Revealed: 4 least profitable industries in Australia

Be aware of the risks if you hold shares in these sectors. Some companies might return to profit, but some may not.

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The four least profitable industries in Australia have been named, in a warning to investors who have ploughed money into ASX companies in those sectors.

Research firm IBISWorld revealed its analysis this week, noting that the named sectors are having a rough time in 2020-21 — but this may not necessarily mean losses will continue in future years.

Here are the four industries:

International airlines

With travel between countries at an almost standstill since the COVID-19 pandemic hit last year, it is no surprise that airlines are bleeding cash.

In the 2020-21 financial year, IBISWorld forecasts the average profit margin for the industry will sink to -31.4%.

"Revenue across the industry is expected to decline by 67.2% in 2020-21, as international tourist visitor nights have fallen by 82.6%," said IBISWorld senior industry analyst Tom Youl.

"The industry is expected to begin a rebound next year, with revenue expected to rise by 78.4%, to $14.7 billion."

In the latest reporting season, Qantas Airways Limited (ASX: QAN) recorded a $1.1 billion statutory loss after tax, while Air New Zealand Limited (ASX: AIZ) copped a 93% loss in earnings before taxation.

IBISWorld predicted recovery would take "several years" while vaccinations roll out around the globe.

Buy now, pay later

Players like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) have been ASX darlings in the past 12 months. But that still doesn't make them profitable.

"Although the buy now, pay later industry is growing strongly, industry firms have made losses over the past 5 years and will likely continue to do so in 2020-21," said IBISWorld senior industry analyst Yin Yeoh.

"While losses as a share of revenue are declining, the industry has yet to achieve profitability."

IBISWorld predicts revenue will grow 25.8% for the industry this year but the average profit margin will sit at -2.6%.

The industry is also seeing more competition from broader financial institutions like Paypal Holdings Inc (NASDAQ: PYPL) and Commonwealth Bank of Australia (ASX: CBA), which this week revealed its own BNPL product.

But Yeoh was optimistic about the industry in the long run.

"While the industry continues to post losses, the scale of losses has shrunk significantly over the past two years," she said.

"It is likely that the industry will achieve profitability for the first time before 2023-24."

Wired telecommunications network operation

The wired telco sector, dominated on the ASX by Telstra Corporation Ltd (ASX: TLS), is one of the largest loss-makers in the country, according to IBISWorld.

The industry copped an average profit margin of -25.7% for the 2020-21 year.

IBISWorld senior industry analyst Liam Harrison placed the blame on government-owned NBN Co.

"'NBN Co Limited's industry-related revenue has risen at an annualised 68.2% over the 5 years through 2020-21, vastly outperforming the wider industry," he said.

"However, the company has registered stronger losses over the past five years, largely due to the high costs involved in financing the NBN rollout."

The sector is suffering from a multi-year downward spiral, with revenue declining 4.7% per annum over the past 5 years.

"NBN Co has been able to sustain its losses largely due to its public backing. However, it will need to achieve profitability eventually," said Harrison.

"There are increasing threats to its profitability, including the roll-out of 5G fixed wireless networks that may erode NBN's user base."

Cotton ginning

Ginning is the process of separating fibres from the seeds on harvested cotton.

Severe drought across the country in the season leading up to the current financial year has meant revenue will go backwards to the tune of 26%.

The average profit margin for the sector will end up at -4.5% for the year.

However, Youl predicted better times ahead as water availability has improved in the past 12 months.

"Assuming a return to near-average annual rainfall, industry revenue is projected to increase from a low base over the next 5 years," he said.

"Wide profit margins in the cotton growing industry are expected to encourage farmers, particularly irrigators, to grow cotton when water availability increases."

Tony Yoo owns shares of AFTERPAY T FPO, PayPal Holdings, and Qantas Airways Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended PayPal Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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