Profits exceed expectations

Australian corporate profits for the second half of last year rose more than brokers expected as miners including BHP Billiton and Rio Tinto reported record results.

Average net income for the Australian companies followed by Goldman Sachs JBWere climbed 44 per cent in the six months ended December 31, about 1.2 per cent more than expected by Chris Pidcock, an analyst at the Melbourne broker.

BHP Billiton, the world's biggest mining company, more than doubled first-half profit to a record US$2.8 billion. Rio Tinto's net income for the period surged 58 per cent. Those results helped to lift earnings of resources companies by 87 per cent from a year ago, Pidcock said.

George Raftopulos, who helps to manage the equivalent of A$655 million at Constellation Capital Management in Sydney, commented: "Miners, in particular, showed they have enough of what it takes to keep us interested in the Australian stock market for the next 12 months."

Credit Suisse First Boston said yesterday that it had increased its earnings forecasts for the mining industry by more than 10 per cent in 2005 and 2006. 

About 36 per cent of companies reported earnings that beat the forecasts of UBS analysts and 26 per cent of companies disappointed, the broker said in a note dated March 1. It increased its forecast earnings growth for the year to June 30 by 2.7 per cent to 18 per cent.

Billabong International prompted the biggest positive reaction to an earnings statement. Shares of the surfwear maker surged 13 per cent the day it increased its profit forecast because of rising sales in the US.

Shares of Multiplex Group, a construction company, had the biggest negative reaction, falling 16 per cent when it reversed previously booked profit from the rebuilding of Wembley stadium and another project in London.

"The strength of the reporting season seems to have been generally well anticipated by the market," UBS said in its March 1 note. The S&P/ASX 200 Index increased 1.6 per cent last month.

Companies had until the last day of the month to publish results for the period ending December 31, under Stock Exchange rules. The materials index, which counts BHP and Rio among its members, added 8.1 per cent, leading gains.

Another feature of the season was capital returns to shareholders, demonstrating that "corporate cash flows were generally very strong", UBS said.

Among these, AMP, the nation's biggest life insurer, agreed to return A$750 million to shareholders and Rio Tinto said it would buy back as much as A$1.5 billion.

Looking ahead, the brokers expressed concern that a slowing economy would depress growth at companies whose earnings are sensitive to nonessential spending and housing.

Australia's economy grew 0.1 per cent in the three months ended December 31, the slowest pace in four years, as home building and consumer spending slowed, the Australian Bureau of Statistics said yesterday.

The Reserve Bank of Australia increased interest rates for the first time in 15 months, citing concern that unemployment at a 28-year low will fuel wage increases and stoke inflation.

"The balance of risks of a domestic slowdown are increasing, particularly in light of the accelerated tightening bias by the Reserve Bank," said Goldman Sachs JBWere's Pidcock.

"We therefore expect the positive earnings revision trends which were a key feature of the market during the second half of 2004 will reverse during 2005."

He recommended avoiding stocks such as Coles Myer, Australia's biggest retailer, and Westfield Group, the world's biggest owner of shopping malls.

- BLOOMBERG