Reporting season provides surprises

THE current reporting period is of particular interest to the novice investor, with company results bringing all sorts of market response. Recently, two companies with a strong WA flavour have reported with opposite reactions on the sharemarket. Wesfarmers Ltd and Futuris Corporation have both reported, on the surface, very good half-year results.

However, investors have reacted to the results with a mix of cynicism and unabashed enthusiasm. Wesfarmers Ltd was the beneficiary of the enthusiasm, while the management at Futuris Corporation has found itself dealing with an unsympathetic investment community.

Alan Newman, the company chief executive and Les Wozniczka, director – corporate, have been hard at it, attempting to convince a sceptical investment community that their recent half-yearly results are sustainable. The company reported a 56 per cent increase in profitability for the six months to December 31 2001 of $54.6 million.

Novice students of the equity markets may assume that this kind of result would be positive for the share price. This was certainly the case after Wesfarmers came back on the market after reporting a 61 per cent increase in profit.

Futuris shares, however, immediately retreated from a high of $1.97 to a closing price of $1.77 per share. Many pundits argued that the stock may find it difficult to repeat this profit result, with one-off profits included in the net result. The one-offs included returns from the partial sale of Australian Agricultural Company and Bristile Ltd.

Futuris Corporation is an entrepreneurial industrial business, with one-off investment profits often included in its bottom result. This is a matter of some concern for analysts as they are loath to predict future earnings when a share of the profits comes from investment returns.

In the previous period, Futuris was savaged by institutional investors when they took a critical view on the results in August 2001. The shares were sold down from a high of $2.68 to below $1.50, with management taking this sell-off very personally and having, in their own words, a very hard look at themselves.

Management is finding that the investment community has mixed views on Futuris’ use of capital gains to drive profit growth, arguing that Futuris continues to disappoint operationally. Mr Newman would take issue with this, counter arguing that internal growth will come from Air International and Elders.

With regards to Air International, the quality of the customers is the key, Mr Newman argues. He believes there will be plenty of upside with sales expected in 2003/04 of $1 billion. Earnings before Interest and Taxes (EBIT) was 22 times in 2001, but is expected to be 30 times this year.

Elders at present accounts for less than 20 per cent of total turnover in the rural market, which works out at sales of $3.2 billion. Newman is convinced of growth between 8 per cent and 10 per cent in the rural services market, and believes further rationalisation is inevitable.

The Incitec investment is developing very well, with the major players in the fertiliser industry keen to talk rationalisation. Futuris is comfortable with its position, and is expecting some developments in the coming year.

The company announced a 4 cent, 50 per cent franked dividend with an ex-dividend date on the March 13 2002.


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