Corporate profits on course for slowdown

THERE will be few winners and plenty of losers as higher fuel prices and a rapidly slowing economy drag down most industrial companies, with analysts predicting profits falling across the ASX 200 by up to 10 per cent.

The Macquarie Group equity strategy team, which last June correctly forecast a precipitous fall in the ASX 200, says the best outcome on profits next financial year will be zero growth, based on higher oil prices, interest rates and inflation and lower demand and growth. It warns that profits will probably fall by between 5 per cent and 10 per cent after flat profit growth this financial year.

In separate research released yesterday, Goldman Sachs JBWere provided a list of 24 companies facing refinancing of more than 15 per cent of the value of their market capitalisation within a year. The research highlighted the high cost of debt for companies refinancing in an environment of tight credit and high – possibly rising – official interest rates.

The Macquarie team argues that the market consensus of 12 per cent growth in corporate profits next financial year is unrealistic because companies are yet to give concrete guidance on the pain they are feeling from the slowing economy.

A lot of management would not be very accurate about what profit they would be looking for in ’09,” said a Macquarie strategist, Tanya Branwhite.

In the absence of clear guidance, she said she believed analysts had looked to recent experience to assess the likely performance of companies. But in her view the situation had no parallel in the recent bull market and was closer to the last big economic slowdown of the early 1990s.

“What is facing the economy at the moment is nothing like we have seen in the past five to 10 years,” Ms Branwhite said. And the consequence for investors was lower profit growth in a much less certain environment. “You look back to the early 1990s, going back to the decades of shorter, sharper, economic cycles where interest rates are more volatile, and that feeds through to earnings and profit growth,” she said.

The team highlights only a handful of companies outside the resources sector whose profits are likely to continue to increase, based on low exposure to discretionary consumer spending and transport costs, strong corporate balance sheets and the ability to set prices. The companies include Woolworths, Coca-Cola Amatil, Telstra, Optus and the mining services companies Leighton and WorleyParsons.

But the team warns of a stream of earnings downgrades “as the financial climate bears down on weaker franchises, especially in the transport, media, discretionary retail, residential construction and building materials sectors”.

The Goldmans list of companies facing refinancing is dominated by highly geared infrastructure and property trusts, which have experienced sharp share price falls this year.

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