Fletcher Building and a2 Milk were at opposite ends of the spectrum on the sharemarket.
Fletcher Building and a2 Milk were at opposite ends of the spectrum on the sharemarket.
Optimism around a2 Milk and more provisioning for Fletcher Building have served to highlight mixed fortunes on the sharemarket so far this year.
Against that background, stronger-than-expected labour data for the December quarter has put to rest hopes of early interest rate cuts from the Reserve Bank, thereby keeping fixedinterest up there as a viable option over shares.
As the reporting season approaches, the sharemarket’s focus is on Fletcher Building’s dividend now the company has emphatically ruled out a capital raising after adding $180 million in provisioning, largely relating to the construction of the NZ International Convention Centre, to its books.
Sam Trethewey, portfolio manager at Milford Asset Management, said the turnaround this year in a2′s share price (up 23 per cent) versus the selloff in Fletcher Building (down 12 per cent) showed the extremes of the market so far this year.
At the last reporting season in August, the broad theme from companies was about fixed costs, capex costs and interest costs coming in far higher than the market was anticipating, Trethewey said.
Inflation pressure was coming through and the impact of higher interest rates was felt, he said.
“The market always tries to judge when those sorts of pressures bite, and that occurred in August,” he said.
The annual meeting season over October and November for cyclical stocks such as the Port of Tauranga, Freightways and Fletcher Building all signalled those pressures were starting to come through.
“I expect to see those top-line sales pressures continuing, and for it to be evident more fully in the cyclical stocks when they report,” he said.
As for infant formula marketer a2 Milk, Trethewey said the market could be getting ahead of itself.
“I think it’s fair to say expectations are getting a bit high for that stock,” he said.
“The company has been under all sorts of pressures over the last two years, with the declining birth rate in China.
“There’s also intense competition in the Chinese market, and also a need to increase the amount of capital that it invests in its business,” he said.
“Both these aspects - birth rates and competition - have proven to be not as bad as feared over the last six months,” he said.
“Now it needs to show that it has delivered the earnings to support that thinking,” he said.
Forsyth Barr senior analyst Matt Montgomerie said a2 was “swimming against the tide”.
“Data sources we look at continue to show strong market share gains for a2 Milk (market share is now at record levels), but industry value remains under pressure.
“It appears likely that the first half of 2024 will be another period of soft daigou activity, while the online channels look particularly strong,” he said in a note.
He expects a2 to reveal a net cash position of around $800m.
“While a large amount in the context of the business, we don’t expect any news flow on capital management until a2 Milk has concluded its supply chain investments,” he said.
Synlait Milk has a $130m debt repayment due by March 28.
Meanwhile, the closely allied Synlait Milk’s share price remains under pressure as the deadline for its debt repayment looms.
Synlait’s bonds on the NZX debt market platform were last quoted at 24 per cent from just 8.2 per cent this time last year.
The company has a $130m debt repayment due by March 28 and there is still no word as to its progress on the sale of its Dairyworks business.
Milford’s Trethewey said Fletcher Building, which reports its first-half result next Wednesday, would be closely watched, particularly for the size of the dividend.
“That’s going to be a big signal of confidence or caution around the future and their ability to get through what they are facing.
“The increased provisioning and the issues that are going on with Iplex in Western Australia is leading some to question the cash and the balance sheet that the business has to keep going.
“The lower the dividend is, the more cautious and more concerned people in the market should be about what we are facing.”
Overall, Trethewey said there was potential for companies to surprise on the upside in the reporting season.
Market outlook
Unexpectedly benign jobless data - putting unemployment at a lower-than-expected 4 per cent - has backed the case for interest rates to remain elevated.
A similar dynamic has unfolded in the US, where upbeat economic data has combined with the US Federal Reserve pushing back on overly optimistic rate expectations.
While the sharemarket will have to compete with high deposit rates for the short term, Mark Lister, investment director at Craigs Investment Partners, thinks it is well-positioned.
“Last year was an okay year, but far from stellar.
“We are still down from the peak [13,558 on the S&P/NZX50 index] three years ago, and I think the market still looks like not bad value when we look ahead six months, 12 months and beyond,” he said.
“What the Reserve Bank does will have a big impact on when we see investors become a bit more optimistic,” he said.
“Like overseas, people had been premature in expecting early interest rate cuts.”
Reserve Bank governor Adrian Orr has presided over an era of rising inflation and interest rates. Photo / Mark Mitchell
“This will be the year that we see official cash rate rate (OCR) cuts, but it will be a second-half story, rather than a first-half story.”
“In the short term, it may mean the sharemarket remains a little lacklustre, as August is still some time away.”
While the data added weight to the “higher for longer” interest rate camp, there was a positive side to an unemployment rate of just 4 per cent.
“That’s good for economic activity, good for confidence, and good for corporate earnings, so I’m not sure if we should be rushing to get upset,” Lister said.
“For me, it points to the resilience of the economy,” he said.
“It’s still sluggish but it’s certainly not in the doldrums, as people might have expected it to be,” he said.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
