Money
Issue No. 37 - October/November 2007
Strong industrial surprise despite sub-prime fiasco
by Mr Marcus Campbell
The August 2007 reporting season was uneventful apart from the meltdown of the US sub-prime debt market. A summary of the key results are:
The overall net profit for the ASX300 was up 30.5% for the 2007 financial year and came in 1.2% ahead of our forecasts. Industrial profit increased 25%, beating our forecasts by +2.1%, while resource profit increased 38%, which was in line with expectations.
Smaller Industrials (ex Financials) had the largest positive surprise bias with profit coming in +3.2% ahead of our forecasts with nearly 50% of stocks surprising on the upside.
Property Trusts and Resources were the only two sectors where the number of results below expectations (36% and 47% respectively) exceeded the number of results above expectations (18% and 40%).
Overall earnings quality was low with the average tax rate declining from 30% to 27%, suggesting companies were stretching to reach their guidance.
Despite the strong growth in NPAT, payout ratios for the June half declined from 80% in June 2006 to 75% in June 2007 suggesting management remain more cautious about the outlook relative to 12 months ago.
Our key valuation metrics indicate the Australian equity market is back to being fully valued, particularly given the quality issues apparent in the reporting season and the increasing macro risks associated with the US economy.
Investors should adopt a more defensive profile in portfolio construction, focusing on stocks with strong cashflows not leveraged to the economic cycle.
Our key recommended portfolio positions for clients are:
Overweight positions in: banks, insurance, healthcare, diversified resources, consumer staples and transportation.
Underweight positions in: property trusts, diversified financials, telecoms, discretionary retailing and steel.
Credit Shock and the sub-prime fallout
Credit market concerns were driven by sub-prime mortgage lending in the US as initia...
