined with higher interest costs driven by the tougher credit markets and an increased effective tax rate will, however, have an adverse effect on net profit after tax and earnings per share. An update will be provided at the Annual General Meeting."
That’s as much as saying we won’t do well, so the 12%-plus sell off was understandable.
So the 2008 profit might be an interesting historical figure for a year or so, until the domestic economy recovers. That probably won’t be to 2010 at the earliest, if the Reserve Bank starts cutting rates in a year’s time.
Alesco said 2008 profit rose 31.8% and reflected strong revenue gains and the impact of acquisitions over the previous couple of years.
Net profit for the year ended May 31 rose to $57.97 million, from $44 million, as revenue jumped 45.1% to $1.07 billion. That’s a record for both profit and revenues.
Operating earnings rose 36.9% to $72.3 million.
Alesco said its annual earnings per share were 67.2c, up 8.73% from 61.8c in the 2007 year.
Operating cashflow was $84.4 million, 1.19% up from $83.4 million year-on-year.
It declared a final dividend of 36c per share making 67c over the year, which was up from 63.5c in fiscal 2007.
It’s in effect paying out almost 100% of earnings as dividends for the year.
That’s the mark of a company looking to keep in sweet with the market because it knows tough times are ahead.
Will the dividend survive at current levels if 2009 is as "challenging" as the company expects it to be, is an even better point worth remembering.
