THE DISTILLERY: Earnings vexations

A few more juicy reports for our jotters to get their claws into yesterday (and today, with demerging Foster's, and Westpac to update or report). The big two attractors were Leighton Holdings (profit, dividend down) and Insurance Australia Group (profit down, dividend up a teensy bit). Both results were surprises on the downside. Departed CEO Wal King was nowhere to be seen at Leighton to reveal his last crowning glory, a 25 per cent profit fall. Mike Wilkins was at the IAG helm. That saw him attract the bulk of the fire.
 
This morning Fairfax's Adele Ferguson took aim at IAG: "When Mike Wilkins jumped into the saddle as white knight of the insurance giant IAG almost three years ago, he gave himself a year to get the company right. His big bang strategy included a decision to keep part of its disastrous British business. That decision, viewed by many as foolhardy at the time, continues to haunt the company. Almost three years into the top job, a share price that has gone backwards and a ratio of seven profit downgrades to one upgrade, Wilkins's overhaul of the company – and the British business – has not gone well."
 
John Durie wrote on The Australian's website yesterday that: "Mike Wilkins inherited the troubled UK business when he took the reins at IAG three years ago, but his credibility is being undermined by claims that the problems are a thing of the past. Today's profit downgrade was especially disappointing against the backdrop of the stunningly good Australian returns. Wilkins rejected pleas to either sell the business or stop writing new business, saying in the longer term he still believed it would be profitable ... you have to ask whether the highly fragmented and competitive UK business means the problems are more structural and hence out of Wilkins' control."
 
The Australian Financial Review's Chanticleer was another jotter who didn't like British leftovers: "Now that Insurance Australia Group has lost $1.3 billion on a $1.8 billion investment in the United Kingdom, it is worth asking if there is any sense at all in continuing to expose its shareholders to losses from a business it does not understand." A good point. 
 
And Business Spectator's Stephen Bartholomeusz had similar thoughts: "Mike Wilkins can't do much about the spate of natural disasters that are impacting IAG's results, but he must have wondered in the past few days whether, when he gutted IAG's troublesome UK operations after becoming chief executive, he should have exited that market completely. The ill-fated expansion into the UK that claimed his predecessor, Mike Hawker, has produced little but bad news and losses for IAG shareholders. Today the remnants of what was once a very ambitious strategy and beachhead into the UK general insurance market was the main reason IAG flagged a halving of interim earnings, from $329 million to $161 million. Wilkins' first restructuring of the UK operations in 2008 cost IAG $350 million, so the latest losses underscore how unpleasant an experience the UK expansion has been for the group.
 
Ferguson says of the 25 per cent fall and dividend cut by Leighton Holdings yesterday: "Profit downgrades are never pleasant, particularly when a company is the subject of a potential change in parents. But for the country's biggest construction and mining services giant, Leighton Holdings, the headline profit downgrade is worse than first glance. The problems for Leighton are many. They include cost overruns at its Airport Link project in Queensland, its business in the Middle East, Al Habtoor Leighton, wet weather in Queensland and Indonesia; and the high value of the Australian dollar. Leighton has a new chief executive, David Stewart, who officially took the job on January 1, after Wal King stepped down. The chatter in infrastructure circles for weeks has been how Leighton will treat its $4 billion Airport Link project in Queensland, its $1.2 billion joint venture in the Middle East which has been struggling for the past two years as some companies fail to pay money owed for projects and the Queensland and Indonesian floods. Against this backdrop, Spain's ACS is buying up stock in Hochtief, which owns 54.5 per cent of Leighton. The lower the share price, the more stock ACS will no doubt buy. If ACS buys more than the 50 per cent of Hochtief, it will overhaul the board at Leighton." 
 
And the AFR's Street Talk column wondered if the Leighton result was on the up and up: "No one's accusing Leighton Holdings of deliberately attempting to mislead the market with the profit downgrade it delivered yesterday." 
 
The Australian this morning looked at what new Leighton CEO David Stewart was doing to the company after the profit slide and dividend cut. "It's natural for a new chief executive to want to take a broom to a business (especially when your predecessor has been around for 23 years). But this isn't just about cleaning house. The basis for Stewart's strategic review indicates an approach to the business that may well sacrifice yesteryear's rates of profit growth to repair its rate of return on equity. This means Stewart and chief finance man Peter Gregg have to get better returns and maybe push for better margins on contracts. Already Leighton has announced it will restrict capex and has put a freeze on what it describes as discretionary spending." And the comments on Leighton were light on assigning responsibility to Wal King, or the present board, for the profit drop.
 
