Tranz Rail trails season of strong results

By ELLEN READ markets writer

Tranz Rail is not repaying brokers' faith in making it one of the favourite stock picks for this year.

As the interim reporting season comes to an end, the rail company - chosen by half the brokers in the Business Herald's annual top stock survey - is at the bottom of the results board.

Tranz Rail posted a first-half profit of $1.9 million for the six months to December 31, down steeply on the $23 million recorded for the same period a year earlier. (However, that result was boosted by the sale of assets including the Auckland rail corridor and the Tranz Scenic long-distance passenger business.)

But there is hope yet - Tranz Rail chief executive Michael Beard said the results were slightly behind the company's own projections but pleasing overall.

He said it showed "year on year, equivalent-quarter growth in the top line". This was "the first time in this company's history that this set of circumstances have come together".

"This quarter is particularly pleasing for us and is in a sense we believe the beginning of the trend of the company coming in line with the forecast."

Sky Television - also chosen by half the surveyed brokers - is doing more to return the favour. The pay TV company reported a net loss after tax of $4.4 million for the six months to December 31, compared with a $13.2 million loss the year before. Chief executive John Fellet said Sky had continued to increase its subscriber base and reduce losses.

A handful of companies have yet to file reports before the March 17 deadline.

Overall, the season was strong: many companies reported double-digit underlying earnings growth.

First NZ Capital strategist Jason Wong estimated that the median increase in adjusted earnings per share was 15 per cent.

Utility and infrastructure companies did well. Retailers and exporters were hard-hit by the slowing economy and rising dollar.



Trustpower heads the season leaderboard, reporting a strong result that continues the excellent turnaround after the difficulties of winter 2001, Wong said.

Its peer in the utilities sector, Contact Energy, has also performed well, the result showing strong growth in its retail electricity business.

Retail stocks had a hard time as the domestic economy began to slow.

Briscoe Group stood out with stronger-than-expected sales growth of 18 per cent year on year, but other announcements within the retail sector were disappointing.

Warehouse Group reported weaker-than expected sales, Michael Hill International reported profits down 10 per cent year on year, Hallenstein Glasson commented on margin pressures due to weak pre-Christmas sales and that earnings would be similar or below last year, and Pacific Retail Group reported disappointing sales during January and February to date.

Not surprisingly, all retailers underperformed the market over the past four weeks, Wong said.

He said the strong earnings season largely reflects strong economic momentum in the local economy in the second half of last year.

Strong growth in the Australian economy, particularly its housing market, has played a supporting role.

The impact of the rising New Zealand dollar has affected companies in different ways.

Its overall impact has been muted due to hedging, but the currency will become a more important factor on earnings later this year and into next year.

Despite the mainly positive returns, the season was tarnished by a generally weak equity market environment in the face of looming war in Iraq and the early stages of a domestic economic slowdown.

Looking forward, it seems likely that more earnings estimates will be downgraded throughout the year, reflecting the expected slowdown in economic growth, Wong said.