Earnings Outlook/ GUD's Static 2009 Forecast

Sydney, July 25, 2008 (ABN Newswire) - So far we've only seen some scattered June 30 reports: a couple of filings from investment companies associated with Goldman Sachs JBWere, some tiddler industrials and yesterday's annual report from GUD Holdings, the Sunbeam and water products company.

That was a reasonable result but it left investors underwhelmed about GUD's 2009 expectations because there's seemingly no growth factored into the forecast performance (See below).

The market sold off the shares, gently, but it was a message to other reporters that flat or fuzzy guidance for the next year won't be tolerated.

These groups are not going to tell us what the reporting season will be like, but there are a few clues.

BHP Billiton is looking at earnings going close to $US17 billion in the June 30 year, Rio will be higher, Woodside, Santos and Oil Search will also be riding the surge in world oil prices higher, while Woolworths has already said it expects to meet its 20%plus guidance.

Newcrest should do well, if the figures in its 4th quarter production report are any guide (see accompanying story) and ending the hedge book has allowed it to get as much value as possible from the higher gold price, while it will benefit from the higher copper price as well.
Telstra is on track for a small gain, Qantas will earn a record profit, then plunge back to 2006 levels this financial year and others in the transport sector will do it tough because of the higher cost of fuel.

The Commonwealth Bank will give a guide as to how financial stocks fared. Expect write-offs, higher interest costs, narrower margins and pressured earnings.

The funds management business won't be reporting a strong second half. The CBA abandoned its forecast of matching or doing better 'than its peers' back in May, so that might be a hint about its expectations.

Macquarie Bank's confession that the first quarter of its 2009 performance was down on a year ago, should be a guide to investors wondering about how the financial sector will go this year.

It will be tough: home lending, personal lending, car sales are all going to be down or flat at best. High petrol prices have carved a lot of dollars out of consumers' wallets which should normally go to retailers.

In fact it can be said that 2008 will truly be a year of two halves and the first half to December won't bear much resemblance to the second half or the full year performance. And 2009 will be more like a repeat of the back half of 2008.

Centro, Mirvac, Transurban and a clutch of geared property and infrastructure trusts will also be downers, and their 2009 results could very well be a lot worse as they adjust to the new reality of covering payouts with earnings and not borrowings.

Analysts at Citigroup said this week that their expectations for earnings per share growth for the 2007-08 year have already dropped from 10% to 3.8% in the last 12 months.

"Last year's bad news is already priced in, so the risk of disappointment on those numbers is small.

"On the positive side, top-line economic activity was extremely strong in Australia right through to the end of February 2008 – and even beyond that for a significant number of companies. Companies still squeezing strong profitability from ongoing cyclical strength include Downer EDI and JB Hi-Fi.

"Resources stocks can do well, notwithstanding rising costs and a strong currency, and high quality companies with successful business models such as CSL are able to deliver robust earnings notwithstanding a rising $A.

"We expect the tone will be downbeat however, particularly with bigger risks surrounding guidance and trading updates.

"Bottom-up, we are still forecasting S&P/ASX 200 earnings of 10.3% on 2008-09, comprising 16.5% for Resources and 7.9% for Industrials. Given the lack of year-ahead visibility, some companies may also be tempted to withhold guidance – itself a high-risk approach.

"Themes and stocks to watch this season include: Cost pressures (eg: Alumina, Coca-Cola, Goodman Fielder, Qantas); Currency (eg: Cochlear, Aristocrat); Management Change (eg: IAG, Oxiana); and Outlook Comments (eg: Asciano, Wesfarmers)."

Earlier this week Djerriwarrh Investments chairman, Bruce Teele (it's associated with Goldman Sachs) told the ASX in the company's 2008 profit statement that "Equity markets remain wary. Australia has also been impacted by these conditions, as a result higher input costs are likely to place pressure on corporate profitability across a range of industries and businesses other than those able to readily pass on their cost increases to customers.

"However the direct exposure of its resources and energy markets to China and other developing economies has meant economic activity has been generally sound.

"In fact these sectors of the market have helped cushion the impact of a slowdown in other areas of the Australian market, particularly discretionary consumer spending and parts of the housing market," he said.

And we should keep an eye on the nervousness in American and European markets.Thursday night saw falls of more than one to two per cent (and more for the Dow) on renewed worries about banks and financial stocks. Much of the volatility is day to day stuff and trading related, but Ford, in announcing a record loss, said it wasn't expecting the US economy to recover until 2010. Remember that.

So long as China continues to grow, Australia will be held afloat and even the housing sector won't suffer the losses that we are seeing in New Zealand, Britain or the US.

The market took a set against GUD Holdings, which was the first substantial Australian company to report its June 30 full year profit.

The shares fell 4.6%, or 40c, in trading yesterday to close at $8.28 after the company revealed was essentially a solid performance for the year to June.

But there was a lack of clarity about the outlook, which appeared to be somewhat hedged.

The company reported an 11% increase in net profit after tax to $37.4 million, for the 2007-08 year and a 7c or 11% lift in annual payout to a record 68c a share.

The final dividend increased 4c to 38c per share fully franked.

The company said net after tax profit included a business restructuring charge of $5.9 million after tax at it Oates division and $1.4 million gain from the sale of Victa at June to US group, Briggs and Stratton.

GUD said group trading earnings before interest and tax (EBIT) rose 14% to a record $68.9 million from $60.2 million previously.

"All businesses posted double digit EBIT growth with the exception of Water Products, which was down 29%. The Group's strong operating performance was consistent with the previous guidance range of 10% to 15% growth in trading EBIT.

"GUD is strongly positioned to sustain earnings from our continuing businesses despite the competitive and less certain macro environment," CEO, Ian Campbell said in a statement accompany the profit announcement.

"Our market leading brands, on-going focus on new products, tight working capital management and a cost reduction program will assist in maintaining solid returns," he said.

"The sale of Victa will impact first half year profit comparisons as it generated 22% of Consumer Products EBIT in the December half year."

"Our objective for trading EBIT for the full FY09 year is to be around the FY08 continuing business level of $63.5 million. We expect growth from the Water Products business to be offset by demand and cost pressures in some of our other businesses. FY09 earnings per share will benefit from the FY08 share buyback activity."

"Due to our strong balance sheet and healthy surplus of franking credits we are well placed to maintain a high dividend payment."

And that's where investors got nervy as it seems the company is in reality forecasting no growth in profit in 2009.

There will be some growth, but lower demand for Sunbeam consumer products and higher raw material costs look like taking the edge off any improvement from the water business.

The company said net trading profit after tax increased 16% to a record $41.9 million from $36.1 million in the prior year on sales which rose 3% to $534.9 million. 

Trading earnings per share increased 20% to 72.5c per share from 60.2c previously (that was higher than profit growth because of the continuing buyback during the year).

Cash flow was strong with cash generated from operating activities up 46% to $58.2 million. 

The company said this reflected the tight control over working capital and the strong profit performance. Balance sheet strength improved through the year with net debt falling 9% to $86.2 million.

GUD said it was strongly liquid with $33.1 million cash on hand, $0.5 million in current borrowings and $118.8 million in non-current borrowings. "Bank and bill facilities were renewed during the period and the business is well positioned to invest in both organic growth and acquisitions.

"The net debt position includes the receipt of $19 million of Victa sale proceeds and $17.7 million in share buy back payments. During the period 2.1 million shares were purchased onmarket, representing 3.4% of issued capital," GUD said.


 
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