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Market catches migraines

By Peter V O'Brien

Friday 9th May 2003

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Continuous disclosure rules for listed companies have confirmed the market's instant reaction to perceived bad news.

The table shows share prices of 10 companies immediately before and after they revised forecasts this year. Only Horizon Energy and Richina Pacific's prices improved.

The former revised an earlier forecast of $5 million for the year ended March 31 to $5.4 million. An immediate 3.3% price rise (10c) could have been a reaction to the revision, although a 10c movement from a $3 base was within a normal trading range on a day when the market was positive.

Richina said it expected half- and full-year profit to be similar to last year, despite the effects in the first quarter of the Sars virus on its Chinese operations.

The other eight companies revised forecasts downward, substantially in most cases, and got the appropriate reaction.

Continuous disclosure has issues for and against. The fors include a stream of information to the market updating likely profit outturns but companies have always carried the burden of disclosing information that had potential to affect share prices.

Current forecasts are more specific than previously, in particular the inclusion of broadly framed dollar amounts.

There is a view that the requirements of continuous disclosure put pressure on company directors and executives and, if the revised forecast is down, on the share price. That is one argument against the new order, particularly as it highlights the essentially myopic, short-term approach of many market operators.

The argument is valid but hardly new. These operators have always reacted instinctively, whether to political and economic events or to companies' profit falls and losses.

Continuous disclosure may have the effect of increasing short-term market and individual stock volatility but the old system of reporting profit in a rigid six-month time frame only postponed the news and resulted in larger falls or rises after the announcement.

We can imagine what percentage would have occurred to prices for some of the companies in the table if figures were given only twice a year. Changes for Vertex and Tranz Rail, for example, related to latest forecasts but not to subsequent actual results.

It was understandable for people to react sharply to Vertex because the company revised its position soon after listing last year and continued to process in 2003.

The situation in some of the other companies was more complex. Retailers Michael Hill International and The Warehouse Group are suffering in overseas-based activities.

Michael Hill announced a profit revision for the year ended June to $9.5-10.5 million, compared with an actual $12.3 million last year. A new operation in Canada was likely to contribute a loss of about $1.05 million, double that originally budgeted. The trading situation in Australia had tightened considerably, as was the case at home, both since February.

Tight trading conditions in Australia were also cited in The Warehouse's profit revision, in addition to specific weaker sales growth and lower margins in its Australian stores, which would result in operating losses in Australia for the year ended July.

Both companies got "the treatment." Michael Hill's share price fell 7.4% in a day, while The Warehouse's fell 26.4%

Price changes in the near future will decide whether reaction to the latter company's revision was excessive or a standard adjustment to the lower forecast.

Immediate slashes to share prices after announcements can be suspicious. It is often in the interests of traders to take advantage of initial market reaction to push a price down further and buy back on a rebound.

Traders can also see opportunities when prices react, without sending them down further.

Dental software technology company Software of Excellence, for example, has rewarded those who bought when the price slumped from $1.15 to 87c on February 1. It was $1.32 on May 2. Such individuals would be laughing if they had studied carefully the company's January 31 announcements. Most of the revision (for a loss) related to the group's rigorous accounting policies and some technical matters, although both have a legitimate impact on profit.

Continuous disclosure can have the effects of keeping the market informed, increasing share price volatility and providing trading opportunities as well as giving directors and executives headaches. Strange world.

Profit forecasts and share prices, 2003 Company Forecast Pre-forecast Post-forecast %
date price (c) price (c) change
Software of Exc 31/1 115 87 -24.3
GDC Comm 3/2/ 117 95 -18.8
Cedenco 7/2 191 190 -0.5
Vertex 20/2 165 151 -8.5
Tranz Rail 7/4 95 77 -18.9
Horizon 9/4 300 310 +3.3
M Hill 10/4 443 410 -7.4
Waste Man 10/4 310 310 Nil
Richina Pacific 15/4 47 50 +6.4
Warehouse 2/5 551 406 -26.3

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