Investment columnist for the NZ Herald

Brian Gaynor: Dairy a rare downer in solid six months

Sky City reports good external demand. Photo / Richard Robinson
Sky City reports good external demand. Photo / Richard Robinson

The NZX reporting season clearly demonstrates that the domestic corporate sector is in good shape, with the notable exception of the dairy sector.

Overall profit figures probably scored seven out of 10 in terms of performance while dividend announcements rated more like eight out of 10. This is because 80 per cent of the largest listed companies announced dividend increases.

The accompanying table contains the net profit after tax figures for the 20 largest listed companies that reported for the six months ended December 2015. These 20 companies represent 59 per cent of the total sharemarket value and 60 per cent of the benchmark NZX 50 Gross Index.

The left-hand column ranks these companies according to their sharemarket values with the gaps in the ranking representing companies with a different balance date. For example, Fisher & Paykel Healthcare, which ranks sixth, and Ryman Healthcare, which ranks eighth, both have March 31 balance dates.

The first point to note is that the total profitability of these 20 companies increased by 20 per cent for the six months ended December 2015 compared with the same period in the previous year. These companies reported a 6.9 per cent earnings increase in the previous corresponding period.

Fourteen of the 20 companies reported higher earnings although Precinct Properties (+1.1 per cent), Trade Me (+0.3 per cent) and Port of Tauranga (+0.1 per cent) barely beat their December 2014 ending figures.

The highlights were as follows:

• A2, which raised its net profit after tax from .1 million to $10.1 million for the six-month period, had the largest percentage increase. It was followed by New Zealand Refining, which reported an earnings increase from $16.9 million in the six months ended December 2014 to $85.5 million.

• Air NZ reported a $205 million year-on-year earnings increase, the largest expansion in dollar terms.

• Air NZ's net earnings after tax of $338 million for the six-month period was more than twice the level of the next two companies, Fletcher Building with $159 million and Spark, $158 million.

• Three of the four electricity generators reported a decline in earnings compared with the six months ended December 2014. The four companies had a combined net profit after tax of $319.9 million for the latest six-month period compared with $349.2 million for the six months ended December 2014 and $304.7 million for the period ended December 2013.

• Chorus (minus 48.4 per cent) and Genesis Energy (minus 47.4 per cent) had the largest declines in net profit after tax.

The big question is will the weakness in the dairy sector spill over to the rest of the economy, as it has in the past?

However, the major highlight of the reporting season was the large increase in dividends. Sixteen of the 20 companies announced higher dividends with only Contact Energy, Sky Television and Precinct Properties holding their distributions at the last year's level. A2 doesn't pay a dividend.

The 20 companies declared an aggregate 27.2 per cent increase in dividends, on a per-share basis, compared with a 20 per cent rise in net profit after tax.

The Crown is one of the biggest winners as Meridian Energy, Mighty River Power, Air New Zealand and Genesis Energy all announced dividend increases while Contact Energy, which has no Crown involvement, held its interim dividend at last year's level.

The dividend increases, which were higher than those of the larger ASX-listed companies, have been reassuring to investors, particularly in a low interest rate environment where investors are looking for yield.

Ironically, the companies with the most impressive earnings increases - A2, Air New Zealand and New Zealand Refining - all had negative share market returns during February while the two companies with the largest earnings declines - Chorus and Genesis Energy - had positive market returns during the month.

Air NZ reported a $205 million year-on-year earnings increase, the largest expansion in dollar terms. Photo / Jason Oxenham
Air NZ reported a $205 million year-on-year earnings increase, the largest expansion in dollar terms. Photo / Jason Oxenham

The companies with the highest market returns during February were Nuplex, which was the subject of a takeover proposal, Ebos and Auckland Airport. The worst market performers were SkyCity, Air New Zealand and Sky Television.

Investors are now focusing on the future and there are a number of ways to assess the earnings outlook, including forward statements by chief executives and directors and business opinion surveys.

The forward-looking statements during the reporting season were reasonably positive although the electricity generators continue to note the competitive retail market environment.

The generators are relatively cautious because customers are switching from one provider to another in order to reduce their power bill. The four companies continue to reduce costs to compensate for this, a development that is consistent with the Government's objectives.

All but Contact Energy raised their dividends because most major capital expenditure programmes have been completed and the companies are generating huge cash flows because of their large non-cash depreciation provisions.

Auckland Airport, Fletcher Building, Air New Zealand, SkyCity, Ebos, A2 and Metlifecare all report good external demand. These companies are benefiting from a combination of strong tourism numbers, record net migration inflows, increased construction levels, strong sales of infant formula to China and the ongoing demand for retirement village accommodation.

The monthly ANZ Business Outlook, which was released this week, gives us an insight into how business people are seeing the current situation and the short-term outlook.

The latest survey shows that business confidence stands at plus 7.1 compared with plus 23 at the end of December and plus 10.5 at the end of October. These figures show the net balance of respondents who are more positive than negative.

It is worth comparing the latest survey with the October survey because the latter was just over half way through the six-month period ended December 2015, which was a fairly strong period for company earnings.

A comparison between the two periods shows that the retail, manufacturing and construction sectors remain relatively strong, the services sector has weakened while agriculture is clearly the weakest part of the economy.

According to the ANZ Business Outlook the following trends in profitability have occurred since October:

• The overall profit situation has eased slightly from plus 12.7 to plus 12

• Retail sector profitability has soared from plus 4.3 to plus 17.5

• Manufacturing profits have improved slightly from plus 11.5 to plus 12.4

• Construction profitability has risen strongly from plus 20 to plus 31.3

• The services sector has fallen from plus 20.1 to plus 12.7

• Agriculture profitability has deteriorated dramatically from minus 13.7 last October to minus 25.5 in the latest survey.

Thus, New Zealand has a two-sided economy as agriculture, mainly dairy, is in the dumps while retail, manufacturing, construction and the services sectors are fairly buoyant.

The New Zealand sharemarket is fortunate to have limited exposure to the dairy sector at present as a number of companies with activities in this area, including PGG Wrightson, Skellerup and Steel & Tube, had below average results for the six months ending December 31.

The big question is will the weakness in the dairy sector spill over to the rest of the economy, as it has in the past? At present it looks as if the rest of the economy is holding up remarkably well with ANZ noting that its composite growth indicator is flagging economic growth between 2.5 and 3 per cent in the year ahead.

Investors will be studying company announcements and business confidence surveys in the months ahead to ascertain whether the positive earnings environment for NZX-listed companies is being maintained.

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

- NZ Herald

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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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