The biggest week of the annual reporting season is drawing to a close and some companies are hacking into their balance sheets like the GFC days.
While we’ll never see another day of results such as February 28, 2009, when 17 companies joined the $100 million loss club, next Wednesday should be pretty ugly when all the lay day results dribble in.
Apart from BHP-Billiton’s record $22.5 billion profit and a healthy performance by Seven West Media, the overall tone has been pretty gloomy this week.
One reason for this is boards taking a reality check on the book values of assets on their balance sheets.
The reason that BlueScope Steel became the 29th instance of an Australian company losing more than $1 billion was largely because of non-cash write-downs.
Yet the write-downs arguably didn’t go nearly far enough. Cheap Chinese imports, the record high Australian dollar, surging iron ore prices and inflexible Australian work practices have conspired against BlueScope to the point where it would struggle to give the Port Kembla steelworks away, especially with a carbon tax coming next year.
Even after the write-downs, the BlueScope directors are claiming to have gross assets of $7.8 billion, total liabilities of $3.34 billion and net assets or total equity worth $4.4 billion.
The market disagrees. With the stock trading at 87c, BlueScope’s market capitalisation is only $1.6 billion, some $2.8 billion less than the equity valuation claimed by the directors. The same applies to other companies such as Gunns and Fairfax Media.
The Tasmanian timber giant plunged to a net loss of $355 million yesterday after $477 million of one-off impairment charges against a wide variety of assets assembled during the John Gay acquisition binge. But that only reduced its claimed net assets from $1.49 billion to $1.05 billion — some 600% above its current market capitalisation of $174 million based on a share price of 20.5c before the stock was suspended to finalise the taxpayer-funded compensation deal for stopping logging in old-growth forests.
Gunns is already wallowing under $600 million of debt led by its long-time bankers at ANZ. Having spent more than $200 million on the pulp mill, which has not been written down at all, it is somehow expecting to be able to finance, with the assistance of external partners, the controversial $2.3 billion project.
Bizarrely, the Gillard government is giving $100 million to BlueScope for a partial industry shutdown, but is reluctant to give anything directly to the pulp mill, which would be the biggest private investment in Tasmanian history.
Tony Abbott is remaining silent on the pulp mill as he’s more interested in seeing it bring down the minority Labor-Greens government in Tasmania. Gunns is audited by KPMG partner Leigh Franklin. Interestingly, he happily signed the accounts when a modest $4.6 million net loss for the first half was announced on February 15.
There is no Franklin signature on the full-year results as the audit is still in progress. Clearly there is some uncertainly over the future of Gunns as reflected in the suspended shares.
If Gunns collapsed, the first thing an administrator would do is attempt to sell the assets. However, there would also be a compensation claim against the Tasmanian government for the exit from old-growth logging. On top if its $600 million debt, Gunns had $136 million of trade and other payables as at June 30 and there is a lot of talk of creditors not being paid.
The directors and the auditor are in a very difficult position. If massive write-downs are approved, it can trigger covenant breaches on the loan-to-valuation (LVR) ratios and formally place the company in the hands of its bankers.
This situation is different at Fairfax Media, which today announced $674 million of write-downs, the biggest component being mastheads, licences and goodwill.
The market was pleased with the result — especially the proposed partial float of Trade Me and the healthy $357 million of free cash flow after all interest and tax payments — as Fairfax shares jumped 6c to 83.5c in morning trade. But even after this 7% gain Fairfax is valued at $1.95 billion, whereas the directors are only claiming its net assets have fallen from $5.3 billion to $4.4 billion over the course of 2010-11.
Traditionally, incoming CEOs clear the decks and paint their predecessor black with huge write-downs.
Fairfax CEO Greg Hywood missed his chance in February, presumably because chairman Roger Corbett didn’t want to admit Fairfax over-paid for assets during the Ron Walker years.
Fairfax still has great cash flows and reduced its net debt to $1.5 billion this year. Seeing as its bankers even permitted a $1.5c final dividend, surely a more realistic approach on write-downs of intangible assets would have been something that the auditors, bankers and directors could have agreed on.
If you’re going to make a write-down, do it properly. Gunns, BlueScope and Fairfax all produced half-hearted efforts this week. They will all have to do it again in coming results, assuming they all continue to exist in their current forms.
*Stephen Mayne will be giving a free lecture at the University of Tasmania Hobart campus about Gunns, corporate governance and Australia’s economic performance at 12.30pm on Sunday. Details on the UTAS open day here.