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Published 02 September 2010 06:27, Updated 09 September 2010 04:16
The impact of the reporting season on equities has again been overtaken by global events in what has become a trend for the past couple of years.
Soon after the global financial crisis, investors focused on profits to ensure the earnings base of their investments had not fallen into a black hole. The focus then shifted to chief executives’ outlooks to peer through the global recession and see a return to growth.
In the current reporting season, the focus is again on chief executives’ outlooks and analysts’ expectations for 2011 earnings, both of which have cooled considerably over the past six months.
But overriding the profits and outlooks is the global economy and events taking place at a macro-economic level. It’s not an area that featured in investors’ interests for most of the decade but for the past three years it has been the dominant issue facing sharemarkets.
In announcing a 16 per cent rise in full-year profit to $US12.5 billion last week, BHP Billiton chief executive Marius Kloppers reiterated a theme that has been consistent over the past 12 months. He is cautious about the short-term outlook for the global economy but remains upbeat on the long-term pricing outlook for metals, driven by China’s appetite for raw materials and the looming prospect of India adding to that demand.
Even in the event of a double-dip recession, his long-term outlook does not waver as the lack of investment by mining companies globally in recent years due to chaotic credit and debt markets and the uncertain economic outlook means supply will remain tight.
BHP has backed its long-term outlook by trying to create a new division for the diversified miner through its proposed $43 billion takeover of PotashCorp in the US. This would give it an instant global position in the fertiliser feedstock market for the agricultural industry. It is also planning to spend $US15 billion on its mining projects over the next 12 months to expand its iron ore, petroleum and aluminium operations.
In the retail space, Woolworths managed to grab investors’ attention with its 11th consecutive year of double-digit growth in profits and it rewarded shareholders with a $700 million share buyback program. Share buybacks are a tax-effective means of returning excess cash to shareholders but in recent years such programs have been scarce as companies hoard cash to ensure a strong balance sheet in difficult times.
Woolworths posted a 10.1 per cent rise in full-year profit, to $2.02 billion, and chief executive Michael Luscombe focused on the retailer’s financial strength and market position to maintain long-term ambitions to achieve low double-digit earnings growth.
Chairman James Strong says the global economic challenges will continue in “the near term” but there was no guidance on how those economic pressures would feed through to forecast consumer spending habits. Luscombe did say that headwinds encountered in November last year and continuing through the first half of the year had abated and that sales in July and August had been surprisingly pleasing. He expects 2011 to be “more positive overall’ than the last financial year.
It has been a surprisingly strong reporting period for discretionary retailers, with JB Hi-Fi, Myer and David Jones all reporting some improving trends in consumer spending.
JB Hi-Fi reported a 26 per cent rise in full-year net profit, to $118.7 million, and forecast sales in fiscal 2011 to rise 11 per cent, to $3.2 billion. That rise will be largely due to the retailer continuing a strong platform of new store openings, chief executive Terry Smart says. While sales growth in July was positive, it will be a challenging six months as consumer spending remains subdued.
Smart and all retailers will take some comfort in increasing expectations the Reserve Bank of Australia will not raise interest rates until early 2011 as it grows increasingly apparent that the United States and Europe are moving into a slower period of economic recovery.
While David Jones reported only fourth-quarter sales, some comments by chief executive Paul Zahra were interesting and upbeat. He says sales in May were worrying but that weakness evaporated with stronger sales in June and July: “We are pleased to have reported positive like-for-like sales growth for the past four quarters. This trend suggests we have traded through the worst of the global financial crisis. The upward trend in sales in June and July more than offset challenges faced in May and provides encouraging support for the view that the worst is over and that the first half of the financial year is looking more positive.”
Macquarie Group senior analyst Sean Conlan says retailers have provided some of the few earnings upgrades in what has been a mixed bag of profit results across the board. Although retail sales for the June quarter fell a dramatic 30 per cent, the halt in interest rate rises flowed through quickly with a rebound in consumer sentiment and sales.
Conlan says the positives in the reporting season outweighed the number of companies downgrading 2011 and 2012 financial year forecasts. There was also a general picture of low and slowing revenue growth that was not being offset by continued cost-cutting, particularly in the business-to-business category.
In announcing a flat net profit of $132 million for the 12 months to June 30, Boral chief executive Mark Selway pushed the benefits that will accrue in the future from a six-month review to reposition the building and construction products group in its key Australian, Asian and American markets long and hard. However, in the year ahead, he says the outlook is tough in key product markets and that economic volatility is making forecasting difficult.
BlueScope Steel, which turned the previous year’s loss into a $126 million net profit for the full year to June 30, has witnessed steel prices and demand weaken since the June balance date. CEO Paul O’Malley labels the weakness as short term and is optimistic about the company’s medium- to long-term prospects, which was a view reinforced by a board decision to reinstate dividends on the basis they can be maintained in the future.
O’Malley also recognises the changed business environment for risk. “Our target gearing has been reassessed and we believe a range of 25 to 30 per cent, down from a range of 30 to 35 per cent, to be appropriate for a business operating in a cyclical industry while seeking to maintain strong investment-grade metrics,” he says.
It’s further evidence that corporate earnings will be based on lower leverage, which, while reducing risk to investors, will also lower potential returns.
However, as many companies already have gearing below 30 per cent, when a more general shift to use balance sheet strength to grow becomes apparent, it will involve big spending commitments. There is already some $123 billion in committed investment in the year to June 2011, of which more than half comes from the mining sector.
Some important sharemarket sectors, such as financial services, are still trending below par, with growth of only 9 per cent forecast in 2011, following a 5 per cent fall in the year just passed.
|Company||Date||Interim or Final||Forecast net profit after tax ($m)||Announced net profit|
|Adelaide Brighton||Aug 19||1||66||68.8|
|BHP Billiton ($US)||Aug 25||F||12,636||12, 722|
|Coca-Cola Amatil||Aug 12||I||209.7||212.7|
|Commonwealth Bank of Australia||Aug 11||F||5978||5664|
|Newcrest Mining||Aug 16||F||760.3||763.7|
|Origin Energy||Aug 24||F||605.6||585|
Source: Goldman Sachs Investment Research. All figures in $A unless otherwise advised