Forecasts have positive return

The current reporting season for listed companies is well through and there have been some highlights, reflecting the growth in the New Zealand and global economy. Business editor Dene Mackenzie talks to industry observers about the next six months.

Air New Zealand and other New Zealand companies have had a rise in their earnings during the present reporting season. Photo supplied.
Air New Zealand and other New Zealand companies have had a rise in their earnings during the present reporting season. Photo supplied.
One of the major changes in the current reporting season for listing companies was the re-emergence of forecasts and guidance, Craigs Investment Partners broker Chris Timms says.

When the global financial crisis hit in 2007-08, companies took guidance off the table as their profits were hit hard and uncertainty reigned.

''If companies didn't meet their guidance targets they were punished and their shares were hammered. Now, they are feeling more confident and positive about giving a heads-p. Economically, they are dealing with more stable operating conditions and have a handle on where they see their business going.''

That was great news for investors but more risk for the companies, Mr Timms said.

The risk was still concerning companies not meeting their targets and seeing their shares punished in return.

Air New Zealand, which reported a record profit on Thursday, gave a full-year guidance but like others reporting earlier in the week, it took a conservative approach.

''They say they will meet or beat expectations, not they will `absolutely whip' them.''

The companies posting further strong gains highlighted the good health of the corporate sector as earnings expectations were met in the majority of cases, he said.

The reporting season had so far provided comfort that although the New Zealand market had strong gains and, in some cases, was trading at above-average multiples, earnings growth was solid and gaining momentum.

There were more good results than bad during the period. Among the standouts were Steel and Tube, Auckland International Airport, Fletcher Building, Fisher and Paykel Healthcare, NZX, Ebos, Trade Me, Meridian, Freightways, Summerset, Air New Zealand and Port of Tauranga, Mr Timms said.

Telecom, Contact and Nuplex were the only stocks to weaken off in the wake of their results.

''If we look at current consensus earnings estimates, compared with the beginning of February, there have been a healthy number of upgrades for the coming two years.''

NZX50 stocks that had had consensus earnings upgrades for both the 2014 and 2015 financial years since the start of February included Auckland International Airport, Ebos, FPH, Meridian, Skellerup, Meridian, Precinct Properties, Vector and Vital Healthcare.

''Increasing dividends and forward guidance being provided included mention of better economic conditions.''

Asked what had changed for New Zealand-listed companies, Mr Timms said since the GFC, companies had worked on reducing debt and taking costs out of their businesses.

Not all the gains were driven by sales, most were driven by cost reductions.

''Now they have done all the hard work, any improvement flows straight to the bottom-line. They took the hard knocks early and it is paying off now.''

The lack of debt gave companies such as Auckland Airport the ability to return capital to shareholders from a ''lazy balance sheet'', he said.

Chris Timms
Chris Timms
One of the notable features was the lift in share prices as the opinion polls continued to show National having the main support and prospects of forming the next government, Mr Timms said.

The threat of a Labour-Green government introducing more regulation had taken its toll on some companies. But a poll last weekend showing National well ahead of a combined Labour-Green result, gave a lift to share prices this week.

Harbour Asset Management adviser Christian Hawkesby said February provided a test for markets as companies provided earnings results and profit outlook statements.

This year, companies had generally provided earnings marginally better than expected with outlook statements resulting in some upgrades to future profit expectations - particularly in Australia where expectations had been low.

The lead for New Zealand and Australia often came from the United States where quarterly earnings statements came out a week or two earlier.

The US earnings season is drawing to a close and, on average, companies have delivered profits 3% better than expected, he said. Most of the improvement had come from better margins which now touched about 12.5% - not far from previous peaks of 13% and above a 11.6% long-term average. US resource companies, property, industrial and financial services companies did the best while the bank and retail sectors were disappointing, Mr Hawkesby said.

In New Zealand, for the market as a whole, aggregate profits were about 1.5% lower than expected because Telecom, Contact, Trade Me, Sky City and Nuplex pulled down more positive results coming from Sky Network TV, Meridian, Auckland International Airport and several smaller companies.

''The outlooks for 2014 earnings were also evenly balanced, with those signalling upgrades offset by others downgrading expectations. A key theme in most profit statements has been improving margins.''

New Zealand companies still had plenty of margin upside given the strong growth outlook. Additionally, margins were not as stretched relative to historic norms as was the case abroad. At the same time, most companies with Australian operations had noted challenging conditions and currency impacts.

Mr Timms said it was difficult to look ahead at where currency movements would go in the next six months.

The higher interest rate differential between New Zealand and Australia - where New Zealand had a rising environment and Australia had a flat environment - meant the NZ dollar would stay higher for longer.

Against the US dollar, a fall could be expected as the US economy strengthened and US investors kept their money at home because of the better returns being offered, he said.

Christian Hawkesby
Christian Hawkesby
Low interest rates meant people had moved from having money in banks to investing in the sharemarket where they had received both income, through dividends, and growth in value of their shares.

''I don't think interest rates will return to the heady heights of 2007-08 but if people can get 5% in the bank, they may move back. But getting income of 6% to 7% and a bit of growth in shares hasn't been all bad,'' he said.

Relative to expectations, the Australian reporting season had been one of the best in years, Mr Hawkesby said. Profits were 3% better than expected, with 58% of companies beating expectations and 47% upgrading profits.

''These are impressive numbers because companies had not reset the bar lower with downgraded guidance going into the results.''

The improvement in Australian earnings growth signalled a possible reversal of prior weakness relative to New Zealand and broader global markets, he said.

While the big miners did well, domestic Australian companies continued to deliver mixed results. Most of those connected to the building sector and the technology sector provided positive announcements and many saw large upgrades.

Markets always looked ahead, Mr Hawkesby said.

Now, investors appeared to be retaining a very cautious tone to a recovery in Australia and remained strongly attached to both a global recovery and strong New Zealand growth.

''We concur with the consensus regarding the world and New Zealand. However, this February we have seen some Australian companies beginning to lift profits through cost management and productivity. The miners, banks, builders and tech companies have led the way. We will be watching closely for signs a broader lift in margins can be sustained in Australia.''


Reporting season
• February was a test market for corporates.
• Good health of corporate earnings.
• Currency issues remain.
• Forecasts and guidance provided.


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