Adelaide-based Argo Investments expects first half profit to decline but says improving conditions in the market and economy mean there could be a modest increase over the full year to next June.
Chairman Chris Harris told shareholders at the group’s AGM yesterday that Argo had retained its forecast for net operating profit for the half year ending December 31 to fall by 25% to 28% from the same period in 2008-09.
The forecast excluded realised gains or losses on its stock market investments and any unrealised impairment revaluation charges.
Argo said in August it expected continued downward pressure on company profits and dividends in the first half, before a modest improvement in the second half.
He said the first half forecast, based on expected lower dividend and interest income, "is unlikely to be representative of the Company’s results for the current full year ending 30 June 2010, for the following reasons:
"The result for the previous corresponding period was a record first half for the Company – whereas the result, on the same basis, for that full year ended 30 June 2009 was down 10.4%.
"In our letter to shareholders dated 3 August 2009 we mentioned that we expected continued downward pressure on company profits and dividends in the half-year ending 31 December 2009, before a modest improvement expected in the first half of calendar 2010.
"In the absence of any unforeseen circumstances, the Directors have provided interim dividend guidance of 12 cents per share, fully franked, for the current half-year ending 31 December 2009, which compares with 14 cents per share in the previous corresponding period."
"Since troughing in March 2009, the Australian share market has risen around 56% in anticipation of the economic and earnings recovery flowing initially from the stimulus programs and subsequently from resumption in global growth. Despite some relief, credit conditions for borrowers still remain tight with funding costs relatively high and credit availability constrained.
"As a result, more than $110 billion in fresh equity has been raised over the past year by listed companies on the Australian Securities Exchange as corporate Australia de-leveraged balance sheets.
"Argo participated in many of these capital raisings at favourable prices," Mr Harris said.
"As was expected, Corporate Australia recently reported a tough results season.
"Those companies which were able to quickly cut costs and manage their capital fared better than those with high legacy cost structures.
"Looking forward, revenue growth should moderately improve and profit margins increase as the economy recovers, however, further cost cutting is likely to be limited as credit costs remain relatively high and input costs begin to pick up. Capital management is likely to remain conservative."
On the sustainability of the market rebound, Mr Harris was more circumspect:
"Presently, macroeconomic themes appear to be driving share market valuations as opposed to fundamental earnings.
"This makes long-term investment decisions more difficult."
CEO, Rob Patterson told the meeting that since balance date Argo had made "very few purchases".
He said that was because of "the substantial rise in the sharemarket, although we have continued to support a number of capital raisings made by existing investments, including $4.8 million in National Australia Bank Ltd.
"Since balance date, ABB Grain Ltd. has been taken over and our holding in Bendigo and Adelaide Bank Ltd. has been sold."
Mr Harris also told the meeting that Mr Patterson will be retiring at the AGM in 2010.
"After 40 years of dedicated and loyal service to the Company, our Managing Director, Mr. Rob Patterson has indicated that he will be retiring at next year’s Annual General Meeting in October 2010.
"The Board and senior management have been preparing for this eventuality for a number of years and I intend to further update shareholders on our succession plans in March 2010.
"It is the Board’s intention to invite Mr. Patterson to subsequently rejoin the Board as a non-executive Director following a well earned break. The expertise that he will continue to contribute to the Company in a non-executive role is considerable."
Argo shares rose 6 cents yesterday to $6.88 (in a market that was down all day), just 3 cents under its 52 week high of $6.91.
