Gloomy news for shareholders in two mid-ranking stocks – Regional Express Holdings (REX) and Bank of Queensland (BOQ) – at AGMs yesterday.
First up Regional Express’s new earnings warning just about condemns the domestic airline business to the scrapheap for another year.
Virgin (VAH) is raising $350 million and losing money in its battle with Qantas (QAN), which is also battling to keep its margins safe for its domestic mainline, plus Jetstar and QantasLink.
Weak demand, volatile fuel and currency costs (hedging to protect the business is expensive) and the sluggish outlook for resources (where Rex is a significant travel operator) means a rough year ahead for all local carriers.
Rex, which has regional scheduled and unscheduled air services in parts of the East Coast of Australia, warned shareholders that earnings will fall this year (after they were hit in the year to June).
"Continued weakness in the Australian economy in 1Q FY14 indicate that the full year performance will significantly deteriorate," shareholders were told at yesterday’s annual general meeting.
Apart from that the company’s deputy chairman John Sharp said the company can’t provide any earnings guidance because of the volatile outlook, especially for the dollar, fuel costs and the strength of the economy.
But obviously the first quarter performance was so weak that the airline sees no chance of an improvement in earnings by the end of the 2014 financial year next June.
This followed a 45% slide in the net profit in fiscal 2014 to $14 million, even though passenger numbers only fell 6.5%.
Rex blamed that slide on the carbon tax. Seeing that’s no longer an irritant, it’s back to the big picture and ‘the weak economy’.
Though in the company’s defence, the slowdown in resources means less demand for travel in regional parts of the East Coast, especially for Fly in-Fly out business for miners and service companies.
A year ago, Rex also downgraded its 2012-13 profit outlook, and now there’s yet another reduction in the airline’s expectations.
Rex shares dipped 1.5c to 92c yesterday in a weaker market. Investors have been expecting negative news from the AGM on the outlook. Rex shares are now at their lowest for two and a half years.
REX YTD – Rex downgrades outlook, again….
And there was a similar message from the Bank of Queensland AGM in Brisbane as well.
They heard that the bank faces the impact of the slower economic growth in the year ahead, with the sluggish domestic economy and strength of the Australian dollar weighing on the bank’s earnings outlook.
Chairman Roger Davis told shareholders that while he was confident in a 2014 result similar to 2013, there were significant challenges to be faced.
Bank of Queensland bounced back to profit in 2012-13 after becoming the first Australian lender to post a loss for 20 years in the 2012 year as it took write-downs on property and franchising assets.
It reported cash earnings to $119.9 million after seeing good in its home loan book in the second half.
"While we are pleased with the 2013 result, we also recognise the challenges of the year ahead will bring with slowing economic growth, continued margin pressure especially from the asset side of the balance sheet, rising regulatory imposts, continued weakness in non-mining sectors of the economy and frustratingly high exchange levels and, of course, continued global growth concerns," Mr Davis told the meeting.
"Our sense is that the year ahead will not be dissimilar to the one we’ve just had and that a broad-based recovery is still up to 12 months away and depended on a number of factors, especially any depreciation in the current value of the Aussie dollar."
Chief executive Stuart Grimshaw said the upcoming inquiry into the financial services sector needed to address the difference in capital requirements for big and small banks.
"The reality is that the funding advantage the big banks currently enjoy creates incentives to become bigger and more complex," he said. ”We think an inquiry should address the issue.”
But that’s not the big message from the AGM, it’s the weak and indifferent outlook.
Bank of Queensland shares eased 3c to $12.30.
BOQ YTD – After a great year Bank of Queensland not to upbeat either
The takeaway from the BOQ AGM is that shareholders in all banks heard a summary of what faces them in the coming year after the record pace of earnings and dividends for the big four especially.
The Bank of Queensland and its peers are going to depend on the strength of the home loan market for revenue and earnings growth and to protect margins. If revenue growth slows, it wouldn’t surprise to see the bank’s cost rise and action taken to reduce those costs.
Even though all banks showed good cost control in the 2013 year, slowing revenue growth is a strong possibility if domestic growth doesn’t expand out of housing and into other areas of consumption where credit is needed, such as in credit cards and personal loans.
