Brian Gaynor: NZ's best and worst performing companies

CEO Don Braid's company Mainfreight enjoyed some outstanding results this year, making it top performer for 2018.

COMMENT: What have been the best and worst performing companies in 2018 in terms of overall achievements?

The easy answer might have been two companies in the same industry — a2 Milk as the best and Fonterra as the worst.

However, the situation isn't quite as simple as this.

A2 Milk reported net earnings of $195.7 million for the June 2018 year compared with $90.6m for the previous year and its sharemarket value surged from $5.9 billion at the end of 2017 to $8.2b this week.

However, it isn't in the top performing group for two main reasons.

First, on May 16 it released a trading update which anticipated revenue of $900m to $920m for the June 2018 year compared with forecasts of around $960m at the time.

The company's share price plunged 13.7 per cent, from $13.10 to $11.30, immediately following the announcement.

Second, on September 21 the infant formula company revealed that new CEO Jayne Hrdlicka had sold 357,232 shares for $4.4m. This represented her entire ordinary share holding although she kept 245,787 performance rights.

The company's share price fell 5.4 per cent on the day after the announcement.

This was a poor decision by Hrdlicka in my view, particularly as she subsequently told the annual meeting that she would probably sell more shares.

Shareholders appreciate their alignment with management through shared ownership and this alignment is eroded when a CEO sells a substantial percentage of his or her shares.

A2 Milk chairman David Hearn will have his hands full ensuring that Hrdlicka doesn't continue to erode the enormous goodwill created by the company's excellent operating performance.

Meanwhile, Fonterra continues to be a perennial disappointment with the Fonterra Shareholder' Fund unit price down 27.6 per cent since the end of December 2017.

This is the sixth consecutive year that the fund has underperformed in the NZX market.

Positive developments included the appointment of Miles Hurrell as chief executive, to replace Theo Spierings, and the appointment of John Monaghan as chairman.

The co-operative has been given the benefit of the doubt this year, mainly because of these changes, but it still has a long way to go before it clearly explains its long-term strategy and executes effectively on its plans.

Fonterra's poor long-term performance can be assessed on a look-through basis by way of the NZX-listed Fonterra Shareholders' Fund.

On this basis, the co-op's market value has declined from $10.3b to $7.5b since November 2012 while a2 Milk's sharemarket value has surged from just $0.4b to $8.2b over the same period.

A2 Milk announced its entry into the Chinese infant formula market just five weeks before the Fonterra Shareholders' Fund first listed on November 30, 2012.

With a2 Milk eliminating itself from the top awards this year, the best performing NZX companies were Mainfreight, Kathmandu and Spark New Zealand.

Mainfreight has been a great long-term performer but its 2018 results were outstanding.

The company reported net earnings before abnormal items of $112.2m for the 12 months to March 2018, an 8.8 per cent increase over the previous year. This was a great way for the company to celebrate its 40th year.

It then reported a net surplus after tax before abnormal items of $55.9m for the six months to September 30, a 30.7 per cent increase over the same period in the 2017/18 year.
The commentary stated: "The first half result is satisfactory, compared with a somewhat muted result in the prior year, and provides us with a good platform for further improvement over the longer term.

"To have all regions contributing improved financial and operating results is pleasing.
"Therefore, it is our expectation that financial performance will continue to be better for the full year, delivering another improved full year profit."

The company's great performance has been driven by a strong culture and the excellent leadership of founder chairman Bruce Plested and CEO Don Braid.

Plested has been with Mainfreight since day one and Braid has been CEO since 2001 when the company reported a net profit after tax of only $2.4m.

Mainfreight focuses on sustainability and has had only 13 directors since 2001 while Fletcher Building, which has been a major disappointment, has had 27 board members over the same period.

The transport company places a great importance on a "Mainfreight family" philosophy as demonstrated by the recently released 72-page staff newsletter, which is full of "family" photographs.

Braid's opening remarks finished with the comment: "Did you know we have now opened our first branch in Malaysia? This becomes our 23rd country and continues our strategy of growing and intensifying our network."

By contrast, Fletcher Building's previous CEO ripped through the company's senior executive team with almost no regard for the group's "family" culture.

The second best performing company was Kathmandu under CEO Xavier Simonet, mainly because it produced a strong result in a difficult retail environment.

The company reported a net profit after tax of $50.5m for the year to July 2018, a 32.9 per cent increase over the $38m achieved in the previous year.

Chairman David Kirk wrote: "2018 was our most successful year ever. Sales growth was supported by the successful launch of innovative new products, inspiring digital content, and an enhanced in-store customer experience."

Simonet told the recent annual meeting: "We expect first half profits to be strongly above last year."

Spark New Zealand was the third best performing company, mainly because of the highly successful strategy execution by Simon Moutter and his executive team.

Investors were impressed as the company's share price has risen 18.7 per cent this year, before dividends. This return is well above the market average.

With Fonterra being given a reprieve this year, the three worst performing NZX companies were CBL Corporation, Fletcher Building, and Metro Performance Glass.

The three companies have one feature in common, they were all chaired by knights when they hit the proverbial wall.

Sir John Wells was chair of CBL, Sir Ralph Norris chaired Fletcher Building and Sir John Goulter was chair of Metro Glass from its mid-2014 IPO until his November 2017 resignation.

CBL has been a complete disaster and is a poor reflection on the Reserve Bank's oversight of the insurance sector.

The failed company made so many mistakes that it would take a lengthy report to chronicle them all.

One of them was the purchase of the French-based Securities and Financial Solutions Europe (SFS) for €94.5m ($150m) in 2016.

There seem to have been a huge number of problems associated with SFS and this asset is now effectively worthless as far as CBL is concerned.

But the sorry saga doesn't end there.

Brendon Gibson and Neale Jackson of KordaMentha were appointed Voluntary Administrators on February 23 but little progress seems to have been made since then.

CBL's watershed meeting was due to be held on May 18 but it has been adjourned numerous times.

The meeting must now be held by February 15 next year and the tortuous process has been severely criticised by interested overseas parties.

The dreadful performances of Fletcher Building and Metro Performance Glass, in both cases largely due to poor governance and management in my view, have been extensively covered in recent months.

Fletcher Building has been the worst performing NZX50 Index company this year, in terms of sharemarket performance, and Metro Glass has been the sixth worst performer of all companies outside the benchmark index.

The 2019 year can't arrive soon enough for shareholders of these two dismally performing companies but CBL shareholders have nothing to look forward to.

Looking ahead, one of the major issues next year is whether Fonterra can finally drag itself out of the doldrums under the co-op's new leadership team.

- Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management which holds shares in Mainfreight, Kathmandu, Spark NZ and Fletcher Building on behalf of clients.