January 30, 2012
REPORTING season for first-half results is expected to be a bloodbath for the retail, manufacturing, media and housing-related sectors, with only those companies connected to the resources sector likely to escape relatively unscathed.
"The two-tiered economy will again be in evidence," UBS equities strategist David Cassidy said, adding he expected reporting season to show "further evidence of subdued profit conditions and more trimming of estimates".
"Top-line growth will be subdued across most sectors, while margins will also remain under pressure in many areas," he said.
Mr Cassidy said the average market estimates for annual earnings per share growth by Australian listed companies had fallen by 8.4 percentage points over the past six months, and was now at a "moderate" 7.8 per cent.
And despite the Reserve Bank having delivered interest rate cuts in November and last month, Mr Cassidy said there was potential for further downgrades to earnings estimates if commodity prices and financial markets underperformed, given the dominance of those two sectors in the Australian equities market.
"It is premature to expect we are at the bottom of the downgrade cycle for domestically focused industrials," he said.
Citi equities strategist Tony Brennan said while the six months to the end of last month were difficult for some industries, the earnings period largely pre-dated the RBA's interest rate cuts.
"This, and any further easing considered necessary, should assist June-half earnings, though with the decline in commodity prices as well, fiscal 2012 market earnings still may not show much growth overall," he said.
Patersons Securities analyst Kien Trinh said cost inflation would be a major theme for companies reporting over coming weeks, with higher input costs from rising commodity and energy prices likely to have a significant impact on margins.
He said sectors most vulnerable were transport, consumer goods, motor vehicles, building products, construction materials and consumer staples.
Even the resources sector would not be entirely spared, he said, predicting project delays and cost blowouts among the mining, construction and energy sectors would be an issue for companies including BHP Billiton, Woodside and Murchison Metals.
A tightening labour market, skills shortages, supply chain bottlenecks and rising wages would constrain expansion plans in the construction, mining and engineering industries, he said.
"For the last 18 months, wage growth has outpaced profit growth and continues to accelerate in 10 of 15 industries," he said.
Mr Trinh said the strength of the dollar would also play a major role in earnings season, with companies making a significant portion of earnings from offshore, such as Paperlinx, Incitec Pivot, Bluescope Steel, OneSteel and Billabong, most at risk.
But Mr Trinh said the poor outlook could also provide an opportunity for share buybacks, with corporates looking to take advantage of low gearing levels and weak share prices.
The season will get off to a slow start, with the only major results due out this week coming tomorrow from education provider Navitas and on Wednesday from Energy Resources of Australia.
But the most-watched results this week will not be profits but second-quarter retail sales figures from Woolworths tomorrow and Wesfarmers on Wednesday.
Deutsche Bank is tipping Woolies to report a 2 per cent rise in food and liquor sales from Australian stores, but a 3 per cent decline in revenue from discount department store division Big W.
Both Woolworths supermarkets and the Wesfarmers-owned Coles supermarkets are expected to show continued price deflation.
Article by Blair Speedy From:The Australian