Transfield’s bottom line fails to weather the storm
Oh, the irony. There was Business Council chairman Tony Shepherd telling a business audience of his plan to “lock in Australia’s prosperity”. He said the country also needed to embrace increased migration, and greater engagement and integration with Asia.
And, Australia needed to make dramatic productivity improvements, and tap into our $1.2 trillion pool of superannuation funds to invest in infrastructure that would drive improvements in the nation’s standard of living, he told a lunch of the Australia-Israel Chamber of Commerce. And, the GST should be increased to pay for cuts to personal and company income tax rates.
All noble sounding stuff. The big picture. And while he was spruiking his grand plan, shares in Transfield Services, the company he chairs, were tanking on the ASX. They plunged 15% at one stage before recovering slightly to close off 12% after the company blamed wet weather and other problems for a near 20% cut in profit guidance for the 2012 financial year.
It will be the second year in a row that Transfield has disappointed in the profit stakes: in 2010-11 it reported a a net loss of $19.7 million. That was after lifting profit before significant items $100 million, up from $96 million. But a series of non-recurring expenses, including a foreign exchange hit of $50 million on the sale of the group’s USM business, and write-downs associated with the divestment of its stake in its eponymous infrastructure fund that totalled $119.9 million.
This year its another series of one-offs: Transfield said its resources sector services company Easternwell had been hit by $7.4 million of unforeseen costs relating to a recent cyclone in Western Australia and wet weather in Queensland. Another $1.6 million in unforeseen costs linked to extreme weather in South Australia had also hurt the group. A further $16 million in costs came in the form of a provision on a construction contract in Transfield’s New Zealand business.
These one-offs are becoming a yearly profit factor, so shouldn’t Transfield be including these in its normal business costs? (And the weather-related costs would almost be enough to make Transfield and Shepherd a convert to global warming?).
To make matters worse, the company forecast last August, and again in February, that full-year net profit would be at the lower end of the $130 million to $135 million range. So in the words of the great Maxwell Smart, Transfield’s profit guidance “missed it by that much”!
Now it might be that by being chairman of Transfield, Shepherd has time for the Business Council and its grand plans, but suffering shareholders in the company would be wishing he paid a bit more attention to events closer to home. After all, it’s not just the nation’s prosperity that should be ‘locked in’ but that of Transfield and its shareholders.
Tony Shepherd has been chairman since 2005 and has seen the share price collapse from more than $8 four years ago to $2.19 yesterday. That’s a far bigger fall than seen in the Australian stockmarket.
Not what you’d call “locking in prosperity”. More like value destruction. And that highlights a part of the productivity improvement debate that many people, from Reserve Bank governor Glenn Stevens to the federal government, economists and those in business shy away from: the at times unproductive use of capital in this country by businesses and government. So far much of the debate on improving productivity has concentrated on changing labour markets, getting rid of penalty rates and weekends, and the Workplace Relations Act.
But there has been little, if any comment or analysis anywhere on the destruction of valuable capital that has gone on since the GFC started in 2007 with hundreds of billions of dollars of losses, dud investments (and new capital raised to repair broken balance sheets). As we have seen with the latest update from Transfield (and an earlier one this week from Metcash), the destruction of capital and value continues, for various reasons.
But Transfield has a history of overpaying for assets in the past. Weather-related problems can’t be avoided, (but will become more common in future years because of global warming) but paying too much for assets (as Transfield did in the US several years ago), or being slow to restructure your basic business are management and board errors (Metcash). Measuring the impact of those (and disasters such as Leighton Holdings $1 billion-plus impairment charges and write-downs, plus $600 million of new capital needed a year ago), seems beyond many economists and others.
And yet they surely contribute to our recent poor productivity (because it is non-productive investment), as do bottlenecks in the wider economy and problems in the labour market.