The next few weeks will see an outbreak of ‘earnings honesty’ as companies large and small try to soften the blow to investor confidence from lower revenue growth, weak or lower earnings and lower or stalled dividends, as well as big asset impairments in the energy and mining sectors, and in other sectors, such as the broadcast and print media and perhaps retailing.
In fact judging by the updates during the annual meeting season, the 2014-15 interim (and in some cases full year) reporting period won’t see good news from many companies, large and small.
In fact some companies are clinging to an improvement in the current six months period to the end of June to meet full year guidance, which will be a stretch for many.
The plunge in oil prices, on top of the rout in coal and iron ore, will be seen in the interim and full year results from a slew of resource companies, but they won’t be alone and we can expect bad news from many companies in the rest of the market, as we saw with the numerous warnings issued during the annual meeting season late last year.
Possibly the most important set of reports will be the Commonwealth Bank’s interim in mid February, and the trading updates for the first quarter from the NAB and ANZ.
Outside of those from mining giants such as BHP Billiton and Rio Tinto, and retail giants, Woolworths and Wesfarmers, the updates from the banks will go a long way to setting the tone in the market for the next few months.
Retailing is already shaping up as a bit of a disaster zone with a quartet of companies already revealing cuts in the past six weeks – Metcash, Kathmandu, OrortonGroup and Specialty Fashion Group.
Falling copper prices will add to the pressures on the resources sector – led by BHP Billiton, Rio Tinto (shareholders in the giant Escondida mine in Chile) and Oz Minerals and its Australian mining business. Glencore, which is not listed in Australia, is under pressure from weak coal prices and the falling copper price (for its mines in the Mount Isa region of northwest Queensland). That adds to the emerging belief it won’t be a bidder for Rio Tinto soon.
December quarter reports for both BHP and Rio Tinto this week will go a long way to setting investor views of the outlook for both miners – Rio will also report 2014 production and sales data, BHP will report six months sales and output figures.
Both will give us an idea about their respective profit reports next month which will feature big falls in revenues and earnings.
The production and sales figures will look impressive, but we will have to wait for a month until the 2014 full year figures for Rio and the six month profit report from BHP, are released to see what the damage is to the finances of both giants from the slide in iron ore coal, and oil and gas prices (in the case of BHP).
Both companies are expected to keep dividends steady, but the future timing of Rio’s reported $US5 billion buyback, is now up in the air.
Apart from the looming half and full year reports and updates, the past month saw,the Spanish bid for Transfield Services failed when the target company rejected a sweetened offer in late December, but Skilled Group is still under assault from Programmed Management Services.
Investors will have to weigh the impact from the weak market conditions many companies encountered in the December half year from the sluggish domestic economy, the slide in commodity prices, led by iron ore, coal and oil and gas, will blight the profit and loss accounts and balance sheets of companies from BHP to Santos, Woodside, Seven West Media, Seven Group Holdings, mining companies large and small.
The share prices of Oz Minerals took a pounding last week as the copper price slid, as did the shares of Pan Aust, and BHP and Rio. But the rebound in gold prices has helped soften the damage for the likes of Newcrest and Northern Star Resources, especially after the Swiss National Bank ended its support of the franc at 1.20 to the euro last Thursday night, sending gold sharply higher, support which continued through Friday.
Services companies, such as education and software will report variable figures, judging by the early data.
But watch the retailers where bad news is already flowing. Kathmandu issued a weak trading update late last month and more are expected from some of its competitors, but Gerry Harvey reckons Harvey Norman has seen an upturn in sales this month.
Retailers are being looked at in new light by some investors because they expect consumers to spend some of their fuel price savings in them in coming months.
As usual JB Hi Fi will be one of the sector’s bellwhether stocks for investors to assess overall sales and profit performance. If they have seen an upturn in traffic and spending on consumer electronics, then the market will take that as positive news.
But reports from David Jones’ new owners, Woolworth of South Africa, indicator that it wasn’t a great Christmas trading period for department stores, although some improvement in January has been reported.
And last Thursday, OrotonGroup joined the downgrade warning club when it told the market that first half underlying earnings are set to fall by between $2.5 million and $3.5 million, from the $8 million reported in the first half of 2013-14.
