Companies pass results season test

Mark Lister, head of private wealth research at Craigs Investment Partners, said most firms met or exceeded expectations.

Fletcher Building spoils party while A2 Milk easily cream of the crop.

The majority of Kiwi companies boosted their bottom line this reporting season, in what was billed as an important test of whether our listed firms were overvalued.

Dozens of the country's corporates revealed the good, the bad and the ugly to investors when they opened their books over the past three weeks.

A Weekend Herald comparison of 26 firms which reported full-year results showed that these companies made combined profits of $3.36 billion in the 12 months to June.

While that's down 6.2 per cent from the $3.59b these same companies reported in 2016, Fletcher Building's 80 per cent earnings drop alone accounted for the difference.

Sixteen of the 26 companies grew their net earnings across the year, while profits fell at 10 of the firms.

A report from Forsyth Barr's Brian Stewart, Matthew Leach and John Hughes was positive about the season and said that aggregate earnings exceeded expectations, once Fletcher was taken out of the equation.

Total revenue was up by 4.2 per cent, more than double the expected rate, while dividend per share growth came in at 3.3 per cent (ahead of a forecast 2.1 per cent).

One issue, though, was earnings revisions for the current financial year, with 17 downgrades compared to 10 upgrades across the 38 firms which Forsyth Barr looked at.

Shane Solly, director, portfolio manager and research analyst at Harbour Asset Management, summed it up as a "pretty solid result season" which reinforced the view that the New Zealand sharemarket was a good place to invest.

Mark Lister, head of private wealth research at Craigs Investment Partners, said most firms met or exceeded expectations and "growth forecasts for the coming financial year were upgraded slightly".

"As a result, the market held its own despite some high valuations and lofty expectations," Lister said.

"Overall, investors will be comfortable with how the reporting season panned out. More than 70 per cent of NZX 50 companies grew their earnings in 2017, and the average growth rate was 8.5 per cent. That's slightly better than what was predicted before reporting season," he said.

"More importantly, earnings growth expectations for the year ahead improved to 8.5 per cent as well, up a little from 7.8 per cent a month earlier. Strong share price gains over the first half of the year had set the bar quite high for the reporting season and, in most respects, corporate New Zealand delivered."

However, Castle Point Funds Management co-founder Stephen Bennie was not as impressed.

"It was a soft reporting season with more downgrades than upgrades. Looking across the market there are a bunch of New Zealand corporates that are sitting close to peak earnings and so growth just gets harder. And that was definitely part of why earnings fell on the light side of expectations and why outlooks have been pulled back," he said.

Bennie also pointed to a number of companies which were happy to maintain high dividends, even if that required them to increase debt levels.

"Fletcher Building, Spark, Chorus and Auckland Airport are all partly funding dividends from increased borrowing. Frankly it is not a conservative way to run a business and it leaves you vulnerable to any downturn," he said.

"Our view is that corporates should not pay more in dividends than they earn in profits. It's akin to a household that has an ever increasing Visa bill, it's unsustainable."

The one positive surprise for Bennie was A2 Milk. A2 Milk's runaway growth - in which it boosted its full-year earnings by almost 200 per cent - was leagues ahead of the pack and received plaudits from a host of commentators for its standout performance.

Its net profit in the year to June 30 soared to $90.6m from $30.4m, in a result that beat many expectations.

"Those guys have really struck the right formula," Bennie said. "Earnings growth has been nothing short of remarkable and the market has acknowledged this with the share price up another 25 per cent in August."

The company's share price has advanced 165 per cent since the start of the year and closed yesterday up 16c at $5.71

A2's forecasts for the 2018 financial year were also positive, with the dairy company expecting to grow sales of its infant formula and milk powder in Australia and China together with "improved momentum in the US and UK businesses".

Comvita, the natural health products company, also impressed the market.

The Te Puke-based firm reported net profit of $9.8m for the 12 months to June, ahead of its guidance.

Provided honey production remains normal and "grey" informal sale channels to China recover, the company believes it will post after tax operating earnings of at least $17.1m this financial year.

Comvita shares, which closed at $6.07 the day before its August 22 result, were yesterday at $7.55, having jumped 24 per cent in a fortnight.

Harbour's Solly said Metlifecare and Summerset delivered very good results while Air New Zealand was particularly solid.

On the other hand, Solly said casino operator SkyCity - whose profit dropped almost 70 per cent to $44.9m - was "at the weaker end of expectations" and that network operator Chorus had a disappointing result.

Lister said a disruption theme was running through the market, "with Sky TV and Trade Me two of the weaker performers".

Sky TV's profit fell 20.9 per cent while Trade Me's rose 26 per cent but the company warned the pace of growth would not be sustained this year as it ramps up investment.

"Their results weren't too bad actually, especially in the case of Trade Me," he said.

"However, there is increasing uncertainty on what the likes of Netflix, Amazon and Facebook will mean for their businesses in the coming years." Solly said both companies had strong management but needed to get moving and addressing technological change."Doing nothing is not a good strategy," Solly said.