The profit reporting season gets off in earnest on Monday and the biggest feature will be one-off write-downs by numerous commodity-exposed players, particularly from the oil and gas sector.
Other structurally challenged sectors have taken their medicine in previous years, right-sizing their balance sheets to something approximating the current market value.
Look no further than these six examples from the struggling media sector:
APN News and Media: market cap $530 million vs book value of $481 million.
Fairfax Media: market cap $2.12 billion vs book value $2.07 billion.
Seven West Media: market cap $1.25 billion vs book value of $1.2 billion.
Southern Cross Media: market cap $830 million vs book value of $936 million.
Nine Entertainment Company: market cap $1.5 billion vs book value $1.08 billion.
Ten Network Holdings: market cap $546 million vs book value $412 million.
It’s a very different story in the oil and gas sector where claimed net assets of companies are now way overblown after the collapse in oil prices over the past year.
While Woodside and BHP Billiton have been out early, putting numbers on specific write-downs that will be formally reported next month, it is Origin Energy that perhaps has the most work to do.
Last August, the Origin board and auditor signed off on net assets worth $14.2 billion, but the market capitalisation has since collapsed to exactly half that at $7.1 billion.
Origin Chairman Gordon Cairns might have been quick to admit to a Masters disaster as the new Woolworths chairman, but Origin has been in denial about its situation, judging by last week’s defiantly bullish “clarification”.
This might have something to do with the fact that Cairns has been an Origin director since 2007 and chairman since October 2013. It is much easier to admit other people have made mistakes.
Most of the lost value can be put down to the grossly over-capitalised investment in new LNG processing plants in Queensland.
Santos has been hit equally hard by its separate over-priced Gladstone punt and now finds itself with a market capitalisation of just $5.23 billion against claimed net assets of $9.7 billion. Unlike Origin, it has flagged major write-downs next month.
Beach Energy is currently in the throes of bedding down a Kerry Stokes-driven merger with fellow Cooper Basin gas player Drillsearch. Beach has already signalled it will be taking a write-down of up to $650 million, which is certainly warranted given its market cap has plunged to just $534 million, yet last August it claimed to have net assets worth $1.35 billion. A $650 million hit arguably doesn’t go far enough.
Woodside’s foreshadowed US$1 billion-plus in write-downs (see page 9) looks to be on the money, given that its market value of $21.8 billion has slipped below its August 2015 claim that it had net assets worth $23.2 billion.
The same applies to BHP Billiton, which foreshadowed the biggest single write-down in Australian history with this brief statement on January 15 detailing a US$7.2 billion impairment to its US on-shore oil assets.
This was needed as BHP Billiton’s market cap has now fallen to $81.2 billion, but with the currency down at US70c, the book value of its claimed net assets was looking overdone at $92.1 billion. A $10 billion hit pretty much brings the accounts and the market into line, although there are many overs and unders across the entire BHP Billiton portfolio when it comes to individual valuations.
One company that is yet to put a specific number on its coming write-down is listed law firm Slater and Gordon, which advised the market on December 17 that UK profits were down and goodwill valuations are being looked at.
Slaters paid a ridiculous $1.4 billion for a business known as Quindell and will be forced by its new auditor, Ernst & Young, to write that down by several hundred million dollars, less than a year after buying the business. After all, when your market cap has tumbled to just $259 million, it is very hard to keep a straight face claiming your net assets are really worth $1.43 billion.
Adam Schwab summed up the problems Slaters is facing well in this recent Crikey piece and there are indeed plenty of similarities with ABC Learning, although it may not finish up that bad.
Remarkably, Eddy Groves still holds the prize for having the largest pile of accounting net assets declared at the time of collapse, as this list demonstrates:
ABC Learning: claimed net assets of $2.23 billion in February 2008 and never got to reveal the work of new auditor Ernst & Young, which was preparing for a big write-down just before the collapse.
Pasminco: declared a $23 million net profit for 1999-2000, and then collapsed while claiming to have net assets of $1.5 billion.
One-tel: collapsed in 2001 and the last published balance sheet claimed net assets of $945 million even though it never reported a profit.
HIH Insurance: placed into liquidation on March 15, 2001, and the 1999-2000 annual report claimed net assets of $953 million. Remarkably, the company never reported a loss.
Sons of Gwalia: somehow reported a $12.23 million profit for the six months to December 2003 when this balance sheet claimed net assets of $728 million.
Allco Finance Group: reported a $1.73 billion full-year loss for 2007-08 but this still left it with net assets of $545 million when the administrators were called in.
The most recent high profile Australian collapse, Dick Smith, is not in this league. The retailer claimed to have net assets of $169 million last August and the board foreshadowed a $60 million write-down on November 30, five weeks before it collapsed.
Let’s hope some bigger companies than Dick Smith don’t join this list as the commodities crash plays out.
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