Confession season underway in Australia

The ASX200 looks set to test levels near 4000 – before finding some solid support and bouncing back, in the absence of any large offshore blow ups.

Confession season is now underway – a period where companies under continuous disclosure requirements update the market on earnings expectations as the financial year end closes out.

Today we see Transpacific, NIB Holdings and Treasury Group joining the list of companies which expect earnings pressure. These are all businesses in different industries which highlight earnings risk to the downside across the whole market.

We don’t think this is a bad thing. Stock prices have already fallen hard enough and now earnings will play catch up. Over the next few weeks we expect some conviction to return as earnings are qualified and the focus shifts on management strategies and balance sheets in the upcoming August reporting season.

Billabong is back on the market with a share price of 95 cents at the time of writing. We wrote about the reluctance to participate in the capital raising regardless of price and discount last week. Today’s price action will no doubt make it harder for other companies to raise capital. Underwriters will be very well aware of the risk in having too large an exposure.

Billabong’s discount not only to the theoretical ex price but also the issue price of $1.02 shows the market will not back incompetence. Future raisings could, like Billabong’s, be non-renounceable which makes it very unappealing for ordinary retail investors to take a punt on a business which has balance sheet vulnerabilities. We prefer to wait until the August reporting season, when the balance sheet and cash flow statements are disclosed, before backing a discounted name.