Brokers Downgrade Shares Of Local Manufacturers

Sydney Morning Herald

Monday November 24, 1997

MORGAN MELLISH and CAROLYN CUMMINS

Profit outlooks for industrial stocks are to come under pressure in the coming months as the companies struggle to overcome the dual impact of weak domestic growth and economic turmoil in Asia.

The earnings revisions follow a round of savage cuts to forecast profits of resource companies due to lower commodity prices and weakening demand out of Asia.

Industrial companies to be downgraded include Email, Boral, Pacific Dunlop, Metal Manufacturers, Pacific BBA, Amcor, ICI, Pioneer, ANI, Qantas, Crown and Burswood Casinos.

The reduction in forecasts also comes on top of the earnings downgrades of Coca-Cola Amatil, which was hit hard immediately after the fall in the sharemarket in October.

All the companies are facing a mixture of company-specific problems, lower demand from Asia and increased competition from imports as manufacturers around the region drop their prices.

J. B. Were is one of the major broking firms to downgrade companies in the last two weeks. The broking firm has reduced Email's forecast 1998 earnings per share (EPS) by 5 per cent because of the poor outlook for the company's industrial products division.

It also has downgraded Pacific Dunlop's forecast 1998 EPS by 5.8 per cent because of the poor outlook for its cables division.

Automotive supply company Pacific BBA and cable company Metal Manufacturers were downgraded because of their large exposure to Asia.

Were is also looking at its optimistic 1998 forecast profit for Boral following reports that Boral was "uncomfortable" with projections above $250 million.

However, the broking firm remains optimistic about growth for industrial companies despite the economic problems in Asia and it has upgraded several shares, including retail and media companies which should gain from a forecast pick-up in economic growth.

Coles Myer's 1998 forecast EPS has been upgraded by 3.6 per cent, Woolworths 1998 EPS by 2.7 per cent, and Harvey Norman's 1998 EPS by 2.6 per cent. Foodland's 1998 forecast EPS was increased by 13 per cent.

News Corp's 1998 EPS has been upgraded by 4.2 per cent and West Australian News' 1998 EPS increased by 2.7 per cent. Other companies to be upgraded included Tabcorp and Wesfarmers.

J.B. Were's head of research, Mr Craig Drummond, said he was forecasting 11 per cent EPS growth for non-bank industrials for the year to June 1998.

"To get pessimistic is completely and utterly wrong," Mr Drummond said.

"The Asian crisis forced us to wipe 1.3 per cent off earnings across the board but subsequently we've put that back on.

"October was quite a good month from a profit point of view and we're very comfortable with the growth outlook."

ANZ Securities has revised downwards its earnings estimates in trade-exposed and cyclical industries. That would include diversified industrials such as Email and Pacific BBA, transport, paper and packaging products, building materials and the chemical sector.

The brokers said Korea could be a trigger for significant moves. The inability of analysts to consider the impact of imports on the trade balance could also lead to further reductions in profit forecasts in the months ahead.

Retail stocks could be faced with further writedowns of inventory if they get stuck with excess whitegoods stock as import competition starts to bite.

Bankers Trust chief equity strategist Mr David Rees said the manufacturing and res-ources sectors particularly faced downgrades.

PROFIT OUTLOOK
                                 '97 (A)        '98 (E)
 Net profit             $m      $m
 DOWNGRADES
 Email                    58.7    68
 PacDun         175.7   209
 PacBBA                   32.7    38
 Qantas                 260.5   280
 Metal Manufact*          27.1         29
 UPGRADES
 Coles Myer     318.1   379
 W'worths       S258.0  299
 Harvey Norman    37.3    48
 News Corp           1295.0      1565
 Tabcorp                       100.8    116
 Source: Reserve Bank Bulletin, August 1997.
 (A) is acutal profit to June 30. (E) is broker estimates. * December balance
date.