Investment columnist for the NZ Herald

Brian Gaynor: Profits help to justify soaring prices

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The overall results were satisfactory but investors need to look at the figures closely. Photo / Greg Bowker
The overall results were satisfactory but investors need to look at the figures closely. Photo / Greg Bowker

The June year reporting season, which winds down next week, has been a satisfactory one for investors.

Total net underlying profit after tax for the 12 largest reporting companies increased by 19.2 per cent compared with the June 2015 year and total ordinary dividends by 9.1 per cent. The latter does not include special dividends announced by five of the 12 companies.

The 19.2 per cent net earnings increase partially justifies the 31 per cent hike in the benchmark NZX50 Gross Index since the end of August 2015.

The accompanying table lists the twelve largest companies with a June 30 balance date in terms of sharemarket value. Fisher & Paykel Healthcare (ranked 5th), Ryman Healthcare (6th), Z Energy (9th), Xero (12th) and Trustpower (15th) are not included because they have different balance dates.

The 12 included companies have a total sharemarket value in excess of $55 billion, representing just over 45 per cent of the total value of all NZX-listed companies.

Auckland International Airport, which is the largest company in terms of market value, reports on Monday.

It is disappointing that the country's most valuable listed company has waited until the last possible reporting date, which is 60 days after its balance date, to release its June 2016 profit figures.

However, shareholders will be happy as long as the result is a good one.

The airport company's underlying net earnings increased by 18.6 per cent for the first six months to December and chairman Sir Henry van der Heyden's guidance for the full year was in the $200 million to $206m range.

Trading has been strong since then and the consensus of analysts' forecasts is now $211m.

Meridian Energy is the largest listed electricity business with four additional energy sector companies in the top 17; Mercury NZ (formerly Mighty River Power), Contact Energy, Vector and Trust Power. These five companies have a combined sharemarket value of $23.7b or 17 per cent of the total NZX market capitalisation.

Meridian reported an underlying net earnings after tax increase of 11.5 per cent after excluding the non-cash costs of treasury and electricity hedges.

Chief executive Mark Binns was upbeat about the June 2016 year result and the company's ordinary dividend was raised from 12.88c to 13.5c. Meridian will pay an additional special dividend of 4.88c, giving a total dividend of 18.38c for the 2015/16 year.

The company hasn't issued any guidance for the current year but analysts are forecasting a fairly flat result.

Fletcher Building, which has moved from fourth to third place on the market capitalisation table, presented a relatively upbeat outlook.

Chief executive Mark Adamson said that "we have now largely concluded the restructure of our business portfolio" and he predicted operating earnings (EBIT) in the $720m to $760m range for the June 2017 year compared with $719m for the 2015/16 year.

Spark NZ, which has slipped back to fourth place in terms of sharemarket value, continues to face intense competitive pressure.

Net earnings declined 1.3 per cent but the company raised its dividend from 20c to 22c and is paying an additional 3c special dividend for the 2015/16 year.

Chairman Mark Verbiest did his best to talk up the telco's prospects but his guidance was restricted to the following comment: "For shareholders, we are looking forward to the 2017 financial year and to raising our game again. As we did in FY16, for FY17 we anticipate paying ordinary dividends of 22c per share, with a special dividend of 3c per share, subject to there being no material change in outlook."

Mercury NZ and Contact Energy had relatively flat results.

Mercury's Chair Joan Withers released an operating profit guidance of $490m for the current year, compared with $493m for the June 2016 year, with the ordinary dividend expected to be 14.6c compared with 14.3c for 2015/16.

The electricity generator paid an additional special dividend of 4.0c, giving it a total dividend of 18.3c for the 2015/16 year.

Contact Energy chief executive Dennis Barnes issued a rather cautious profit guidance for the current year. He was quoted as saying: "For the next financial year I expect to see continued improvement in operating performance" but "ultimately our performance will be influenced by our need to be competitive."

In other words, the electricity retail market is extremely competitive and Contact will have little scope to increase prices if it wishes to maintain its existing customer base and gain new customers.

Vector's strong result was mainly due to the $164.1m gain from the sale of Vector Gas, partially offset by a $64.0m non-cash write down in the value of its gas trading business.

The company said that it anticipated adjusted operating earnings in the range of $460m-$475m for the June 2017 year compared with $473m for the latest year. Vector operates in a highly regulated environment with limited scope for a substantial increase in earnings.

Meanwhile, Sky City has failed to capitalise on New Zealand's tourism boom, particularly the massive increase in Chinese visitors. The problem is that its Adelaide and Darwin casinos continue to disappoint.

It stated that "difficult trading conditions and competitive pressure [is] expected to persist in Darwin" and there will be a "strong focus on delivering sustainable revenue and earnings growth in Adelaide".

The performance of these two Australian casinos will have a major influence on the company's 2016/17 year result.

The highlights of the Port of Tauranga result were a special dividend of 25c, to bring the total dividend for the year to 78c, and a proposed five for one share split. These partially compensated for a disappointing 2.3 per cent reduction in net earnings for the year, mainly due to a decline in log exports.

Chief executive Mark Cairns was quoted as saying "we are looking ahead to the remainder of the year with confidence and expect earnings growth to recommence".

The company will provide specific guidance at its annual meeting on October 20.

Ebos chief executive Patrick Davies said that his company's good result "reflects our ability to capture the growth opportunities that continue to emerge within our prime business segments".

He said that "the company is confident of further profit growth in FY17 on a constant currency basis".

Ebos will provide a performance update at its October 19 annual meeting.

Air New Zealand reported net earnings after tax of $463m, compared with $327m for the previous year, and a full year ordinary dividend of 20c. It also announced a 25c special dividend, a total of 45c for the June 2016 year.

This was a record net profit for the national carrier but it faces increased competition in the year ahead and is guiding a net profit before tax for the June 2017 year in the $400m to $600m range compared with $806m in the 2015/16 year. The wide guidance range reflects the airline company's uncertain profit outlook.

Finally, Genesis Energy reported a net profit for the year of $184m, a 76 per cent increase over the previous year. The Kupe reserves upgrade and a revaluation of the company's generation assets made important contributions to the higher earnings.

Chair Dame Jenny Shipley said that 2016/17 guidance will be provided at the October 19 annual meeting.

The overall results were satisfactory but investors need to look at the figures closely because a number of companies included one-off non-cash earnings in their reported figures while others exclude one-off losses in their adjusted or underlying profit.

The other important issue is the trading outlook for the current year which should become much clearer when companies hold their annual meetings over the next few months.

- NZ Herald

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

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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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