Oroton had already warned its earnings would be weaker, mainly because of less discounting on its products, the cost of starting up its joint venture with US clothing label Brooks Brothers, and the closure of a store in Hong Kong.
And while sales have picked up in the past three months, (which takes in the Christmas period), but the recovery hasn’t been enough to offset lower earnings in the three months to October. But Oroton management is tipping second half earnings to rise modestly from the $5.3 million achieved in the same period in 2014.
For Specialty Fashion the news Friday was also gloomy – despite good performances in many of its chains, the recent $4-$5 million acquisition of the Rivers brand has turned to dust and will push first half earnings down by up to 32%.
The company, which owns the Katies and Millers women’s fashion chains, expects earnings before interest, taxation, depreciation and amortisation for the six months to December 31, to be between $21 million and $23 million, down from $31.2 million last year.
It comes despite Specialty lifting group sales 27.4% to $413 million during the half and comparable sales growth of 5.7%, excluding Rivers stores. Ballooning losses at Rivers have more than offset the higher sales from the acquisition.
Listed investment companies (LICs) will feature because they will not be able to escape the weak performance of the market in the December half year, and the fall in the price of some of the big miners and oil groups, such as BHP, Woodside, Santos, Rio Tinto and Oil Search.
Sharp rises in the price of Telstra shares (they hit a 13 and a half year high of $6.275 last Friday) will help offset those losses for the LICs, and the continuing strength of the big banks, led by the Commonwealth Bank, will also help the LICs, which are big holders for the dividend.
But their interim results will be subdued, as half year report last week from Mirrabooka and Djerriwarrh Investments showed (a slide in profit, a steady dividend on the previous corresponding half, and a build up in cash reserves as the companies watch for value to reappear and markets to steady).
In the broader market we have seen a number of small companies provide bad and good updates to the market in the first couple of weeks of January.
Christmas Eve saw some bad news delivered by struggling education services provider, Vocation, which was one of the big flops of 2014.
Vocation told the ASX it is preparing for some heavy write-downs on the carrying value of some of its assets. If it happens, it will mean more red ink from the company which has already revealed heavy losses.
Vocation told the ASX that it "is currently reviewing the carrying value of its non-current assets including intangibles which may result in some non-cash impairment adjustments" when the company reports its half-year results in February, 2015.
Stream Group, the small, $30 million ASX-listed insurance claims assessor, told the ASX it is expecting a pre-tax loss for the first-half because of benign conditions and expansion expenses.
Software company Altium told the ASX that preliminary revenue growth figures fell short of expectations. Management blamed the outcome on "challenging" conditions in Europe and currency fluctuations.
Sydney-based Redflex Traffic Systems confirmed that it faces write-downs if its traffic programs in the US states of New Jersey and Ohio are discontinued because of legislative decisions.
And the weak conditions in the resources and energy sectors hit Titan Energy Services, which says it will report a loss at the earnings level for the December half and has announced a capital raising to repair its balance sheet.
Titan’s problems have also hit a key supplier, Royal Wolf, which warned it is looking at a hit to earnings of around $2.5 million for the year to June from Titan’s woes.
It won’t be the last in the resources area to issue such a statement. It was in fact a follow up from Titan to a warning issued late last year.
Infrastructure and environmental services company Cardno, which has also been facing pressures from weak demand for its services here and offshore, parted ways with its CEO Michael Renshaw who resigned immediately after only 10 months in the job.
But on the plus side, Beacon Lighting Group told the market before Christmas that it would report further growth for the first half of the fiscal year.
The lighting retailer, which floated last April said it expects to report earnings before interest, tax, depreciation and amortisation of between $13.6 and $14.6 million in the six months to December 28.
The guidance follows strong full-year results in 2014, where the company posted a 21% in EBITDA to $20.1 million. The company said the latest guidance was a result of strong company store comparative sales and a rise in trade sales.
Beacon Lighting will announce its interim results in February, but it would seem it is one of the companies benefiting from the strong level of activity in the home building and renovation sectors.
