Duncan Bridgeman: What to watch out for in company accounts

Directors and management should be transparent.

COMMENT:

Sometimes in business it's not what is said that's important but rather what isn't said.

With the majority of NZX-listed companies reporting earnings at this time of the year, it's worth bearing that old adage in mind.

Generally speaking numbers don't lie. How they are presented and interpreted is another matter.

Perhaps just as important, though, is the management commentary accompanying the accounts and the outlook for the business.

A golden rule for company boards and management is: don't over promise and under deliver (easier said than done!).

Any companies that fail to meet expectations are in for a rough time.

Air New Zealand discovered that yesterday when it announced a profit warning ahead of its result, slashing its earnings guidance range by 16 per cent to $340-400 million.

Aside from the estimated impact from the Rolls Royce engine issues plaguing the company, the downgrade indicates signs of slowing revenue growth from leisure travel within domestic New Zealand and softening inbound tourist traffic.

The market took notice and the airline's share price was hammered on an overall tough day for the local stock exchange.

"What Air New Zealand is seeing in forward bookings tells us a lot more about the future than any retrospective statistics will," Craigs analyst Mark Lister said.

And hence shares in the likes of Tourism Holdings and Auckland International Airport suffered in Air New Zealand's backwash.

A contrast was Sky City's market update this week with the casino operator upgraded its underlying earnings and profit guidance for the first half.

Sky City said it has been helped by favourable performance in Auckland and strong growth in its international business.

The upgrade was tempered by the company flagging that earnings growth in the second half of the fiscal year would be "harder to achieve". However, it does expect full year normalised earnings to be slightly ahead of last year.

By and large, company boards are looking to ensure they are comfortable with their message and how they deliver it all within the continuous disclosure rules.

This has led to directors and management being more transparent with hopefully less marketing spiel as they try and make it easier for investors to get a feel for the direction of the company.

Comparing company results to previous years can be difficult, especially when they headline their own "preferred" financial performance measure.

However, companies should be consistent in their reporting from period to period.
Statutory net profit is not always the most relevant figure as the bottom line can be distorted by one-off unusual items. These should be clearly identified, including previous year adjustments which need to be highlighted to show where the company has come from.

Firms with exposure to overseas markets need careful scrutiny given the more subdued economic growth outlook shown in global surveys.

The NAB Australian business conditions survey out this week provided a soft backdrop for New Zealand companies with significant Australian earnings.

Australian business conditions dropped sharply in the December survey, perhaps belatedly realigning with the weaker levels of confidence, and retail sales.

The deterioration was broad-based across states and industries and suggests a significant slowing in the momentum of activity in the business sector, particularly retail.

Further afield, global geopolitical factors such as Brexit and the China/US trade negotiations continue to affect capital markets while the US company reporting season has so far been mixed.

On the local front, the tax working group report is a looming issue for New Zealand investors and adding to uncertainty in the real estate sector.

It will be interesting whether companies reliant or exposed to property portfolios make mention of this, depending on the timing of when the report is made public.

Other things to look for in management commentary will be evidence of increasing costs for businesses, as confidence surveys suggest has been occurring.

"With a tight labour market and evidence of increasing costs for many businesses, some will be facing a squeeze," Lister said.

"This is particularly so for those who can't pass higher costs on to customers, or when revenue trends are also working against them."

One section of accounts sometimes glossed over by shareholders is the audit report.

But when analysing some companies it should often be the first thing to look at as the auditor should make note of any fundamental uncertainty, including debt covenant breaches.

In general, analysts are expecting steady growth in earnings from companies.

But there is always the odd surprise.