Crystal ball still clouded for NZ equities

New Zealand companies beat analysts' low-ball earnings estimates in the year through June but provided little guidance for the next 12 months, as they await evidence of the much-touted recovery from recession.

The average reported fall in profit for NZX-50 companies was 34 per cent, but more than half those results were better than predicted by national broking firm, Forsyth Barr. Analysts and investors were expecting a dismal earnings season in the wake of six quarters of economic contraction.

"Earnings clearly did better than analysts expected but they were incredibly pessimistic," said James Lindsay, who helps manage $400 million at Tyndall Investment Management. "The outlook still alludes to the fact it is a very uncertain environment. Companies are very reluctant to give forward-looking guidance."

Earnings tumbled at the three biggest companies on the NZX-50. Telecom's profit sank 44 per cent on weaker retail revenue and chief executive Paul Reynolds said 2010 earnings would remain subdued. Fletcher Building posted its first loss since 2001 and Contact Energy annual net income halved.

It was a financial year in which several iconic New Zealand companies were forced to take extreme measures as worldwide demand slumped. Fisher & Paykel Appliances had to sell shares at a deep discount and bring on board China's Haier Group as a cornerstone investors to bolster its balance sheet, while clothing manufacturers Lane Walker Rudkin and Line 7 collectively slashed some 300 jobs as they filed for receivership.

The jobless rate is forecast to top out at an 11-year high of 7.5 per cent in 2010, from 6 per cent now, according to the Treasury.

Investors are looking for signs that companies are recovering from the worst slump in more than 30 years after the Treasury this week said the recession probably ended with the second quarter.

Business confidence climbed to a four-year high in August, with a net 34 per cent of firms expecting conditions to improve in the coming year, according to the National Bank Business Outlook. Consumer confidence rose to a 17-month high, the latest Roy Morgan poll showed.

New Zealand's benchmark stock index rallied strongly into the earnings season, gaining 11 per cent in the second half of July. The NZX 50 climbed just 2.7 per cent last month, when most companies reported their results.

Corporate profits showed "underlying weakness" in the latest year, according to First NZ Capital. The decline in earnings was a "contrast to the sharp rise in global risk appetite."

First NZ Capital head of research Rob Bode said companies were typically reticent in their forward-looking statements. "There's more business confidence as things have stabilised, but for those companies that did offer guidance, it was fairly cautious and conservative," he said.

Fletcher and Contact declined to offer guidance for the 2010 financial year, citing ongoing uncertainty in their markets.

Of the 25 companies reviewed by First NZ Capital, six reported "good" results, with the rest either "mediocre or poor." Excluding property trusts, median adjusted net profit slumped 30 per cent from the previous period.

One of the worst performers was national carrier Air New Zealand Ltd., where profits plunged 90 per cent to $21 million as the global economic slump, swine flu pandemic and resilient kiwi dollar discouraged tourists from venturing to the South Pacific.

Still, the airline was one of a handful of carriers to keep earnings in the black, and chairman John Palmer told analysts the sector was "likely to remain turbulent" and the Australasian market's commercial performance won't be "satisfactory" until supply aligns with demand.

The weak global picture weighed heavily on New Zealand Farming Systems Uruguay, which develops dairy farms in South America using New Zealand techniques, as its full-year loss widened to $45.9 million on falling dairy prices, the credit crunch and drought.

Meanwhile, the collapse of New Zealand's property development sector dragged down Pyne Gould, the South Island-based financial services firm seeking to become the first locally-owned listed bank, as it took a $60 million impairment charge for its finance unit Marac, taking the annual loss to $54.4 million.

Still, the market responded kindly to Marac shedding its exposure to the property sector, a key reason for its downgrade to a BB+ credit rating by Standard & Poor's, and PGC's share price rose some 10 per cent on the day of its report.

It wasn't all bad news as first-half profit at NZX Ltd., the regulator of the stock exchange, soared some $61 million on the sale of its TZ1 carbon registry and holding in the Bond Exchange of South Africa.

Abano Healthcare Group Ltd. boosted full-year earnings 24 per cent to $9.7 million and sold its New Zealand interests for around $158 million as it looks to focus on building its opportunities in Australia and South East Asia.

Reserve Bank of New Zealand Governor Bollard will probably point to tentative signs of economic recovery when he reviews monetary policy tomorrow.

Economists expect he will keep rates at a record-low 2.5 per cent, but will remove the easing bias in his statement that interest rates will remain at or below current levels until late next year.

The central bank predicts New Zealand's economy will shrink an annual 1.3 per cent next year before resuming growth of 3.2 per cent in 2011.

In a report last week, Bank of New Zealand chief economist Tony Alexander said the evidence of a turnaround in New Zealand's economy can't be ignored. Still, with restraints on the dairy, tourism and commercial property sectors, "the upturn will not be a boom."

Massive fiscal and monetary stimulus from policy-makers and central bankers around the world in response to the global credit crunch helped revive investors' appetites for higher-yields, with stocks on Wall Street staging a strong recovery since their lows in March, while demand for raw materials in China has underpinned confidence the world's fourth largest economy will help lift the world out of the worst recession since World War II.

Even as the extraordinary measures boosted economic forecasts from the World Bank and International Monetary Fund, Group of 20 finance ministers decided to wait until recovery was "secured" before unwinding stimulus when they met in London last weekend.


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