The Australian's Tim Boreham gently raised an eyebrow at the interim result from Bendigo and Adelaide Bank: "Richard Fennell, Bendigo & Adelaide Bank's bucolic chief financial officer, has declared this morning's half-year numbers are so clean they're "almost boring". When it comes to bank financials, there's nothing wrong with boring when you consider the exciting but dire alternatives. But judging from the analysts' quibblings, perhaps Bendigo's 15 per cent surge in cash profit to $162.1 million isn't so lily-white (bank profits rarely are). One concern is the bank is light on for regulatory capital and has not been organically growing surpluses at the desired rate to meet the elevated requirement of the pending Basel 3 requirements. The bank maintains a capital raising won't be required and the current dividend payout ratio can be maintained (as long as enough investors take up the dividend reinvestment plan)."
 
And John Durie pointed out this morning that the Bendigo result should force a change in attitude to the banks: "Bendigo and Adelaide Bank's half-year profit didn't set the market alight but it should ring warning bells in Treasurer Wayne Swan's office. Bendigo's Mike Hirst made clear the market is now operating as normal and the case for special assistance or legislative changes to ensure bank competition has disappeared. This was what everyone but special interest groups had argued from the outset, but in politics you need to be seen to be doing something. The special interest groups included the ACCC, which tried to get long sought-after increases in power on spurious grounds. The playing field is now level as far as Bendigo's Hirst is concerned."
 
Elsewhere the AFR mused: "It's understandable that investors are asking why BHP Billiton could be contemplating spending up to $US50 billion in a bid to acquire additional oil and gas exposure." BHP is out tomorrow.
 
Fairfax's Ian Verrender made a very good point about the big resource company profits: "Ever had that sinking feeling that you've been led up the garden path, taken for a ride and been had a right royal lend of, all at the same time? As our politicians bicker over whether to fund the Queensland disaster relief program through a temporary tax or years of spending cuts, the most extraordinary transfer of wealth in the nation's history is taking place right under our noses. In case you have not noticed, in the past week the mining giant Rio Tinto announced a 161 per cent lift in annual earnings, Gina Reinhart was declared the nation's richest individual and the Swiss group Xstrata unveiled a 430 per cent surge in earnings, based mainly on its Australian operations. Now, make way for the whale. Tomorrow BHP Billiton will deliver one of the biggest half-year earnings results in Australian and British history. If all the stars stay in alignment, the large multinational is on track to hand down a whopping $20 billion full-year result."
 
News Ltd tabloid opiner Terry McCrann joins Westpac and the other banks in not liking NAB's decision to abolish exit fees: "National Australia Bank's exit fee play has been welcomed in general terms and also as clever marketing. It's actually more likely to just be irrelevant and even costly. To NAB. Exit fees have attracted, if you'll pardon the term, interest and borrower anger out of all proportion to their actual relevance. Far less either their actual cost to borrowers or their feared prevention of bank and loan switching. The overwhelming majority of borrowers never pay them because, self-evidently, they don't switch banks. More importantly, that overwhelming majority never even face the possibility of paying them because they only affect the very early years of a loan."
 
The Australian's Bryan Frith looks at an emerging boardroom fight: "A looming board fight at the WA-based property investor and funds manager Aspen Group appears to have turned ugly. On January 31, the ASX queried Aspen regarding media reports that Perth-based funds manager Entrust Funds Management and former Aspen managing director Angelo Del Borrello were working together to remove the majority of the board and to reinstate Del Borrello as managing director. Last Thursday, 10 days after making that statement, Aspen quietly issued a retraction, which came well after the close of trading. It said Seng Fai Chan, the fourth member of the board, had requested the company to make a release to clarify the situation and that he does not share the view of the other board directors as to the suitability of Del Borrello to hold the position of managing director."
 
Michael Pascoe examined the new federal-state health agreement and came up with some interesting insights on smh.com.au yesterday: "The drawn-out process of establishing a new funding system to meet our hospitals' voracious appetite for money demonstrates the best and worst of our politicians – a genuine desire to improve the lot of the people as well as a dangerous addiction to power. Kevin Rudd's original offer to take over the health system, botched by his personality and lack of negotiating skills, appeared to be a political no-brainer for state governments. As I've written before, hospitals are an incurable disease and thus the chance to flick responsibility for them would have been immediately seized in a rational world. Some states, specifically the electorally-challenged governments of Queensland and NSW, were happy to take a deal, any deal, while going through the process of talking tough about wanting more money for their citizens. The clunky and inefficient Rudd compromise – a camel of a funding system – was enough to get all but WA over the line. And there was something else, revealed in an off-the-record chat with a minister: if states give away running the health system and then the education system and, well, soon there's nothing left to run, there's no effective state any more, just an administrative body functioning at the behest of Canberra."