New Zealand companies reporting this month are expected to fare better than those in Australia, as has been the case for a while, Craigs Investment Partners broker Chris Timms says.
New Zealand has superior economic conditions as well as the greater proportion of more defensive companies listed on the New Zealand market.
Several of the resources companies in the Australian index, and the dominance of the Australian banks, also dragged down the earnings expectations for the ASX50, he said.
Defensive stocks typically delivered "solid results".
In the current economic environment, Craigs still favoured defensive names such as Sydney Airport, Auckland Airport, APA Group and Transurban, as those companies had healthy dividend yields, along with earnings growth.
"We don’t expect any major surprises from these companies when they report. Results should be solid and accompanied by positive outlook statements, in particular."
Sydney Airport had felt the benefits of strong traffic growth throughout the year, Mr Timms said. Given its high valuation, it was important its outlook remained strong.
Craigs would watch the company’s expectations for traffic growth as well as the expected trajectory of the distribution.
"We will be also interested in any comment the company makes in relation to the second Sydney airport to be built at Badgeries Creek."
With the New Zealand economy back on track after a rough spot late last year and earlier this year, some more cyclical names such as Freightways should bounce back to report a stronger second half.
Healthcare sector stocks, including CSL Ltd, would largely deliver solid results given the sector’s defensive growth characteristics.
This year had been viewed as a transition year for CSL as the company invested in its business ahead of opportunities it identified.
Meridian Energy might pay another special dividend, given it continued to hold excess capital.
While the dividend would not be tax-paid, it would boost gross dividend yield to above 9% when combined with the expectation of an 8.5c-per share final dividend. That was attractive relative to the rest of the market, particularly when combined with Meridian’s strong operating performance, Mr Timms said.
Air New Zealand had recently disposed of the majority of its stake in Virgin Australia.
Its gearing was at present at the top of the target range and there was scope for the board to remain prudent and retain the capital received from the sale.
However, the board had previously indicated some of the capital could be distributed to shareholders.
Another candidate for a special dividend was AGL Energy, given it had recently sold assets and achieved efficiency gains and was generating significant free cash flows, he said.
AGL could invest the capital into an acquisition, as Alinta Energy was reportedly up for sale.
Currency was a diminishing tailwind.
Despite the New Zealand dollar gaining ground since the start of the year, it remained below where it was in late 2014 and late 2015.
It would have provided 2016 earnings help for those companies with offshore revenue, Mr Timms said.
Exporters like Scales and Delegat Group were expected to report an earnings benefit.
There were three companies at risk of reporting weak results.
Telstra had experienced some high-profile outages across its Australian mobile network.
Given the company’s superior network was the justification for its premium pricing, and the market being so competitive, it might have been detrimental to the performance of its mobile division.
which accounted for about 40% of revenue.
Telstra’s outlook was challenging due to the upcoming switch to the National Broadband Network in Australia, which would mean revenue falling once infrastructure payments from NBN for the use of Telstra’s network ended.
Ansell delivered a poor half-year result as global industrial conditions remained tough and the company experienced manufacturing issues.
Ansell was at risk of missing expectations and it was too early to take a more positive view on the company, Mr Timms said.
Hallenstein Glasson was facing tough conditions as competition intensified.
The stronger New Zealand dollar had been a problem for much of the financial year.
"We expect the company to report a weak result and, with Hallenstein Glasson’s dividend payout ratio about 120%, we see a risk the dividend will be below previous levels."
Craigs had become more cautious on Fletcher Building following its first-half result, he said.
The result was disappointing. Underlying earnings were broadly in line with expectations but corporate costs were high and dragged earnings below the previous year despite strong operating conditions in its core New Zealand market.
Since the first-half result, macro conditions in New Zealand had remained strong and Fletcher had announced some aggressive targets for its distribution business, which contributed about 23% of earnings.
The share price responded positively and was up 48% since the result in late February.
"Fletcher needs to report a significant improvement in earnings for the second half of the 2016 year, and achieving guidance remains a stretch," Mr Timms said.
This week
Tomorrow: ANZ third-quarter, Argosy Property annual meeting, Cochlear full-year, PGG Wrightson full-year, Property for Industry first-half, Transurban full-year.
Wednesday: Sky City full-year, AGL Energy full-year, CBA full-year, Computershare full-year.
Thursday: Goodman Group full-year, Telstra full-year, Vital Healthcare full-year.
Friday: James Hardie first-quarter, Steel & Tube full-year.
