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Confession Season – Downgrade Alley

The end of the financial year is nigh and that means it’s time for companies to fess up on the bad news to follow when financial reporting for FY15 begins in August.

Yesterday’s GDP news contained some good news and some bad news too. The headline rate of +0.9% for the March quarter (+2.3% annualised) suggested Australia’s economy is growing. The figure is below par, according to the RBA, but positive news as far as the government is concerned.

Yet the annualised nominal rate of growth at +1.2% says that conditions are weaker domestically. The headline figure was boosted by net exports which seems peculiar given the squawking about iron ore prices recently from certain quarters.

As if to confirm the weaker domestic outcome, Metcash told the market today that although its EBIT guidance range of $315-330m was intact, the company would write down its goodwill by $640 million, mostly due to its food and grocery business. MTS is still investigating the possible float of its automotive business but there is plenty of chatter that Burson Auto Parts (BAP) might pull out the cheque book.

MTS has turned off the dividend tap for the next year until it can get its balance sheet back in order.

Qube Logistics joined in the fun but tried the age of trick of burying the bad news with some positive news.

The announcement of government approval for the long awaited $1.5 billion Moorebank Intermodal Terminal in Sydney (QUB is in partnership with Aurizon Holdings as well as the Federal Government) was expected.

QUB’s trading update was the yucky bit with the Ports and Bulk Division apparently struggling. Additionally, lower volumes and rate pressure wasn’t helping and the severe NSW weather had affected the rail division. Consequently, FY16 EBIT will likely be downgraded by analysts who had previously pencilled in some decent growth.

Earlier this week, Myer told the market it would close its Top Ryde store and shut down some experimental stores in Melbourne. This is ahead of the more comprehensive strategic review currently underway under new CEO Richard Umbers. The review is likely to be several degrees more stomach-churning for the company.

Patties Foods also had a dose of financial indigestion after it revealed the frozen berry recall saga earlier this year would cost it $1.5 million in this year’s result. PFL hinted it might include an impairment in its full year result but didn’t provide details. The CFO has now resigned.

There is plenty of time for other companies to tweak guidance, provide market updates or massage expectations before the books are ruled off for 2015. Some may even upgrade guidance!

Downgrades are a regular feature of the market disclosure process these days and they generally aren’t good for share prices. Some cynics also think that downgrades are seldom one-off events and often come in two’s and three’s such as with Super Retail Group last year.

The trick is to decide if any downward price adjustment is an overreaction that might provide a buying opportunity. Take your time in this regard.

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