Profit downgrades set to continue Friday, 06 May, 2005 Print...

Profit downgrades set to continue
Friday, 06 May, 2005 Print
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By Chris Herde

BRISBANE, May 6 AAP - The recent rash of profit downgrades is expected to continue as Australian companies prepare themselves for the reporting season.

While Australia's largest banks and resource companies have so far escaped profit warnings, many smaller and medium sized firms have issued unwelcome guidance over the past few weeks.

The small caps - those listed outside of the S&P/ASX 100 - have been most affected because they have the least resistance to an economic slowdown, especially those in the property and discretionary spending sectors.

And the pain is set to continue.

Bell Potter senior client adviser Stuart Smith said with companies approaching the end of the 2005 financial year, they were "pre-empting any nasties" which might appear in their books.

"It's all to do with margins," he said.

"All the big brokers are putting out lists of stocks that you shouldn't buy because of fears of margin squeeze.

"To a man they are all getting prepared for more downgrades."

Mr Smith said companies which can't immediately pass on increasing costs will be cruelled by the market.

In the past week property and property affiliated companies that recently reported downgrades include S&P/ASX 100 member Mirvac Group and small caps like Folkestone, Auspine and paint manufacturer Wattyl.

Others making profit downgrades have been automotive parts maker Pacifica Group, grain exporter GrainCorp and branding firm Signature Brands.

Shares in companies like car parts seller Repco, beverages firm Coca-Cola Amatil and retailer JB Hi-Fi have plunged after admitting conditions have become more difficult.

According to Macquarie Research Equities Smalltalk, the number of profit downgrades reported by small cap companies in 2004/05 is approaching 100.

These include household names like Sams Seafoods, Incitec Pivot, AV Jennings, Village Life, Funtastic, Spotless, Virgin Blue, Millers Retail, Flight Centre, Strathfield Group, Hutchisons Child Care and McGuigan Simeon Wines.

Yet according to some analysts it is not all doom and gloom.

FW Holst & Co economic analyst Michael Heffernan said the Australian economy remained strong.

He said although there may be concerns with the small caps, the blue chips and most of the companies in the S&P/ASX 100 were still sticking to forecasts.

"There have been a few downgrades but remember there are 1,600 companies out there," he said.

"There have been no downgrades in the top stocks and the mid range and smaller stocks have been the hardest hit.

"This is because they've had an excellent run and their future profits are not looking to grow as much as they did last year."

Mr Heffernan said the market was focused on economic events in the United States but the Australian economy remained in good shape.

"The economy is slowing down a little, it's not going into reverse and it's that what people have to realise," he said.

"But when you're going down from fifth gear to fourth gear there is a little loss in power and that's impacting on the retail end of the market in particular."

AAP