ASX CLOSE: Qantas falls short of expectations; ASX 200 dips

Thursday 18th February 2010

In Asia, equity markets are in afternoon trade despite positive leads from the US market. Both the Nikkei 225 and Hang Seng are flat while the Kospi is lower by 0.4%.

Locally, the ASX 200 closed 0.3% weaker at 4654.9 after trading down to 4633 this morning. Early trade was dominated by profit taking among cyclicals and financials after a strong two-day rally before Wesfarmers better-than-expected result excited the bulls.

Markets love a turnaround story and news that the Coles turnaround was on track, coupled with Wesfarmers profit smashing forecasts by more than 15%, was just the tonic.

It seems market sentiment has come a long way in a few short days. Having finished at session highs yesterday, today's willingness to buy into weakness is a very encouraging sign and contrasts greatly to the late session selling that has characterised recent weeks.

Expectations heading into this earnings season seemed to be fairly realistic. Company's beating forecasts have largely been rewarded with share price gains and broker upgrades. However, on the downside those companies that have missed badly have been savaged. Case in point, Qantas fell well short of profit and dividend expectations and is down more than 9% for the session.

The worst performing sector for the session was the materials, finishing 1.3% lower. Fortescue Metals Group was the biggest decliner, down 3.9% while gold producers Lihir Gold and Newcrest Mining lost 3.5% and 2.3% despite a good report from Lihir Gold.

This morning's full year numbers were very strong indeed, highlighted by record revenues, profitability and cash flows. While Australia's number two gold miner has clearly benefitted from its unhedged gold exposure (achieving an average price of US$956 per ounce), the result was also achieved on record production volumes, with the company selling 1 million ounces for the first time ever. Whilst this was a stellar result, uncertainty over the company's post-2012 production profile and its lack of a CEO likely kept some investors sidelined.

Diversified miners Rio Tinto and BHP Billiton were both down 1.1%. Interestingly, in a note from Merrill Lynch on the planned production JV between Rio Tinto and BHP Billiton, they believe the deal is better for BHP Billiton than Rio Tinto. The broker said, in the near term the deal would be 10 - 13% EPS dilutive for Rio Tinto and 7 - 11% accretive for BHP Billiton. Merrill went on to say that while some in the market (including us) may have been hard on BHP Billiton for not doing a ‘bottom of the cycle' deal, this JV does look very compelling. Having said that, the broker still prefers Rio Tinto to BHP Billiton, due to its higher iron ore exposure and leverage to the global recovery.

The industrial sector was very weak, finishing lower by 0.8%, thanks largely to Qantas's fall of 8.1%. Its first-half result significantly missed market expectations, on both a NPAT and PBT basis. The lack of an interim dividend also surprised some analysts, although this was due to increased capital expenditure on aircraft reconfigurations, which management expect to improve profitability. Will investors be happy to forgo their dividend to fund aircraft reconfigurations, which may or may not deliver enhanced profitability? In our view, this move to reconfigure aircraft is prudent given the changing trends in air travel. You only have to look at yesterday's statement from IATA (International Air Transport Association) to see the dynamics are changing. IATA suggested corporate travellers that were forced to fly coach during the recession, may never return to business-class cabins, as employers seek permanent cuts to their travel budgets.

The energy sector also detracted points, losing 0.4% for the session. Santos led the retreat, down 1% despite meeting expectations with a $434 million FY profit and underlying profit of $257 million. As expected, the company said its transformational Gladstone LNG joint venture remained on track for a mid-2010 final investment decision. However, it appears investors are disappointed that there was no update on the progress of talks with potential LNG customers.

Elsewhere, WorleyParsons added 0.6% after first-half net profit was down 30.1% on year to $138 million. The company reiterated FY profit guidance of between $280 - $320 million. In a broker note from Royal Bank of Scotland, it was encouraged by increasing activity in a number of regions and customer sector groups, supporting our view of a more significant weighting of earnings in the second-half of the financial year. RBOS said the result came in slightly ahead of its forecast, with the dividend of 38 cents in line. Elsewhere, Macquarie Group reported no further bad news and a slightly better-than-expected 1H result (excluding lower tax rate) means a relief rally is likely. Macquarie retained its ‘neutral' rating.

Financials also detracted thanks largely due to profit taking. AMP led the retreat, down 1.8% after its FY09 result was largely in line with expectations. Credit Suisse reported AMP's FY09 profit was roughly in line with its forecasts and the result featured strong cost control. The broker went on to say that underlying net profit before investment experience and non-recurring items of $756 million was in line with its forecast of $759 million. Overall, the broker deemed this to be a strong result, with a more robust capital position (gives AMP M&A flexibility) and continued strong cost control. Interestingly, AMP's CEO said "while we called our offer for AXA ‘best & final', the longer the takeover battle takes, the more circumstances change and the more flexibility we have". The market seems to think there is the possibility of an increased bid, with AXA trading higher by more than 1%.

On the upside, it was the typically defensive sectors that offset further weakness. Consumer staples was the leader, up 1.5% after both Coca-Cola Amatil and Wesfarmers added more than 3%. Wesfarmers's half year profit beat market forecasts by more than 15%, with its dividend also surprising on the upside.

Prices are in AUD unless otherwise stated.
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