By Stephen Mayne
With just a day or so to go in what will undoubtedly be the worst annual profit season in living memory, it is amazing to see how pleased analysts and investors have been with the overall message.
The red ink has spilled like never before but it has almost been a case of the bigger the loss, the better the reaction.
James Packer looked like he'd taken his medicine in February when Crown booked a $407.9 million half-year loss, but he tripled his bet yesterday by producing a net full-year loss of $1.19 billion after virtually all casino investments outside Australia and Macau were written down to zero.
However, these Crown write-offs were a classic case of the numbers not necessarily telling the full story. Investors pushed the stock 16 cents higher to an 11-month high of $8.15 yesterday, giving Crown a market capitalisation of $6.14 billion.
But all these write-downs in North America and the UK saw the Crown balance sheet shrunk to the point where the directors now claim it only has net assets of $3.43 billion - only 55.8% of the value which the market ascribes.
The Crown balance sheet was already under-cooked when the directors and auditor came to consider the full year accounts this month, yet they swiped more than $1 billion off the carrying values to render it even less accurate today.
The Crown board's decision to ''clear the decks'' was in stark contrast to many companies, which didn't take similarly stiff action to get their book values somewhere near to what the market believes.
Heavy write-downs sent fast-shrinking tollroad player Macquarie Infrastructure Group to a $1.7 billion net loss for 2008-09 but this only brought net assets down to $4.16 billion - still well above the current market capitalisation of just $3.05 billion.
The same applies to most of the major property players. GPT delivered a $3.25 billion loss for calendar 2008 and then with a new chairman and CEO in place, managed an additional $1.19 billion loss for the June half. However, those combined $4.44 billion in losses in 18 months, along with $3.3 billion in freshly raised capital, left the latest balance sheet claiming net assets of $6.88 billion - still $1.55 billion or 29% more than the current market capitalisation of $5.34 billion.
The Singapore Government-controlled Australand has been another laggard on the write-downs front. It could only manage a net loss of $257 million for the last half - after somehow managing a $40.2 million profit in calendar 2008.
No major listed Australian company has ever produced a balance sheet more removed from reality than Woolworths
The Australand board and auditor PricewaterhouseCoopers now reckon the company is worth more than $2 billion, when the market capitalisation is only $1.13 billion. Maybe Australand needs to invite James Packer onto its board to show them how to swing an axe through a balance sheet.
Stockland was a lot closer to the money. Whilst write-downs of $2.4 billion delivered a net loss of $1.8 billion in 2008-09, after $2.7 billion in capital raisings the board now claims the company is worth $8.69 billion. The market capitalisation has this week hit $8.8 billion, so the directors have clearly got the balance right.
However, there were some companies which got so excited about write-downs they managed to join the very small ''negative equity club'' even though the directors and investors clearly think they are solvent and offer some residual value.
Centro Properties Group followed up the $2.05 billion loss in 2007-08 with a season high $3.5 billion loss in 2008-09, which delivered a balance sheet showing negative equity of $613 million.
Sure, Centro is in litigation with its former auditor PwC but did the board and new auditor Ernst & Young really need to over-compensate that much? After all, Centro shares have tripled to 16 cents since the lows of March and the stock is now capitalised at $160 million.
It won't be possible to fully critique the 2008-09 profit season until after we see all the last day laggards air their dirty washing on Monday. However, we've got something to benchmark it against.
The performance on February 27, 2009, will go down as the greatest loss admission day in Australian history. It was the last day of the interim reporting season and given it was a Friday at the end of the shortest month of the year, there was an incredible list of almost 200 companies which declared losses exceeding $1 million.
You can see a chronological account of what happened here, but it is unlikely to happen again.
Below is the state of play with the 16 companies which waited until the last possible day in February to deliver a loss of more than $100 million. This time around, nine of the 16 have already reported but I reckon there are potentially three more billion-dollar losses to come this season from Paperlinx, GPG and ING Industrial Fund.
