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Reporting Season Wrap - Big Sky Financial Solutions

Reporting Season Wrap



The Australian share market reporting season has come and gone for another year, with the market delivering 11 percent growth for the financial year. The “two speed” economy was evident, with resources delivering 30 percent growth while the remainder of the market only gained three percent.

This was a reasonable result in a year where companies battled the global economic backdrop of a sovereign debt crisis in Europe, fears of a double-dip recession in the United States, and a sharp decline in consumer confidence. The main themes of the reporting season were rising costs, the strong Australian dollar, weak consumer demand, modest lending growth, and strong commodity prices.

The balance sheet of corporate Australia is in solid shape following the capital raisings during the early stages of the Global Financial Crisis, with the debt to equity ratio of 27 percent compared to the long-term average of 50 percent. This saw a number of companies announcing share buy-back schemes as a means of improving EPS and maintaining appropriate debt levels. Total buy-backs announced during the reporting season totalled $9 billion - the highest level in four years.

Dividends were generally slightly higher than expected, with average dividend per share growth of 6.8 percent. Only 15 percent of companies reduced their dividends, with nine companies using their excess cash to declare special dividends.

Current global economic uncertainty has made it extremely difficult for companies to issue outlook statement guidance for FY12 with any degree of confidence. For some companies, directors have opted not to give any guidance at all for FY12, preferring to update shareholders and the market at the time of their Annual General Meeting.

Analysts are forecasting EPS growth of high single-digits for FY12, which could be optimistic given the current volatility in global markets. EPS growth for the resource sector is expected to be around 23 percent, with growth in the banking sector of just under 10 percent.

The resource sector benefited from booming commodity prices, as long term demand from China shows little sign of abating.

Two highlights of the reporting season were BHP Billiton and Telstra. BHP reported the highest profit recorded by an Australian company. The company’s net profit of US$23.7 billion was boosted by surging commodity prices and delivered on flat volume growth.

Telstra reported a 16 percent fall in net profit. Telstra gained momentum in the second half the year following $1 billion in capital expenditure to win back market share in mobile phones. The company reaffirmed its expectations of paying a 28 cent per share dividend for the forseeable future, which equates to a grossed-up yield of just over 13% based on current prices. This is particularly attractive in the current economic climate.

The recent share market weakness and cheap credit available in the US means that companies are likely to be on the lookout for potential takeover targets. This has been highlighted by the recent takeover offers for ConnectEast Group, Foster’s Group, and Macarthur Coal.

The Australian share market looks cheap based on historical perspective, with the market trading on 10.2x FY12 profits compared to the long-term average of 14.5x.

The issue going forward is how much global growth will be impacted by the debt crisis in Europe.

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