Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Companies must lift earnings performance

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If leading firms such as Fletcher Building do not generate more growth, the sharemarket will struggle to maintain its momentum

Lack of growth in energy demand is a problem for electricity generators. Photo / Christine Cornege
Lack of growth in energy demand is a problem for electricity generators. Photo / Christine Cornege

The profit reporting season has finally come to an end with all of the 31 NZX50 Index companies with a December 31 interim or final balance date releasing figures to the NZX.

The results were good, but not spectacular, with 27 of the 31 companies reporting aggregate earnings of $1.469 billion, a 4.4 per cent increase over the same period in the previous year.

These aggregate figures are based on adjusted, normalised, underlying after-tax profits or profits from continuing operations.

Most analysts and sharemarket investors consider these adjusted figures to be more appropriate than the accounting figures reported under International Financial Reporting Standards, mainly because the latter can include a large number of non-cash items.

The aggregate figures exclude Diligent and OceanaGold, because they report in US dollars, and Michael Hill as it now uses Australian dollars. Guinness Peat Group's figures have also been excluded from the aggregate figure because the investment group's true profit figure is difficult to determine.

With the NZX50 Gross Index increasing by 15.8 per cent over the past 12 months, and aggregate earnings by just 4.4 per cent, there was clearly an expansion in the market's price/earnings ratio.

The NZX will run out of steam unless companies, particularly the larger ones, can take advantage of the stronger economy by reporting much larger earning increases.

The good news was that 19 of the 31 reporting companies have raised their dividend. Chorus, which cut its interim dividend from 10 cents to zero, was the only one to reduce its payout.

If Chorus is excluded then aggregate dividends increased by 7.8 per cent, in terms of cents per share. The largest increases, in percentage terms, were Air New Zealand from 3c to 4.5c, Summerset, 2.5c to 3.25c, Heartland, 2c to 2.5c, Metlifecare, 1c to 1.25c, and Ebos, 17.5c to 20.5c.

The main issue haunting the NZX is the inability of our largest companies to achieve high and consistent profit growth.

For example the six largest index weighted companies in the accompanying table - Fletcher Building (11.5 per cent), Telecom (7.7 per cent), Auckland International Airport (6.6 per cent), Sky TV (4 per cent), Sky City (3.8 per cent) and Contact Energy (3.3 per cent) - had combined adjusted earnings of $633.2 million for the six months ended December 31, a minuscule 1.5 per cent higher than the $623.9 million achieved for the same period in the previous year.

The market will struggle to go higher if the largest six companies, which represent 36.9 per cent of the market's benchmark index, achieve earnings increases of just 1.5 per cent.

Fletcher Building continues to disappoint as it is not achieving the profit growth expected under the new management team.

The group's sharemarket performance has also languished as it had a gross return of 10.8 per cent over the past 12 months compared with the 15.8 per cent achieved by the NZX50 Gross Index.

Telecom will spend a huge amount over the next few months to rebrand itself as Spark and its management team is confident that it can successfully target the under-35 market, particularly in Auckland.

It is also planning to launch a Netflix-type entertainment service but based on Netflix's market penetration, and revenue per customer, this initiative is unlikely to make a big contribution to Telecom's earnings.

Auckland International Airport produced another good result, Sky TV had the biggest percentage increase among the six largest NZX50 Index companies but Sky City disappointed once again.

The casino group has consistently failed to fire under the current management team.

Contact Energy's result reflected the problems facing the electricity generation sector as the growth in energy demand is lagging well behind the country's overall economic growth.

Two of the three listed electricity generators with a December 31 balance date reported a downturn in adjusted earnings and the combined net profit of Contact Energy, Meridian Energy and Mighty River Power for the six months to December 2013 was only $285 million compared with $313.5 million for the same period in the previous year.

TrustPower has a March 31 balance date and Genesis Energy, which will launch its IPO this month, reported net earnings of $19.7 million for the six months to December 31 compared with $70.8 million for the same period in the previous year.

Thus the four big electricity generators with a December 31 interim balance date reported adjusted net earnings of just $304.7 million for the latest period compared with $384.3 million for the six months to December 31, 2012.

This clearly demonstrates that the decision to partly privatise Mighty River Power, Meridian Energy and Genesis Energy has been totally driven by political considerations as most business owners would not IPO their companies during a period of depressed earnings.

OceanaGold and Ebos provided the two best results, in terms of percentage increases year-on-year. The former benefited from the opening of its new gold and copper mine in Didipio in the Philippines and the latter from the purchase of Symbion in Australia.

The three property companies - Property for Industry, Vital Healthcare and Precinct Property - announced impressive distributable profit figures and Heartland continued to make good progress and reported a net profit increase of 56.1 per cent.

Summerset and Metlifecare, the two retirement village operators, continue to achieve strong profit growth while Air New Zealand and NZX were the other two benchmark index companies to achieve net profit increases in excess of 20 per cent compared with the same period the previous year.

At the end of the table are GPG and eight other companies that reported a decline in earnings.

Michael Hill produced the most disappointing result of the Australasian-based companies. The jeweller seems to be running out of puff as chairman Sir Michael Hill has established a target of 1000 worldwide stores yet store numbers increased by only 16, from 263 to 279, over the past 12 months.

Finally, the annual return figures in the right hand column clearly show that investors have a strong bias towards growth companies as A2 Corporation, with a gross investor return of 74.1 per cent for the past 12 months, was the best performer in this group.

Xero, which has a March 31 balance date, had a gross return of 424.7 per cent over the same period.

Chorus was the worst performing company with a negative 36.4 per cent gross return for the past year.

However, the main message from the reporting season is that our main listed companies will have to generate far higher earnings growth if our sharemarket is to sustain its momentum.

Particular attention will be focused on Fletcher Building because it is our largest listed company, it operates in the buoyant construction sector and the group's new management team has promised much but has yet to deliver.

Brian Gaynor is an executive director of Milford Asset Management which holds shares in most of the companies mentioned in this column on behalf of clients.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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