How the $100m-plus losses unfolded on February 27, 2009:
8.29am, : $174m half-year loss
Still to report but with net assets of $160 million and a market capitalisation of only $46 million, it should be another big loss.
8.42am, : $567.5m half-year loss
Still to report but with net assets of $1.567 billion and a market capitalisation of only $386 million, stand by for a $1 billion-plus full-year loss if the directors are being realistic.
8.55am, : $163.4m half-year loss
Reported a $150 million full-year loss on August 24 so actually made a profit in the second half.
9.19am, : $2.4 billion full-year loss
Reported a $585 million net loss for the half year on August 27 which reduced net assets down to $2.5 billion when its market capitalisation is now up to $3.59 billion.
9.34am, : $110m half-year loss
Sir Ron Brierley's London-based play thing is still to report but the red ink should really flow given the market capitalisation is only $1.07 billion when the claimed net assets are 949 million pounds.
9.38am, : $278m full-year loss
Recovered to only lose $14.19 million in the June half in a result released on August 27.
9.42am, : $3.25 billion full-year loss
Reported an additional $1.19 billion first-half loss on August 27.
9.47am, : $245.8m half-year loss
Increased write-downs to produce a $977 million full-year loss on August 26, but should have been much bigger given claimed net assets are now $1.72 billion when the market capitalisation is only $285 million.
10.09am, : $407.9m half-year loss
Came back for another whack at write-downs to deliver a full-year loss of $1.198 billion on August 27.
11.04am, : $1.43bn loss
Now called Eircom Holdings and full-year loss of $1.48 billion released on August 27, which was way over the odds given it now has negative equity of $660 million and a positive market capitalisation of $198 million.
12.20pm, : $204m half-year loss
Increased the full-year loss to $247 million on August 17 but with a market capitalisation of only $169 million the claimed net assets of $528 million look overdone.
1.50pm, : $445.9m loss
Still to come but with claimed net assets of $2.25 billion and a market capitalisation of only $522 million, we should be seeing a $1 billion-plus loss.
3.06pm, : $297m loss
Reported a full-year loss of $345.9 million on August 26 and now claims to have zero net assets when market capitalisation is $34 million.
3.22pm, : $300m half-year loss
Now just called Alternative Investment Trust and result is still to come.
3.39pm, : $242.4m loss
Full-year loss of $284 million reported on August 27 but should have been more given claimed net assets still $177 million when the market capitalisation is down to $38 million.
3.54pm, : $225.83m loss
Full-year loss of $193 million reported on August 26.
4.31pm,: $105.17m loss
One of the last surviving listed Allco vehicles but yet to report.
7.02pm, : $106.7m loss
Still to come but with a market capitalisation of $533 million the directors have got some more pruning to do given they claim to have net assets worth $1.1 billion.
The lesson from all this is that write-downs and losses are often at the whim of directors and auditors. What really matters for investors is the share price and that is driven more by cash flow than anything else in this credit constrained world.
Look no further than Woolworths which yesterday reported a $1.8 billion net full-year profit. However, it was the net cash flow from operations of $2.6 billion that supports the current $35.4 billion market capitalisation.
Yet the directors and auditor are still only claiming Woolworths has net assets of $7.057 billion, meaning they are undercooking the company's market value in the formal accounts by a staggering $28.34 billion or 80%.
Macquarie Airports is another listed company in the retail business and under Australia's utterly inconsistent accounting rules, they have been allowed to progressively double the book value of Sydney Airport to more than $10 billion even though it has never been sold. If MAP can do that, why can't Woolworths write up the value of its huge retail network?
While MAP's $344 million loss for the 2008-09 year has brought its net assets down near to its current market capitalisation of $4.1 billion, for the last couple of years the MAP balance sheet has been massively inflated above market assessments.
However, no major listed Australian company has ever produced a balance sheet more removed from reality than Woolworths.
Surely in this time of unprecedented accounting losses, it is time for directors to at least be required to attempt an explanation in the annual report as to why book values still largely bare no relationship to market values.
, a shareholder activist and publisher of The Mayne Report, contributed this article to . He can be reached on .