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Profit wrap: Aussie companies cashed up

Corporate profit season

Comment from: Craig James, Chief Economist, CommSec

  • The profit-reporting season has largely concluded, although there are around 24 of the smaller ASX 200 companies (mainly resources companies) to report over the next two days. CommSec has assessed the results of the 115 companies that reported full year (FY) results and 36 companies that reported for the half year (HY) to June.

  • Overall 101 companies or 88 per cent of FY companies produced a profit for full year while only three of the HY companies didn’t report a profit. And 69 per cent of the FY companies reported an improvement in profit while 78 per cent of HY companies reported a similar lift in earnings.

  • As at June the 151 companies had cash balances of $100 billion, up 11 per cent on the previous reporting periods.

  • Dividends are back. Of the FY reporting companies, 83 per cent issued a dividend while 72 per cent of the HY reporting companies issued a dividend.

  • While the strength of earnings is encouraging, analysts wanted more. Bloomberg reports that 45 per cent of companies beat market expectations for earnings per share (positive surprises) while 55 per cent disappointed.

 What do the figures show and what does it all mean?

  • In aggregate, the 115 companies reporting for the full year (FY) to June posted earnings of $43 billion while the 36 companies reporting for the half year (HY) to June posted earnings of $11.5 billion. The good news is that cash balances and retained earnings are even stronger. The FY companies have retained earnings totalling $103 billion (up 16 per cent) with cash balances of $70 billion (up 8.5 per cent). The HY companies have retained earnings totalling $38 billion (up 16 per cent) and cash balances of $30 billion (up 17 per cent).

  • The FY companies achieved a 118 per cent aggregate lift in earnings from a 1 per cent increase in revenue and 5 per cent fall in expenses. The HY companies did better with a 20 per cent lift in sales outpacing a 4 per cent rise in earnings. Given substantial turnarounds on a year ago, it’s not possible to calculate HY aggregate earnings. But even excluding bellwether results from Mirvac and Rio Tinto, aggregate earnings were almost five times higher than a year ago.

  • Compared with analyst forecasts, earnings per share (EPS) results were mixed, just as they were in the interim reporting period to December 2009. Bloomberg indicate that 45 per cent of FY reporting ASX 200 companies beat analyst forecasts while 55 per cent fell short. Bloomberg have assigned results to either positive or negative “surprises” with no classification on companies reporting earnings “in line” with market expectations.

  • While 45 per cent of companies beat EPS forecasts, 48 per cent beat profit forecasts and 46 per cent beat analyst sales forecasts.

  • In terms of EPS positive surprises marginally outweighed negative surprises in basic materials, industrials and telecommunications. By contrast negative surprises dominated in heath care (67 per cent of results) and in financials (65 per cent of results).

  • According to Bloomberg the companies that surprised most with the strength of EPS results were Seven Group, Transurban, Australian Infrastructure, Bunnings Warehouse, Prime Infrastructure and Paperlinx. The disappointments were led by Ardent Leisure, Asciano, Riversdale Mining, Goodman Group, Alesco, AWE Limited and Foster’s.

  • The other pleasing aspect of the earnings season was that the majority of the companies chose to pay a dividend. A year ago uncertain economic conditions and weak balance sheets forced a rash of companies to either cut or suspend dividends. But fast forward twelve months and 83 per cent of FY reporting companies issued a final dividend while 72 per cent of HY reporting companies issued an interim dividend.

  • But in line with the cautious guidance, companies sought to strengthen balance sheets rather than boost dividends. Of the FY reporting companies only 40 per cent lifted final dividends compared with a year ago and only 25 per cent of HY reporting companies increased dividend payments.

Outlook:

  • Corporate Australia is back in the black. Not only did the majority of companies report profits during the earnings season but they also reported an increase in earnings on the previous period. Clearly the results are generally off a low base. But for many companies the past 6-12 months has still been a struggle given an uncertain global environment, a mood of conservatism amongst consumers and businesses and deflationary tendencies in many markets.

  • Investors would look at the situation quite positively. Companies are earning money again, dividends are back in vogue, balance sheets have strengthened and companies are sitting on a pile of cash. Analysts may have wanted more but they under-estimated the conservative mood of Aussie consumers and over-estimated how quickly economies like the US and Europe would bounce back from the global financial crisis.

  • Understandably Aussie companies have recognised the significant uncertainties dominating the operating environment and have been reluctant to provide guidance. But nobody is expecting companies to guess what will happen next, so if there is no basis to provide guidance, why try. Companies would just be on a hiding to nothing.

  • The lack of guidance by companies in the latest reporting period may be something that analysts will have to get used to – at least for the next 3-6 months. While companies still must update the market when there are material changes in the environment or affecting the firm, there is no compulsion on companies to give predictions.

  • Companies have focused on substantially strengthening balance sheets over the past year, trimming debt, lifting cash balances and retained earnings and cutting gearing levels. The risk is that companies become too conservative. So despite high cash levels being maintained, it doesn’t mean that companies will go on a spending spree. Certainly companies such as BHP Billiton are pursuing acquisitions and others like Woolworths are focusing on capital management, but companies will need greater confidence on the outlook before putting cash to work.

  • There is the risk that balance sheets may be seen as a little lazy but investors are likely to give companies a little more time before demanding that the cash is more actively put to work. Of the 151 major companies assessed, 63 lifted cash balances with 25 doubling cash held compared with a year ago. Interestingly The Reject Shop is sitting on $4.3 billion in cash (near zero a year ago) with Bradken, Adelaide Brighton, OneSteel, Amcor and Transurban also reporting big increases in cash held.

  • While Aussie companies are in good shape, we remain cautious on prospects for the ASX 200. The Australian sharemarket is still tracking other international markets, in particular the US. Foreign investors are also inclined to look for growth opportunities or turnaround stories. In Australia the coming year looks to be more of the same – the economy getting back to “normal” growth with “normal” interest rates and “normal” profit growth. Overall this is hardly the type of conditions that would prompt investors to take big bets on Australia. CommSec expects the ASX 200/All Ordinaries to lift to 4,800 by mid-year and to 5,400 by the end of 2011.

 

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