5min read
PREVIOUS ARTICLE Stocks set to benefit from the... NEXT ARTICLE There's no reason stocks can't...

Australia’s listed companies delivered a marginally negative performance during the recent reporting season, indicating the nation’s corporations held up better against the global economic downturn than their offshore counterparts.

But market analysts warn that overall company performances will worsen as global economic conditions continue to deteriorate over the rest of this financial year.

“While the outlook comments from results and the quantum of earnings revisions was negative, the overall tone of the reporting season was not quite the disaster the market was anticipating,” investment house Goldman Sachs JBWere said in a report.

Company results for the fiscal 2009 first half reporting season in February were “no worse than mixed”, Citigroup analysts said in a report.

Companies delivering surprisingly positive results outnumbered those with disappointing results by 10 to nine, with the balance performing broadly in line.

Nevertheless, median net profit growth was down four per cent on the prior corresponding period, the investment bank added.

“At a positive extreme profit results, which were mixed overall, could be taken as evidence of the relative soundness of Australia’s economy, timeliness and efficacy of fiscal and monetary policy responses, quality of the banks and the buffer effect of the 32 per cent drop in the currency,” Citigroup analysts said.

However, the fall in company earnings could have been just gathering momentum, as Australia’s economy slowed down in the six months to December 2008 and into 2009.

“Our view is that, as far as this earnings recession is concerned, we are no further through than the `end of the beginning’,” Citigroup said.

CommSec’s analysis of the results of more than 270 companies showed average first half earnings per share (EPS) was down 6.1 per cent on the prior corresponding period, excluding the diversified financial and real estate sectors which were dominated by asset writedowns.

But most sectors reported solid revenue growth.

CommSec chief equities economist Craig James said share market investors did not appeared unduly perturbed by the overall results in these the tough economic times.

“Companies always have to respond to the challenges posed by economic cycles,” he said.

“This may mean cutting dividends, raising capital or even attempting to win market share from struggling companies in the tougher economic times.

“Investors believe that companies are generally making the right decisions.”

However, the full year outlook is still soft for most sectors.

Mr James said some companies had used the “smokescreen” of the global economic crisis to deflect questions about their earnings outlooks.

And investment group Credit Suisse said many outlook statements had been “overly optimistic”.

“The chief concerns we had going into reporting season in the arena of capital rather than earnings – the potential for dividend cuts, stretched capital positions, refinancing risk – all remain,” its analysts said in a report.

“And many companies have failed to acknowledge the risks to their capital positions borne out of an inevitable decline in earnings, in many cases because they are not entirely cognisant of the rapidly changing macro environment that we are currently in.”

Credit Suisse noted that analysts’ forward earnings forecasts have been downgraded across most sectors of the market for fiscal 2009 and 2010.

And with just four months remaining in the 2008/9 year, and no recovery in global economic conditions in sight, there was potential for further downgrades in 2009/10.

Goldman Sachs JBWere said most of its earnings downgrades can be attributed to a deteriorating macro-economic outlook reducing sales and margin expectations.

But forecasts have also been diluted by a large number of equity raisings undertaken by companies since the beginning of the year, to shore up balance sheets and pay down debt.

UBS said while companies were in the midst of the toughest operating environment since the early 1990s, conditions in Australia still looked markedly better than overseas.

“However, the overall trend in earnings expectations is still for more downward revisions,” UBS analysts said in a report.

“Margins still look optimistic given the weak state of operating conditions.”

UBS said the key question was whether the local and global economies would stabilise and recover a little in the second half of calendar 2009, or get worse.

“In this respect, we believe the play out for the global economy will also determine the outcome for the local economy despite its resilience to date,” UBS said.

CommSec’s Mr James said that with the February reporting season out of the way, investors will focus on the United States, and especially instability in the banking system.

US authorities are still dragging their heels on addressing the fundamental issue of bad loans, and a lack of confidence in US and European policymakers will remain a major barrier for prospective investors.

Mr James said the recent Australian reporting season showed companies were still making money and meeting obligations, with operating or underlying profits still generally rising.

But more companies recorded accounting losses as a result of asset writedowns and impairment charges.

Mr James said 88 companies reported bottom-line net losses totalling $15.3 billion for the first half, influenced by writedowns, compared to 30 firms recording losses of $860 million in the prior corresponding period.

CommSec’s profit season analysis also found, surprisingly, that many companies maintained or increased interim dividend payments despite difficult markets.

Of 273 companies in CommSec’s sample, 47 lifted dividends, 125 maintained them at the same level, and 101 reduced them.

But Goldman Sachs JBWere analysts said that of the companies they covered, 51 per cent reduced dividends, 20 per cent held them steady, and 29 per cent increased them, leaving total dividends paid to fall by 2.3 per cent.

The reduction in dividends was driven by weaker earnings and companies moving to retain more capital given the squeeze on the availability of credit.

Full year dividends for fiscal 2009 are expected to fall by 18 per cent on the prior year, and then rebound in 2010.

Credit Suisse said the energy, consumer discretionary and healthcare sectors delivered a clear majority of positive results during the February reporting season.

Results were split mixed in the consumer staples sector, while other sectors reported mostly negative results.

Goldman Sachs JBWere said the property trust sector was the most disappointing, with net profits contracting by 11.1 per cent.

The resources sector lifted net profits by 24.1 per cent, boosted by strong residual prices in bulk commodities and the positive impact of a much lower Australian dollar.

Goldman Sachs JBWere analysts have upgraded their 2009 full year earnings forecasts for the food and beverages, gaming, discretionary retailing, utilities and gold sectors.

The major downgrades were in agriculture, building materials, steel, diversified financials, general insurance and metals.

CommSec said domestic-focussed non-financial companies had delivered solid results, underpinned by prudent cost control.

But the best performing areas were the “defensive” healthcare and pharmaceutical sectors.