Reality check for stock investors as recovery seems to be some time off John Durie From: The Australian August 14, 2010 12:00AM
WEEK one of the profit season was a massive reality check for investors.
Worse-than-expected profit guidance slashed 12 per cent from Telstra's stock price and 3 per cent from the market.
The accompanying Macquarie Equities table shows how profit estimates are already being cut in a market that has stock pickers tearing their hair out.
The economic recovery is slow and patchy, with consumer spending weak and business investment more so, leading to weak outlooks for the likes of Telstra and Computershare.
The actual earnings came in as expected, but Australian stock prices rallied into the profit season, perhaps due to complacency against a backdrop of a slowing China, a weak US economy, and perhaps little sign of life outside Germany.
That complacency was gone by week's end as investors tried to sort through the results to find some sort of trend.
Market technicians measure something called True Market Surprise, which is the move in a company's stock price 24 hours before the profit release and 24 hours afterwards.
Bendigo and Adelaide Bank scored 4.7 per cent gain and Stockland 4.4 per cent, but from there losers dominated big time.
Telstra fell 10.1 per cent, Computershare by 6.9 per cent and James Hardie by 6.2 per cent.
These moves are meant to dictate price shifts over the next six months. If that's true, right now the outlook for stocks isn't great.
Telstra was obviously the big surprise, in part because it appears to have misread the market and certainly lost sight of the fact its stock had become a safe haven of sorts for fund managers unsure just where to put their money.
As soon as that certainty disappeared, down went the stock price, and retail investors will raise more questions if, as Gold Sachs's Christian Guerra argues, the dividend of 28c a share isn't sustainable.
Telstra has invested $24 billion over five years and all it has to show for it is $300 million extra in earnings before interest tax, depreciation and amortisation
If it wasn't for that spend it would have been in an even worse position, the company argues, but that return must raise doubts as to just what David Thodey can achieve with his $1bn market share fighting fund.
Cultural change is the best tool in an industry that undergoes a revolution or two twice a decade and must now be seen in a different light by investors.
The uncertain outlook is one issue, another is the recovery from last year's $100bn capital raising splurge.
Macquarie numbers for the 2010 fiscal year show industrial company profits are expected to have fallen 1.7 per cent, while earnings per share is tipped to be down by 8.1 per cent due to the dilutive effect of issuing more stock.
The impact is greater for property stocks, where profits are tipped to have fallen by 6.1 per cent and earnings per share by 29.4 per cent.
The figures show 54 per cent of the money raised was to repay debt, 10 per cent for working capital and 20 per cent to improve capital ratios for the banks.
Investment banks had a field day, collecting $1.9bn in fees and, in spite of the wretched climate, the shortfall on all issues was just 2.8 per cent. Investors are still paying the price for generous discounts of some 24 per cent, on average, by panicked boards, but the main concern is what happens next.
The trouble is, if the first week of profit reports is correct, recovery is some time off.
GrainCorp D-day
THE Australian Competition & Consumer Commission has set a date for its consideration of the GrainCorp takeover of AWB, with submissions closing on September 3 and a final decision due on October 7.
In its market inquiry letter this week, the ACCC covered a wide range of issues, including storage and handling, transport costs and export price setting.
The decision will not be as straightforward as first expected, because some years back the then competition regulator rejected a joint venture application. The industry has shrunk since.
In these days of soaring wheat prices and concerns on food safety one could expect the ACCC to tread carefully before waving through another virtual duopoly. AMP will next week launch its New York-based North American infrastructure office, headed by former Access Capital infrastructure ace Thomas Majewski.
As outlined previously, AMP has snapped up the Access team in New York, including Farhad Billimoria and Damien McDonald, along with former Allco Finance executive Digby Beaumont.
The additions, who complete AMP's global team, will report to Sydney-based global infrastructure chief Phil Garling.
AMP Capital has about $6bn under management, with about 70 in its team.
This compares with $2bn under management and seven people when Garling joined seven years ago.
The move comes as AMP tries to fill the gap left by the likes of Babcock, the aforementioned Allco and the big banks that have exited the space.
AMP has recently opened a debt and infrastructure fund and expects increases in global mandates for infrastructure, as well as country-specific mandates.
Trimming Qantas
QANTAS boss Alan Joyce is well advanced with plans to unite 8000 staff at the company's Mascot headquarters under one roof, in what amounts to an internal revolution.
Like NAB, Lend Lease and others, Joyce sees open-plan as a way of breaking down barriers between divisions and to get people talking to each other more.
Cultural change and cost cuts are the combined aims of the move.
Mascot now has two main buildings, a relic of John Ward's days in the 1980s, when new headquarters were built on the outskirts of Sydney to save money.
But the reverse turned out to be the case, as the takeover of Australian Airlines swelled staff numbers.
Qantas is still working through alternatives for the site, including a glass atrium between the buildings to provide an open-space meeting area.
Joyce is also looking at moving to a new site altogether in the name of harmony and cutting costs.
Airlines have big fixed costs and very variable revenues, which explains why most of the cost-cutting agenda is permanent.
Some time ago, streamlining the number of varieties of chicken breasts the airline used was on the list of its cost-cutting measures, as it tried to keep its head above water.
The airline ordered different shapes, sizes and quality for its different brands and classes before it realised it was cheaper just to buy one size from one supplier.
When Peter Gregg was running finance at the airline, his program was called Sustainable Future, which present Joyce has changed to Q Future.
Gregg streamlined chicken breasts, but Joyce has cut back the 52,000 suppliers the airline's 32,500 staff do business with.
Obviously, fewer suppliers can mean bigger volumes from fewer and better deals. Well, at least that's the theory.
Technology is obviously a big driver, as passengers can see when using the airline's automated check-in services.
The Tri-Gen power plant in Sydney is aimed at saving energy costs, as is the Required Navigation Performance program, designed to cut travel times and cut fuel bills by having aircraft fly lower.
A big change will come in 2012 with the Boeing 787, which is billed as the low-cost environmentally sound aircraft.
