Continuous disclosure: Why big revenue is not always beautiful

Fletcher Building tops the turnover stakes on the NZX, but big is not always beautiful. Photo / File

Big is not necessarily beautiful when it comes to company revenue.

In first place in the revenue stakes is Fletcher Building, which last year pulled in $8.3 billion.

However, margins in the building sector tend to be quite slim and the company has been through a tough patch, with highly volatile earnings, says Craigs Investment Partners analyst Roy Davidson who has ranked the NZX's top companies by revenue with some surprising results.

As a result, Fletcher Building sits outside the top 10 in total market value.

Interestingly, the NZX's two biggest companies by market capitalisation - F&P Healthcare and a2 Milk - don't rate in the top 10 in terms of revenue.

The second place on the revenue rankings is held by Ebos Group, which will come as a surprise to many.

Ebos is the largest pharmacy wholesaler in Australia and New Zealand.

"Again, small margins - normal for a wholesaler - and a sizeable minority shareholder, sees the company currently sit just outside the top 10 in terms of value," Davidson says.

Also among the biggest revenue generators were Air New Zealand and Z Energy - both very large companies.

"However, Air New Zealand's earnings tend to be quite volatile. Demand is sensitive to economic conditions, as recent events have illustrated, while the company's main cost, jet fuel, fluctuates significantly year to year," Davidson said in an analysis.

Z Energy, meanwhile, operates in a sunset industry and has faced margin pressures in recent times.

These factors affect their value in the eyes of investors.

So why is it that Fisher & Paykel Healthcare and The a2 Milk Company don't feature in the top 10 companies by revenue?

First, both companies have very high margins, meaning they are able to convert each dollar of revenue into earnings for shareholders much better than most.

At Fisher & Paykel's last full-year result, the company announced it had earned $287 million in net profit from $1.2b in revenue, a net profit margin of 23 per cent.

Despite being the NZX's top two biggest companies by market capitalisation, neither F&P Healthcare or a2 Milk rate in the top 10 in terms of revenue.Photo / Dean Purcell

In contrast, Fletcher Building earned a similar net profit of $246m, but from revenue of $8.3b, a margin of just 3 per cent.

"In other words, Fisher & Paykel Healthcare was able to generate the same profits from around one seventh the revenue, and at the end of the day, it's profits that count."

Second, both companies have large growth opportunities ahead of them.

"The market for Fisher & Paykel's key product, named Optiflow, is significantly under-penetrated," Davidson says.

"Meanwhile, a2 Milk, despite its impressive growth, still only has 5 per cent of the Chinese infant formula market and has only just begun its push into the US.

"Investors are willing to pay a higher price now in the expectation that profits will grow for many years into the future."

NZ stocks up 17 %

The S&P/NZX50 index recorded a 16.9 per cent gain over the June quarter and the index is now only 0.4 per cent down from where it started the year.

It has been a similar story in Australia, although it has been a more modest recovery from March lows.

Australia's S&P/ASX200 index returned 16.5 per cent over the June quarter, but for the year to date, the index is still down 10.4 per cent.

The June quarter returns of KiwiSaver funds generally reflected the improved underlying market conditions, Morningstar said in a quarterly report.

Funds with a large exposure to US growth stocks or overweightings to a2 Milk and Fisher & Paykel Healthcare in their NZ equity holdings are likely to have performed particularly well.

A bad apple?

News from Scales Corp, New Zealand's biggest apple exporter, that its underlying earnings for 2020 would be towards the bottom of a $30m-$36m range came as a surprise to the market.

The company, which is also involved in food ingredients and logistics, said the mix of earnings between business divisions was forecast to change meaningfully from the previous year, when it reported an underlying net profit of $35.8m.

Castle Point Funds co-founder Stephen Bennie said it was a disappointing update, especially as it came just over a month after an upbeat annual meeting when the company appeared confident about weathering the Covid-19 storm.

"This will have been a decent hit for investors that were confident of a top-of-the-range number and are now looking at a 20 per cent downward reset," Bennie said.

News from Scales Corp that its underlying earnings for 2020 would be towards the bottom of a $30m-$36m range came as a surprise to the market. Photo / File

"Investors will be hoping that one bad apple does not spell trouble for the whole barrel."

Broker Forsyth Barr said Scales' full-year 2020 headwinds were largely related to Covid-19 and should reverse in the coming period.

"We understand guidance is predicated on adverse horticulture conditions continuing, and with the key selling period largely behind it, we see limited further downside risk to full-year earnings.

The company will report its first-half result on August 26.

The shares last traded at $4.98, compared with $5.25 just before just before this week's earnings update.