LifeHealthcare Group last week told the ASX it would beat prospectus forecasts with net profit up to 20 per cent better than initial expectations.
And North Star Resources revealed that the lower dollar, higher production and gold prices had resulted in a boost to revenues, cash flow and enabled the company to pay down debt.
Toll road giant, Transurban said last week it saw a 63% jump in revenue from its toll road network thanks to strong traffic growth in Sydney and Melbourne, but not the early impact of the acquisition of Queensland Motorways last July.
Toll revenue was up 37% to $385 million on a proportional toll revenue basis, the company’s preferred measure. The company reports on February 12.
Whitehaven Coal has achieved record sales in the December half year, but warned last week the outlook remains poor with the coal market weak due to lower Chinese demand.
The miner told the ASX that coal sales in the six months to December 31 rose 6% from the same period a year earlier to a record six million tonnes.
Production of saleable coal was up nine per cent to 5.7 million tonnes, despite a 17% fall in the December quarter.
Production fell at three of its mines in the December period, with a halt in mining at Narrabri, in NSW,f or works on the longwall having the biggest impact.
The company pointed out that coal prices continued to fall in December quarter, and Whitehaven now sees a price range of $US86 to $US88 a tonne for its coking coal in the March quarter, in line with the $US87.56 realised in the December quarter.
Prices for thermal coal exports averaged $US66.07 a tonne in the three months to December, but will remain under pressure because of the weak demand from China. the company reports its interim figures in February.
Struggling iron ore junior Atlas Iron is facing up to $900 million of write-downs for the December half year, thanks to the slide in iron ore prices last year.
The impairment, announced in a statement just before Christmas will mean the company will incur a massive loss of around $900 million because the company says its “normalised” earnings before interest, tax and depreciation were “approximately break-even”, before any one-off restructuring costs.
Managing director Ken Brinsden said in a statement the impairment of Atlas Iron’s exploration and project assets in the Pilbara reflected “the changing equity markets and assessment of asset values in light of revised forward pricing”.
Atlas cut jobs by 10% in early December lowered its full-year guidance on costs after raising cost-cutting targets recently to $75 million to $100 million by June 2015.
Listed investment company, Mirrabooka Investments posted a profit of $3.7 million for the six months to December 31, down 16% from the same half of 2013-14 when it earned a net profit of $4.4 million.
Revenues edged up 2.4% to $4.9million compared with $4.77 million in the first half of the 2014 financial year. Mirrabooka said it will pay a fully franked interim dividend on February 10 of 3.5c per share, the same as last year’s interim payment.
Djerriwarrh Investments, a stablemate of Mirrabooka, also reported a fall in profit for the December half year after it too failed to beat the market. The company reported a half-year profit of $19.8 million in December, down nearly 11% from the $22.2 million recorded in 2013-14’s first half.
The portfolio returned 0.4% during the six months to December, failing to beat the ASX200 index’s 3.3% rise in the half year. Djerriwarrh’s portfolio was affected by falling commodity and oil markets, which hit companies such as Santos, Oil Search and Woodside Petroleum. Investors will receive an unchanged 10 cents a share interim dividend.
And on Friday, ALS Ltd, the Brisbane-based testing giant had goodish news for investors – it says its third quarter was better than expected. ALS had said in late November that expected underlying net profit after tax for the December 2014 quarter would be around $40 million. In the event, it was much better – $46 million according to Friday’s statement.
That was 15% above the forecast and an increase on both the First Quarter ($30 million) and Second Quarter ($38 million) of the current financial year, "and in line with the third quarter of the previous financial year on a like for like basis. The better than forecast result was struck on stronger than expected geochemical sample flows and the benefits of cost reduction initiatives across all divisions.”
"Total Group revenue for the December quarter was $376m compared to $373m in the December 2013 quarter; excluding Reward Distribution which was divested in October 2014,” directors said. That’s a sign the company’s profit margins were stronger in the quarter as well with earnings up $6 million on a $3 million rise in sales.
Compared to what we are hearing from other companies in the resources and associated service sectors, ALS’s update could be one of the rare examples of ‘good’ news this reporting season.
