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Report: "Major Sector Outlook is GRIM"



July 07, 2009 – Comments (0)

Outlook for major sectors July 7, 2009 - 9:25PM

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AVIATION - Matt O'Sullivan

Qantas will be in the minority this year as one of the few airlines globally to report a profit as the worst downturn of the jet age takes its toll.

However, the consensus earnings forecast for Qantas of just over $85 million is still a major turnaround on 2007-08 when it posted a record $969 million profit.

Without a $216 million profit in the first half of 2008-09, Qantas's bottom-line result for the full year would have been much worse because the slump in travel demand only hit home in February.

Qantas's profit warning in April suggests it will post a pre-tax loss of $188 million for the second half.

But Virgin Blue, Australia's second-largest airline, will not avoid slipping into the red this year due to the heavy discounting of airfares and the start-up costs of its long-haul carrier, V Australia. Macquarie Equities is forecasting Virgin to post a a $152 million full-year loss, compared with a $98 million profit in 2007-08.

BANKS  - Stuart Washington
Plenty of companies are not just going to see profits down but also because of big capital raisings, investors are going to be see a big drop in earnings-per-share because of the dilution caused by the record amount of capital raising - $90 billion - in the past year.

The capital raisings are a double whammy for investors because sharply lower profits are divided among many more shareholders.

We are likely to see a whole series of dividend cuts in the forthcoming profit season as investors adjust to a "new normal" of a much lower dividend yield from their investments.

Major customers of capital raisings - banks, listed property trusts, resource companies - are likely to be the worst affected in this regard.

The upcoming 2008-09 reporting season will be the toughest ever for the real estate investment trust (REIT) sector which has felt the full brunt of the global financial crisis.

Investors are bracing for almost all of the trusts to report bottom-line losses, thanks to 40 per cent-plus writedowns in asset values, rising gearing levels and steep falls in share prices.

Despite some companies already completing their re-capitalising, debt repayment schedules will continue to play a large role in determining which, if any, projects will be undertaken in the year ahead.

In the next few months, consolidation will be a key trend as the larger, more cashed-up trusts take advantage of the weaker share prices to snap up their smaller peers.

Although the REITs have raised more than $15 billion through rights issues in the past nine month, most of the cash has been used to shore up the balance sheet, rather than provide fresh spending money for the new financial year.

And with valuations tipped to fall by a further 15-20 per cent, some of the REITs may even return to investors for a third dip.

Many of the managers will blame the weak economy for the drop in assets sales volume. Those with exposure to the United States, Europe and Asia will also blame the implosion of those economies on the freezing of global credit markets.

The hardest hit trusts will be the office and retail landowners that have been whacked from both the fall in asset values and the weaker economy. The result has been rising office vacancies and falling retail sales - although the Federal Government handouts have helped cushion the blows.

Dexus has also warned of a further 10 per cent drop in asset values and others may will follow suit.

Westfield will be the stand-out given its size and global presence.

The internalisation of management at Macquarie Leisure is expected to be followed by other trusts as they shun paying out management fees to an external party. The managers will prefer to take on all the risks and use any excess cash to keep the business afloat and expand as market conditions improve.

HEALTHCARE - Eli Greenblat
A defensive sector which performs regardless of economic cycles.

Market heavyweight CSL will report a profit of about $1.1 billion, the first time it will break the billion-dollar barrier

A lot of interest on the impact of Federal Government policy on the health system and company sales.

MEDIA - Miriam Steffens
Media investors will be bracing themselves for another earnings season of doom and gloom, with the June half expected to be the weakest ever period for Australia's advertising industry. Metropolitan television ad dollars are expected to be down 15 per cent, and the large metropolitan newspapers had to grapple with even bigger declines, analysts said.

But with the profit declines largely expected, shareholders will be taking a close look at whether companies such as Fairfax Media (publisher of this web site) and News Corp will confirm recent comments that the rate of decline has slowed.

''We expect outlook comments to remain cautious in the August reporting season,'' Royal Bank of Scotland's Fraser McLeish said in his most recent note on the sector last month, warning such a result may hold share prices back in the near term before advertising starts picking up next year.

Fairfax Media warned in May its full-year operating earnings were likely to drop about 28 per cent to about $600 million because of the downturn in advertising.

West Australian Newspapers expects earnings may fall by close to a quarter this year, and APN News & Media said its profit in the six months to June would be down about 45 per cent.

Network Ten provided the latest evidence of the woes of TV broadcasters late last month, posting a 76 per cent slide in operating earnings for the third quarter.

But analysts pointed out that following the media sell-down of James Packer and Kerry Stokes to private equity in recent years, the earnings of Channels Nine and Seven will have limited impact on the results of Consolidated Media Holdings and Seven Network, respectively.  Seven, in particular, generates a large part of its profit from interest on its cash earnings.

RESOURCES - Mathew Murphy
Oil sank to a five-week low of $US64 a barrel this week - a harbinger of  the grim profit season expected for resources companies in general. The bumper results posted just a year ago are now distant memories.

Global demand for resources slumped for most of the past year although it has recovered somewhat since March. The shining light in the sector has been the gold sector as investors turned away from the volatility of markets, treating the precious metal as a reliable haven. The rest of the resource stocks, though, should take a hit compared with a year ago.

Pengana Capital's Tim Schroeders said investors should brace for a dismal earnings season for  resources stocks.

''Some of these stocks are just going to get obliterated,'' Mr Schroeders said.  ''The oil sector is going to look pretty awful. BHP and Rio (Tinto) are not going to look that flash.''

''The outlook comments are going to be crucial and what we have seen in the past six months is companies are reticent to look further than the end of their nose.  Maybe they will be a lot more adventurous on the outlook for the next 12 months and show more confidence in a rally,'' Mr Schroeders said.

RETAIL  - Eli Greenblat
The economic downturn and tight credit markets have crimped earnings and expansion plans for the industry. Countering that headwind, though, has been the $20 billion so-called cash splash paid by the Federal Government to help stimulate demand.

Myer, David Jones and JB Hi-Fi have recently issued profit upgrades after better-than-expected sales, sending retailing stocks sharply higher.

Interest is likely to focus on forecasts by chief executives for the 2009-10 financial year, in which no stimulus packages are expected.

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