Last year's raisings about to inflict pain MARTIN COLLINS: John Durie From: The Australian January 23, 2010 12:00AM
THE good news is Australian corporate profits rose in the last half, but perhaps the untold story of the coming profit season will be the overwhelming evidence of the massive dilution inflicted on shareholders by last year's capital raisings.
The accompanying table from Macquarie Equities illustrates the point well, with its team forecasting 7 per cent growth in corporate profits but a 17 per cent fall in shareholders' share of that profit, measured by earnings per share.
Last year the entire Australian stockmarket had the equivalent of a one-for-nine rights issue, with more than $90 billion in equity raised -- much at bargain basement prices, reflecting desperation by corporate boards fearing the worst from the financial crisis.
It is easy to be wise in hindsight, and many smart people, such as ANZ Bank's Mike Smith, warn there may be another fall, but there's no denying the deep hole directors have dug for their shareholders.
The debate, of course, is on whether it was necessary to issue so much new equity and siphon $1.8bn from shareholder pockets into investment bankers' wallets as fees earned from the very capital raisings they urged. In many cases the risk was minimal.
Highlights included the $3.2 million in fees Macquarie and UBS pocketed from a $400m SPAusnet entitlement offer when the parent company provided $210m of the funds.
The Transpacific saga gets worse daily, but amid the tripling of its shares on issue last year Deutsche and Macquarie pocketed $3.2m for a $175m retail issue fully underwritten by new major shareholder Warburg Pincus.
These same investment banks will do their best to ensure the debate is on the "right" track, which will tend either to ignore the impact of the equity raisings or remind the market that it's the future that counts, not the past.
Earnings per share has long been seen as a good proxy for corporate performance because it measures shareholders' share of the action.
This time around we will be told to focus on underlying, or real, earnings or to look more for the coming change to provide a much better barometer of the best stocks to follow.
That may be true from a short-term investment perspective, particularly now, in what is seen to be a stockpickers' market, but as a measure of long-term performance it is nonsense.
Macquarie Equities' Tanya Branwhite will address this balance after the earnings season, studying performance measured by return on capital.
That is a better measure of corporate performance over the long term because returns on equity are affected by leverage.
There is some dispute on the issue, with Goldman's Chris Pidcock arguing leverage in Australia has never hit the excesses of the late 1980s and early 1990s, so changes in profit margins have more impact on returns on equity.
There are some obvious exceptions, such as the aforementioned Transpacific, which has a debt to equity ratio of 77 per cent and is still a basket case.
The listed property sector, which en masse was built on debt, also is still crawling out of trouble.
Either way, corporate Australia has trashed returns by issuing more equity to cut debt, or in the case of Wesfarmers, to pay for massive expansion through the purchase of Coles.
On Goldman's figures for the industrial market, returns on equity have fallen on average from 14.5 per cent in 2007 to 11.5 per cent last year.
While edging higher to 12.2 per cent this financial year, they will still be behind at 13.9 per cent next financial year.
The market has celebrated some earnings upgrades, but they tended to be stock specific, and returns for the latest half will be patchy at best.
That means, assuming the results come in as expected, they will confirm the rally in the market rather than being the cause of a re-rating. The market is trading at about 15 times this year's forecast earnings and 12.5 times next year's earnings, which compares with the long-term average of 14 times.
That tells you the market is expensive now, but as investor minds tick over to next year's bets, the more reassurance they get from companies in the coming earnings season the better.
Then again, the market seems in need of a rest.
Since bottoming in March at 3145 points it rose 57 per cent to a high of 4950 points before slumping some 4 per cent in recent days to finish the week around 4736 points.
This is, of course, 30 per cent below the all-time high of 6828 points in November 2007.
In fact, the earnings season may well be the major source of certainty in coming weeks, with the latest Henry tax review rumours, no matter how many times they have been recycled, adding to the list of woes.
China, as has been well flagged, is the key concern because its growth is supporting Australia and the rest of the world.
ABA's new chief
THE Australian Bankers Association has chosen a safe pair of hands for its new chief executive -- government relations veteran Steven Munchenberg. Munchenberg heads government relations and was previously in the corporate policy field at the Business Council of Australia.
He comes to the job at a crucial time for the industry, with this year shaping as one long election campaign.
At the same time there will be international pressure to increase regulation of Australian banks.
While Australia works closely through the international forums such as Basel, US President Barack Obama, for domestic political reasons, is following his own course.
That is a key concern for the local banks, which argue it doesn't make much sense to follow European rules when the US will ignore them. And in any case, they argue, the Australian system isn't broke, so why fix it?
The banks have a point, but as the most protected industry in Australia they cannot expect support if they don't play by the international rules.
The battle for Axa will also turn the spotlight back on bank competition issues as the big four extend their stranglehold on banking into wealth management.
The ABA's public face is rotated around the big banks, with Commonwealth's Ralph Norris currently in the chair, but in Munchenberg the bank lobby has found a superbly credentialled, highly personable representative to replace David Bell.
Axa waiting game
THE battlelines are drawn in the struggle for Axa, with the wealth management company reporting National Australia Bank has completed its due diligence ahead of its planned $4.6bn bid for Axa's Australian arm.
The clean bill of health means it's now just the regulatory battle before any price war between AMP and NAB.
Axa said earlier in the week its Australian operating earnings fell from $275m to $205m in the latest half but this was ahead of analysts' estimates of $185m.
NAB must now wait until February 6, when Axa's French parent company is free to talk, once its exclusive arrangement with AMP ends.
The bank's bid is also subject to Australian Competition and Consumer Commission clearance, which won't come until mid-March, or one month after the ACCC rules on the AMP bid.
If AMP comes back with a higher bid, NAB will challenge it before the Takeovers Panel and seek an Australian Securities and Investments Commission declaration that the company will have breached truth in takeovers rules by making a higher offer when it had already ruled out such a move.
