Earnings hit by flood damage
Source: The Australian

THE Queensland floods are set to take a bite out of corporate profits as analysts prepare to downgrade full-year earnings expectations.

And investors are bracing for moderated outlook statements in the coming reporting season.

Before Christmas, several analysts were expecting the benchmark index, which tracks the top 200 listed companies in the country, to deliver returns of 20 per cent or more.

While most research houses are yet to quantify the impact of the floods, estimates for full-year 2011 earnings are expected to be revised ahead of the February reporting period.

“We are likely to see some revisions, the floods are material enough to have an impact on Australia’s GDP (and) will have noticeable direct and secondary impacts on some stocks,” Goldman Sachs equity strategist Chris Pidcock said.

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This preliminary view will be disappointing to investors, given that the benchmark SP/ASX 200 index finished calendar 2010 down 2.6 per cent.

Mr Pidcock noted that putting a number to the damage bill and how companies would be affected was too difficult at this stage as new information continued to emerge. Australian listed companies with a June 30 balance date will report first-half earnings next month and this is when most investors expect to get a detailed update on the impact of the floods.

Constellation Capital head of company research Brian Han said earnings statements for the December half were unlikely to contain many surprises and that outlook statements for full-year 2011 would be the main focus.

The floods have had a widespread impact on corporate Australia. Hardest hit have been insurers, miners (especially coal producers), contractors, transport groups and some retailers. While the heavy rain and flooding has been devastating for those involved, experts predict the hit to corporate accounts is unlikely to be material for most companies.

“We note any downgrades are likely to be one-off in nature and could well be offset by upgrades in full-year 2012 when Queensland goes into recovery mode,” Mr Pidcock said.

Mr Han noted that even some of the hardest-hit groups such as coalminers — affected by flooded mines or blocked access routes — were not being sold off extensively. “What you’ll find is that the market accepts that the coal supply issue is temporary,” he said.

“They’ll look more to commodity pricing, and ironically the events (floods) are likely to have pushed some of those up.”

Mr Han said the resources sector would continue to post strong earnings in 2011 and was likely to be one of the strongest performers.

The large global miners with affected assets such as BHP Billiton, Rio Tinto, Xstrata and Peabody Energy are diversified enough that the Queensland floods are unlikely to have a material impact on earnings. By contrast, the floods have taken a severe toll on Macarthur Coal and Cockatoo Coal, with the former slashing profit guidance by 22 per cent.

Those providing services to mining groups were also caught out. Contractors such as Leighton Holdings and rail groups Asciano and QR National were some of the worst affected.

All three groups rely on volumes being mined or moved, so disruptions to levels of activity have a notable impact.

Apart from flooding, the continued heavy rain will hurt tourism. Airlines Virgin Blue and Qantas and travel operator Flight Centre are likely to experience lower demand.

Brisbane-based Virgin Blue and Flight Centre felt the immediate impact of the floods this week — both companies were forced to evacuate their head offices. Qantas’s head office in Sydney stayed dry but its operations will still feel the pinch.

JPMorgan analyst Scott Carroll estimates Queensland accounts for up to 15 per cent of the airline’s total capacity and says lower passenger numbers could have a revenue impact of about $15m.

Qantas chief executive Alan Joyce said bookings into Brisbane had taken a hit as people stayed away from Queensland during the floods.

“We have seen the loads during this period, both traffic coming out and traffic going in, impacted,” Mr Joyce said.

“Business traffic and leisure traffic aren’t travelling there.”

Among the insurers, Suncorp has the biggest exposure to Queensland and Credit Suisse estimates the claims and reinsurance costs could push down net profit by 11 per cent to $651 million. IAG and QBE have also been receiving claims but the latter is yet to update the market.

“There’s no doubt that floods will be major feature in the February reporting season, but what we need to appreciate is much of it will also be short-term business disruption,” Goldman Sachs Asset Management head of Australian equities Dion Hershan said. He noted that several businesses such as retailers would experience only temporary problems.

Woolworths, Coles, David Jones, Metcash and Myer all reported store closures, but most expect to reopen soon.

The retailer most affected is The Reject Shop, Its key distribution centre in Ipswich supplies about 43 per cent of its stores and is expected to be out of action for eight weeks. The group went into a trading halt on Wednesday but the stock rallied yesterday, closing up 5.5 per cent at $13.80.

The Australian sharemarket has been relatively unaffected by the flood news. The benchmark index is up 1.2 per cent this month.

Business Council of Australia president Graham Bradley said the disaster in Queensland was a timely reminder of how variable economic conditions could be.

“The disaster in Queensland reminds us that we can never afford to imagine that good economic times last forever and that, for Australia, they can rely on a range of factors outside our control,” Mr Bradley said. “Commodity prices and a strong Chinese economy sit at one end of the spectrum and the forces of nature at the other.”

Mr Hershan said: “A lot of this will eventually be a long-term positive for the region with the rehabilitation acting like a stimulus package.”

Queensland Treasurer Andrew Fraser has forecast a rebuilding bill in the billions and civil engineering, construction and building materials firms are expected to be major beneficiaries.