Published October 21, 2008

Making profit warnings more meaningful

By WONG WEI KONG

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AS THE earnings season gets underway amid a financial and economic crisis, profit warnings will increasingly be issued by underperforming companies ahead of their results announcement.

The idea behind such warnings is a good one: it is to allow market expectations a period of time to adjust to the fact that a company will not be living up to its earlier guidance or targets. It helps avoid an earnings shock, and the negative impact that can have on the share price.

Yet, companies need to realise that the mere act of issuing a profit warning is not enough. A profit warning has to be meaningful.

Take, for instance, the profit warnings issued by two companies yesterday.

A-Sonic Aerospace made what is possibly the shortest of all profit warnings seen in many months. In a one sentence statement, the company simply said that 'the results of the company and its subsidiaries for the third quarter ending 30 September 2008 and the nine-month period ending 30 September 2008 are expected to register losses'.

Reyphon Agriceutical Ltd did little better. 'The group's financial results continue to decline and the financial results for the third quarter ended 30 September 2008 are expected to be significantly lower compared to the corresponding third quarter ended 30 September 2007,' it said.

What's missing in these two announcements, and what investors are expecting, is why?

To be sure, investors were served a warning to lower their expectations, or to expect the worst. But without saying what were the factors that led to the poorer performance, the two profit warnings are not meaningful. Without more information, investors cannot properly assess the situation.

Thankfully, not all companies make profit warnings this way.

Last week, Banyan Tree Holdings warned that it may fall into a loss for the third quarter of 2008. But it provided reasons - the deterioration of the global financial situation, coupled with the political turmoil in Thailand which had affected its operations there. The group also took the opportunity to tell investors that it has no bilateral dealings with known troubled financial institutions and has not entered into any complex financial instruments. It also gave an update on its business outlook, as well as how it is responding to the situation, such as controlling its spending and cutting its costs where possible.

Earlier this month, QAF Ltd warned that the group is expected to incur a substantially higher losses before tax for the third quarter of 2008, relative to its second quarter 2008 loss of $1.5 million. Like Banyan, it provided context. The losses would mainly be caused by the performance of the group's primary production division and its apple juice manufacturing division. Both units suffered from high raw material prices. An unrealised foreign exchange loss was also a contributing factor, it said.

The contrast between the two sets of profit warnings is stark. Which serves investors better? More companies need to put more information into their profit warnings. By the time companies are prepared to issue a profit warning, they already have most if not all the facts in hand. Of course, it's a task that brings far less pleasure than announcing new projects in good times.

But companies should remember that transparency and information flow is as critical, if not more so, in times of crisis.