VBA/GWA: Similar Stories, Outlook

Sydney, Aug 20, 2008 (ABN Newswire) - The sharp drop in oil prices and hints of corporate activity helped push Virgin Blue shares off their awful all time lows of around 50 cents a month or so ago.

The shares went for a good run, climbing well above $1.10, but then reality set in yesterday with the company confessing that profitability remains a "challenge" after it revealed a 55% drop in earnings for the 2007-08 financial year.

The result was in line with market expectations, but investors didn't take notice. Down went the shares, plunging by around 27% to a day's low of 83.5 cents. They ended at 84 cents, off 32.5 cents, or 28%.

"The operating environment during the next 12 months is expected to be the most challenging the Virgin Blue group - which now comprises Virgin Blue, Pacific Blue, Polynesian Blue and V Australia - has experienced to date," the airline said in a statement to the ASX.

"We will continue to adapt business operations accordingly" and as part of this, Virgin Blue said it had reduced planned capacity growth for the next two years.

`The operating environment during the next 12 months is expected to be the most challenging the Virgin Blue Group has experienced to date," the airline said in a statement.

Virgin Blue said in June that it planned to hack $50 million from its cost structure, raise domestic fares and scale back growth plans because of surging fuel prices. 

It also froze management pay and drew up plans to redeploy planes from money-losing routes. It will start charging passengers for services shortly.

It was a rude awakening for those punters who bought on the benefits of the sinking oil price for airlines like VBA, before the benefits had actually appeared in the profit and loss account.

VBA CEO, Brett Godfrey said the high price of jet fuel had eaten into the airline's profits, which were plunged 54.6%, from $215.8 million in 2006-07 to $97.7 million for the year to June 30.

Virgin Blue shareholders will not receive a dividend either "in light of the current economic environment", which isn't the best news. But major shareholder, Toll Holdings doesn't care as it's distributing the shares to its shareholders.

And Sir Richard Branson's Virgin Group, which will be the largest shareholder after the Toll move, wouldn't mind seeing the company conserve cash for a while.

VBA said its underlying profit before one-off expenses was $140.4 million, down from $308.5 million previously.

"Key drivers for the rest of our business, namely capacity, demand and the cost of fuel remain highly volatile," it said.

"Based on current market conditions and fuel prices, a positive result for the current financial year is expected, but remains a challenge."

"At the same time, we will seek to deploy aircraft to more profitable routes or those where there is limited competition today.

"The group will focus on growing ancillary and value-add revenue streams and will also closely monitor product positioning to ensure we remain relevant to all target markets, including both the corporate and government sectors and our core leisure travellers," VBA said.

"Our balance sheet remains strong and no additional equity funding is required. Plans for VAustralia remain on track for a December 2008 launch. With approximately $40 million already invested and a further $55- $65 million of start up costs forecast for the coming year, the total investment in VAustralia remains in line with previous guidance.

"Key drivers for the rest of our business, namely capacity, demand and the cost of fuel remain highly volatile. Based on current market conditions and fuel prices, a positive result for the current financial year is expected, but remains a challenge."

The airline booked one-off costs of $42.8 million related to the setting up of its long-haul offshoot, V Australia, and other initiatives such as the launch of domestic services in New Zealand, the introduction of Embraer jet aircraft and expansion of The Lounge product.
Including those one off items and the bottom line was a very untidy $55 million or so. Not good.

 

Shares in bathroom and furniture products group, GWA International fell as much as 13% in trading after its 2008 earnings fell to their lowest level in seven years.

GWA slumped to a low of $2.70 in trading yesterday before recovering to be off 19 cents, or 6%, at $2.91.

The slide followed the Brisbane-based company revealing net profit fell 19% to $45.9 million for the 12 months ended June 30, from $56.3 million in 2007. That was after sales rose 2% to $648.9 million.

The company blamed the drop in profit on interest rates at their highest in 12 years and a slowdown in housing activity in Australia, reorganization costs and the write-down related to the proposed sale of Wisa Beheer, its business in the Netherlands.

"While there is undoubtedly a strong underlying demand for dwellings in Australia as a result of rising population and a sustained under supply of new dwellings, continuing high interest rates and low affordability will effectively cap demand," the company said in an ASX.

But what also worried the market was the lack of clarity for the outlook for the 2009 year.

There was quite a few words, but no figures.

"While there is undoubtedly a strong underlying demand for dwellings in Australia as a result of rising population and a sustained under supply of new dwellings, continuing high interest rates and low affordability will effectively cap demand," the company said in its profit statement.

"Until economic conditions ease and constraints on new housing supply are addressed, there is little prospect of any meaningful upturn in house building activity during the 2008/09 financial year with most forecasters predicting a continuation of the current flat demand.

"Rising cost pressures both in Australia and offshore will also impact on our cost base. The effective management of price increases in the subdued domestic market will be essential to protect margins.

"Against this challenging economic outlook, management is certain the benefits of our extensive restructuring program will flow through during the new financial year. 

"Our large investment in innovative environmentally sustainable products also positions the Company well to capitalize on changing consumer demands and Government legislation.

"In the current economic environment, the outlook for the 2008/09 financial year is difficult to assess. 

"Further market guidance for 2008/09 will be provided at the Company's Annual General Meeting in October when we can make a more informed assessment of the market."

That's a similar message we also heard from Boral yesterday.

In fact the Housing Industry Association had bad news for GWA, Boral and others in the home building game.

In its 2009 outlook it said: the number of new homes under construction is forecast to drop for the fifth consecutive year, widening the shortfall in available homes for the future and making rental properties more scarce.

Construction of new homes is expected to fall 6% for the financial year, to about 145,300 from 154,200 last year, taking the shortage of available homes to 46,500 in this year alone, the HIA said in its its June quarter national outlook report. The underlying demand for the year will be for 191,800 homes, up from 188,300 last year.

"Interest rate reductions will, in time, boost confidence and then construction activity, but that's a 2009-2010 story," according to HIA chief executive, Chris Lamont who added, "We have a relatively inelastic supply side, so no immediate bounce is expected and this is bad news particularly for those searching for affordable rental housing."

The full-year profit result was the lowest for GWA since 2001 when the company reported profit of $41.5 million.

Directors announced a fully franked final dividend of 8 cents a share, with the total fully franked dividends for the year at 19.5 cents a share.

"To better position the Company for growth through acquisitions the Directors have decided to cease payment of the special dividend and to reintroduce the Dividend Reinvestment program."

(That's always a sign of a company needing support from shareholders in tough times).

Managing Director, Mr Peter Crowley, said "The group has maintained its strong trading performance, despite very poor conditions across the housing sector. We are close to completing our two year re-structuring program and improved supply chain management has resulted in lower inventory levels across all Divisions".

"With very strong cash flows and the reduction in debt levels, GWA is now in a position to capitalise on opportunities through both organic growth and acquisitions.

"With asset values now reasonably priced we are looking for value accretive growth opportunities" he added.

Despite the continuing difficult conditions faced amid the housing slowdown, the group's building fixtures and fittings division lifted its sales revenue 2.1 per cent from $546.9 million to $558.6 million, with trading EBIT flat at $109.5 million.


 

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