The corporate plod, ASIC, and others have been complaining about how many companies are selectively reporting their profits: ASIC says that companies are using terms such as “underlying profit” or various profit measures before and after one-off items to make their results look better than they are and hiding the bad news.
Yesterday we saw a prime example of what ASIC is worried about in Caltex Australia’s profit update, which said the company was expecting a 39% drop in first-half earnings (for the six months to June 30).
But that actually hid good news because the reality is that Caltex looks like reporting a huge profit increase. But the company’s preferred profit measure (which is not used to calculate tax or payout dividends to shareholders or prepare the annual accounts for regulators) yesterday actually hid good news by emphasising an oil industry method of reporting profits.
In its statement to the ASX, the company said it was expecting “a replacement cost of sales operating profit” for the six months to June 30 of $100 million-$150 million, down from $163 million in the first half of 2010.
But on a net historic cost profit, which includes the impact of a higher oil price on its stockpiles, and which it uses to work out the tax it pays (and every other company in the country pays tax on and uses in their accounts), Caltex is expecting profit to almost double to $255 million-$275 million, up from $141 million.
That’s a profit rise of 64% at the low end and 93% at the top end.
“On a historical cost profit basis, Caltex expects an after-tax profit in the range of $255 million-$275 million for the first half of 2011, compared with $141 million, including significant items, for the first half of 2010.
“This includes product and crude oil inventory gains of approximately $160 million compared with an inventory loss of $8 million after tax for the first half of 2010.
“Working capital requirements have increased due to the net impact of higher crude oil prices and exchange rates,” the company said.
Caltex’s preferred method of reporting its profit was swallowed by virtually every reporter this morning in the business media, bar an excellent column by Matthew Stevens in The Australian under the headline “Oil refiner’s gloom doesn’t spell doom.” He got that right, pity others didn’t, including others on The Australian’s business pages where a double-bylined report got out the Mixmaster and went for it:
“Caltex yesterday joined the growing list of companies to have downgraded profit expectations in the lead-up to the reporting season, blaming its woes on refinery problems in Sydney and Brisbane, a stronger dollar and higher prices of the light crude needed in its refineries, relative to heavier crude used by others.
“QBE Insurance Group, Suncorp, Insurance Australia Group, BlueScope Steel, OneSteel, Fairfax Media and Qantas have all warned of hits to short-term profitability.”
Far from it. That was plain wrong. Caltex didn’t join the “growing list of companies to have downgraded profit expectations” as claimed. The report compared the Caltex forecast with those from other companies.
But that is comparing apples with oranges. Caltex reported the 39% drop on the basis of what it calls “a replacement cost of sales operating profit”, the other companies reported their updates on the basic of historic cost. Sounds arcane, but it is what all companies use to calculate their profits or losses, to work out dividends for shareholders and to prepare tax returns.
In fact on the same basis as say QBE, Caltex is looking at a substantial increase in profits.
Caltex’s reporting is part of the trend that is concerning the regulators.
Any Caltex shareholder who saw the headline yesterday and sold should be kicking themselves. The company’s earnings are going to be higher than expected, not lower. They got no help from the financial media this morning, bar Matthew Stevens column in The Australian in which he wrote: “But even Caltex people were warning yesterday against using their business as any sort of litmus test for the results ahead.”
It’s a pity others on the paper didn’t read his column. But The Australian wasn’t alone, The report in The Sydney Morning Herald’s business pages failed to mention the historic profit figure and only mentioned Caltex’s version. Melbourne’s Herald Sun made the same mistake in its report. The Australian Financial Review mentioned the historic cost profit towards the end of the story on page 18, then discussed the replacement cost profit in a column on page 23, treating it as though the right result.
It raises the question, do many reporters understand the difference in the two profit measures (and some broking analysts who use it to analyse Caltex’s result)?