You have to be a bit cynical about the result property group Stockland (SGP) released to the market yesterday, showing a 78% drop in full year profit.
The group changed CEOs during the year with long time boss Matthew Quinn departing to be replaced by Mark Steinert, who has adopted the age old trick of writing down some of the assets – in this case the company’s housing business.
All new CEO’s do these balance sheet clean ups to some extent – it helps make them look better and improves the base from which they can increase earnings and their remuneration.
That writedown was announced earlier this year. Yesterday we saw the impact on the company’s 2012-13 results.
Residential was one of the main areas where Mr Quinn and his management team had concentrated on in recent years, along with retirement villages.
But under Mr Steinert, Stockland is going back to the future, by emphasising retail and industrial property, which were the company’s strong suits years ago.
The outcome of the writedown – some $355 million after tax – is to make Mr Quinn look bad and lower the asset values in the residential business at a time when property prices are in the early stages of an upswing, along with new home construction.
So when the upswing occurs and property sales rise and Stockland starts making money, the profits will look better than they would have been at the old valuations – and no doubt all the managers and board will bask in the luxury of reporting improved profits (starting this year) and no doubt improved remuneration.
While the board of a company has to approve the actual impairment, the tests are carried out by senior management and their employees and announced and defended by the CEO. Whether the writedowns reflects the true state of Stockland’s business is another thing. After all, housing starts and prices are higher than a year ago, while finance approvals are also rising. if anything, the residential housing sector is looking a bit better than it did 12 months ago.
Stockland is also selling its 14.9% in retirement rival, FKP Property, with the cash raised of about $475 million to be used to help finance new developments across the business, including the residential communities.
The FKP play was another deal from former CEO Matthew Quinn that didn’t go anywhere in the end.
Stockland reported a net profit of $104.6 million for the 2012-13 financial year, down 78.5% thanks to that $355 million writedown.
Underlying profit, which excludes the writedown, was $494.8 million, 27% down on the previous year, so times were much tougher in 2012-13.
The shares ended higher on $3.70.
SGP 1Y – Stockland’s full-year profit slides
Mr Steinert said in the statement yesterday that: "This has been a challenging year and we have responded with a number of important strategic decisions that position our business for stronger future returns."
"We significantly restructured the business to reduce costs and improve core processes and skill sharing."
Mr Steinert said the company continued to face difficult conditions due to weak consumer confidence.
"In Australia business confidence remains low and consumer spending is relatively soft as households continue to de-leverage," the company said in its statement.
"We expect consumer sentiment will remain relatively subdued, however we do anticipate continued moderate economic growth."
The final distribution was the already announced at 12c a unit, making 24c for the year. Stockland expects to maintain that payout rate in the 2013-14 year.
Mr Steinert said Stockland was expecting a "steady improvement in earnings from the 2014 financial year" with new Retail, Residential and Retirement Living projects contributing and as benefits of cost reduction initiatives and Industrial lettings are realised.
He said the company was "targeting earnings per security of 4-6% above FY13".
