Seven West Media's shock downgrade on Tuesday night highlighted once again how inadequate the corporate watchdog and Australian Stock Exchange requirements are for companies to produce meaningful disclosure.
As the shares inevitably tumble on the market this morning, corporate regulators should be looking at why a rule that is supposedly designed to disclose information does not force companies to provide comparative figures.
Kerry Stokes's media group, like too many listed companies, complied with legal requirements to tell shareholders their profit was going to fall short of expectations, but did not bother to tell investors the size of that shortfall.
Technically, they did not have to because the seven-year-old ASX guidance note covering the issue is so poorly written it gives companies the latitude to interpret the requirement in the least helpful fashion. (The ASX has secured this clearly "Top Secret" document by making it unprintable from its web page - nice touch for an organisation trying to ensure transparency.)
Newsflash ASX and corporate watchdogs: retail investors do not, for the most part, have access to consensus earnings estimates of brokers or keep files on forecast results, so when a company such as Seven West makes a statement that it now thinks earnings before interest and tax are likely to be between $460 million and $470 million, how on earth can they know whether that is halved, 20 per cent down, or 2 per cent down without comparative numbers?
There is simply no excuse for companies not providing a comparison with either their own forecasts, or the variation from the average of brokers' estimates. Not doing so can only be interpreted as an attempt to deceive the market into thinking not much has changed.
The ASX guidance on disclosure says only that companies should consider that if their profit is likely to vary by more than 10 per cent from either a forecast or an actual outcome, and shareholders are unaware of that, they need to tell the market as soon as the board becomes aware.
While logic would suggest that when a company makes such a statement, investors can be reasonably certain that the movement is significant, boards really have a higher duty of disclosure than expecting their shareholders to apply Sherlockian deduction techniques.
In Seven West's case, it had not provided any firm public figures on where the profit might fall this year yet stockbroking analysts had a clear view (usually because the company has guided them in that direction) that it was going to be between $500 million and $520 million. Stokes and his board could have used that as the benchmark if they did not think last year's $550 million of EBIT was the right basis for comparison.
Seven West is far from alone on this issue. Already this week, Insider has noted several other companies doing exactly the same thing - semi-disclosure. One or two did bother to go the extra mile of relating the new figure to previous expectations, but they are sadly exceptions.
TELSTRA CALLING
Telstra shares hit this week their highest point since December 2009, driven almost entirely by its dividend rather than its growth prospects.
During trading on Tuesday, they touched $3.48 each, which meant the simple yield on its 28? a share dividend is now a little more than 8 per cent, and 11.5 per cent after allowing for the tax advantage of being fully franked.
With every likelihood the Reserve Bank will slice as much as 0.5 percentage points from the official cash rate next week, and the probability of banks reducing deposit rates after that, yields such as Telstra's are going to become even more sought after by investors.
Now for some perspective. At $3.48, Telstra shares are showing a princely 14.5-year capital gain of 5 per cent over their 1997 float price of $3.30 - and that is before discounting for the effects of inflation.
FOOTING THE BILL
Brisbane Broncos, the company that "owns" the rugby league team, does not quite yield as well as Telstra - but the 1? a share Darren Lockyer Dividend just banked by shareholders works out to a 5 per cent return.
That shades by a long way the miserly distributions of its 69 per cent shareholder, Rupert Murdoch's News Corp, where investors are getting a return of 0.9 per cent.
Lockyer, the club champ who retired at the end of last season, was a key driver behind the high match turnouts that generated a revenue and membership participation boost last season, and which translated into a $1.4 million profit, about half of which would have been pocketed by News when the dividend was paid.
In spite of the feel good factor, voting from the Broncos' meeting suggests even less investor interest than usual, with only 3 per cent of the company's shares voted by proxy.
News even gets to vote on the remuneration report, because it appoints only one of the four directors - at the moment, Dennis Watt. He is the only director to be paid a fee for his work, and it goes back to head office. The others, curiously, only get superannuation payments, and the total payments to board members are less than $80,000.
Slightly different to the jammy multimillion-dollar packages the Murdoch family and their acolytes get in the parent company.
Also worth noting is that despite a total wages bill for Brisbane Broncos of $10.4 million, only $1.3 million of that is soaked up by executive management (on-field stars are not management, so their salaries are undisclosed). Given the NRL salary cap for last year was $4.3 million for the top 25 players (about $172,000 each), plus another $300,000 for others on the list, that suggests the club is spending a hefty $5 million a year on other administrative staff.
insider@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
What happened in Seven West Media's shock downgrade and why should investors care?
Seven West Media issued a shock profit downgrade saying earnings before interest and tax were likely to be between $460 million and $470 million, but it did not give comparative figures to show how big the shortfall is. That lack of comparative disclosure makes it hard for everyday investors to judge whether the hit is small or material, and highlights wider concerns about how companies report profit downgrades.
Why are ASX disclosure rules being criticised after the Seven West Media downgrade?
The article says the seven‑year‑old ASX guidance note on profit disclosure is poorly written and gives companies too much latitude. ASX guidance only suggests companies should consider disclosing if profit will vary by more than 10% from a forecast or actual outcome and shareholders are unaware, which critics say doesn’t force firms to provide the comparative numbers investors need.
How can retail investors tell how big a company's profit downgrade really is if the company doesn’t provide comparisons?
Retail investors usually don’t have access to brokers’ consensus estimates or private guidance files, so when a company states a new earnings range (as Seven West did) without comparing it to prior forecasts or broker averages, investors can’t easily tell if the change is minor or substantial. The article argues companies should give comparative figures — either their own previous forecast or the brokers’ average — so shareholders can judge the size of the downgrade.
What role do broker consensus estimates play in understanding company guidance and downgrades?
Broker consensus estimates often provide a useful benchmark. In Seven West’s case, stockbroking analysts had a clear view that EBIT would be $500–$520 million (usually because the company had guided them), so that range could have been used as a comparison. The article notes retail investors typically don’t see those consensus figures, which is why company disclosures should include comparisons.
Is semi‑disclosure (not giving full comparative figures) common, and should investors be worried?
Yes — the article points out several other companies are doing the same sort of partial or ‘semi‑disclosure’. Investors should be wary because not providing clear comparisons can make it difficult to assess the true impact of profit downgrades and can be interpreted as an attempt to downplay the change.
How attractive is Telstra’s dividend right now and what does the article say about interest rates?
Telstra shares hit $3.48 during the week covered by the article, producing a simple yield of a little more than 8% on the recent dividend (and about 11.5% after allowing for the tax advantage of full franking). The article adds that if the Reserve Bank cuts the cash rate by as much as 0.5 percentage points, yields like Telstra’s may become even more sought after by income‑seeking investors.
What did the article say about the Brisbane Broncos, News Corp and shareholder returns?
The article noted the Brisbane Broncos’ recent Darren Lockyer dividend worked out to about a 5% return for shareholders, while News Corp (which holds 69% of the Broncos) provided a much smaller return of about 0.9%. It also said the Broncos reported a $1.4 million profit (about half of which would have gone to News when the dividend was paid), that only about 3% of shares were voted by proxy at the club meeting, and that total board payments were under $80,000.
What can everyday investors expect or ask for to improve corporate transparency after downgrades like Seven West’s?
Based on the article, investors can reasonably expect companies to provide comparative figures when they announce profit downgrades — either prior company forecasts or the average of brokers’ estimates — so shareholders can assess the scale of the change. The piece also suggests corporate regulators and the ASX should review the guidance to ensure it forces more meaningful disclosure rather than allowing vague, hard‑to‑interpret statements.
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