2007-08 Australian profit reports will be the big focus for investors with around 65 major companies due to report this week, including BHP Billiton, BlueScope, Boral, Oil Search, Coca Cola Amatil, Qantas, QBE and Wesfarmers. 80 are due to report the following week and you can bet that the quality of those reports (and some of this week’s) will be terrible.
So far the results have been pretty much in line with expectations, but the avalanche of reports over the next two weeks is likely to help provide a clearer picture as to how the corporate sector is bearing up in the toughest economic environment since 2000-2001.
The likelihood is that we will see more earnings downgrades for 2008-09.
In fact it will emphasise the point I made a week or so ago that it will be a reporting season in several sections: great first half to December, slowing to average second half in the six months to June, and forget 2009.
That was the message we saw last week, for example from Stockland, the country’s biggest residential property group, David Jones, the country’s leading department store and the Commonwealth Bank, the biggest bank.
The management of all three tried to shift the focus away from just how miserable 2009 financial year will be, compared to 2008. Stockland said prominently that it was looking for a rebound from 2010, and buried the fact that it saw the 2009 distribution rising by a "nominal" 1%.
The Commonwealth bank indicated it saw loan growth this year below the average of the past 10 years (which have been fabulous for banks), but tried to suggest that it would be on the prowl for acquisitions.
With dividend for the year up just 4 cents for the CBA, the real story in the coming year is what happens to dividend and earnings per share. The bank has stopped the silly waste of money of buying back enough shares to balance the shares paid out in the dividend re-investment program.
That is a saving of more than $400 million a year. It was done to make EPS growth, a key measure for analysts and big super fund investors, but not for small investors.
And David Jones upgraded its 2008 profit guidance after reporting a very sharp slowdown in second half and 4th quarter sales. It also forecast earnings growth of 5-10% over 2009 and 2010, but also forecast several quarters this financial year of negative to 1% growth in topline sales (which implies negative growth in same store sales).
This week it will be the outlook and earnings forecasts from the likes of Boral, Qantas, Wesfarmers, GWA International, IAG, QBE, lend Lease, Adelaide Brighton, Santos, Caltex, Transfield, BueScope and BHP which will be more important that the reported profits and dividends for 2008.
About the only sectors with a smile on their faces are contracting, engineering and mining services where good growth seems certain for the next year, at least.
A key point to continue to watch for is the impact of the slide in not only commodity prices, but also the Australian dollar: for some companies the slide in metal prices is bad news, but the drop in the dollar will lessen the blow.
For a company like Transfield, the drop in the dollar will soften the impact of the downturn in spending in the US services sector, for BlueScope, it should add to the bottom line if the 12% depreciation is sustained..
But in the next fortnight, we will get a good idea of how corporate Australia sees the coming year, and so far you’d have to say there’s a growing lack of confidence.
Up to Friday there had only been reports from 40 major companies and according to the AMP’s chief strategist, Dr Shane Oliver, the proportion of results in line with expectations is running at 53% which is well above that in previous reporting seasons, and the proportion coming in above expectations is just 20% which is well down (See the chart below).
UBS analysts have cut estimates for 2009 earnings on big cap companies by 4% so far this reporting season, and 12% for small caps. Macquarie analysts are cutting their forecasts and point out that analysts had 2009 bank earnings rising by around 5%, now the forecast is for a 3% drop.
Forecasts for property trusts and investors (Mirvac, Valad and Lend Lease, for example) plus infrastructure trusts (and financial engineers) will bear the lion’s share of big cuts in forecast earnings in 2009.
Other analysts point out that the number of companies reporting so far is down compared to last year, as infrastructure, financial engineering and property companies hold back until next week and the week after to dump what will be some very poor results onto the market in a blaze of red ink and lowered expectations about 2009.
Key themes from last week were: the Commonwealth Bank, Bendigo Bank and St George reports highlighted that significant problems with bad loans remains stock specific at present (and not across the sector, except for property)
We saw reasonable outlook statements from a range of companies including Crane, Cochlear, Worley Parsons, Computershare and Leighton.
Dr Oliver says that overall, while there has not been a lot of upside surprise the results so far have been nowhere near the disaster that the share market is priced for. But he says the year ahead is another matter.
