By Chris Walker,
, October 2009
Listed companies must publicly announce their profits half-yearly to meet Australian Securities Exchange rules.
It must be done within two months of the specified accounting cut-off date, which means the yearly profit reporting season is between July 1 and August 31 for most companies.
Profit announcements are essential information the market uses to value companies, and determine share prices.
Investors anticipate the reporting season with emotions ranging from eager excitement to sweaty foreboding – depending on how they think companies might have performed, and what good or bad news they think those companies are about to reveal.
Generally, but not always, the profit announced is close to that expected.
Keeping reasonably informed about what companies are doing and how they are travelling financially is possible (unless they are hiding something) if you pay attention to the various company announcements they make through their own and the ASX’s websites, and what you read about them in the financial press.
Under the system of continuous disclosure, and particularly Listing Rule 3.1, a company must immediately inform the ASX – and hence the market – of any information that “a reasonable person would expect to have a material effect on the price or value” of that company’s securities.
This not only inhibits insider trading but brings greater transparency and allows a more accurate evaluation by investors of companies’ operations and financial performance.
Part of this regime is the issuing of profit guidance by companies to the market. These are statements saying a company’s anticipated profit for the next reporting period is likely to be higher, or lower, than previously announced, for certain reasons.
Profit guidance can be provided at any time, inside or outside of the reporting season. Depending on how much it differs from previous advice, it can have a dramatic and immediate impact on share prices.
Likewise, company announcements about changes to dividend payments can make waves. For example, when Caltex announced in late August it was scrapping its interim dividend payout, previously 41 cents a share, its share price plunged 7%.
A Patersons Securities’ review of the latest reporting season found 78% of companies met, or exceeded, expectations (compared with 67% in 2009’s first half and 72% in the 2008 second-half reporting season).
Approximately 38% of companies surprised the market on the upside, 22% disappointed and 40% met expectations.
About 40% of companies reviewed made positive outlook comments for 2009-10, versus only 25% in the first half of 2009.
One key reason announced profits generally match anticipated profits is due to the small army of analysts and fund managers that constantly examines companies’ operations and results and reports on them. But even the most-analysed stocks can still surprise the market. Patersons’ senior client adviser, Russell McKimm, cites Rio Tinto’s unexpected announcement in August that it was not paying an interim dividend.
McKimm thinks share analysts’ predictions are getting more accurate, partly due to more information from companies keen to comply with disclosure rules.
It’s good news for most investors, who may find being surprised by profit reports more surprising than the actual report.
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