Company balance sheets get stronger

Results for Fletcher Building, led by chief executive Jonathan Ling, have been revised down by analysts. Photo / Natalie Slade

NZX-listed company results due out in the next few weeks are expected to paint a picture of an economy finding its feet after the recession of 2008-09. For most, it will be a year of subdued revenue growth, coupled with modest improvements in earnings, analysts said.

But the big difference between the June 30 financial year just past and previous years is that most companies will have stronger balance sheets, which should stand them in good stead if world markets continue to deteriorate, they said.

The top three stocks by market capitalisation - Fletcher Building, Telecom and Contact - and most of the other leading stocks, have June 30 balance dates.

Analysts expect currency themes to show through in some results. Over the June year, the kiwi appreciated by 17.6 per cent against the US dollar, which will hit exporters, but fell by 5.1 per cent against the rampant Australian dollar, which will benefit those businesses with exposure across the Tasman.

Economists estimated gross domestic product grew by just 1.6 per cent over the June year, which should be reflected in corporate earnings.

While the rebuilding of Christchurch is likely to become a theme, analysts said it will take a while for the rebuild to show through in company results.

Shane Solly, portfolio manager at Mint Asset Management, said stronger balance sheets will give companies leeway to raise dividends, or consider share buybacks.

Against the backdrop of renewed economic uncertainty globally, companies with sound financial structures will show through, he said.

"The recurring theme is that most New Zealand company balance sheets are in good order, so if things don't improve in a hurry, it is not as if they have to rush out and raise new capital," Solly said. "That's a big difference from a year or 18 months ago."

Market attention will focus on Fletcher Building, the country's biggest listed stock and arguably one of the best bellwether stocks for corporate New Zealand, which will report its annual result on Wednesday.

"That's the one that people will hang the most on," Solly said. "We know that it's been a tough environment and we also know that things are not necessarily getting better in a hurry," he said, pointing to flat conditions in the New Zealand and Australian residential construction markets.

Analysts have over the last few weeks been revising down their forecasts for Fletcher Building, mostly because the benefits of the Christchurch rebuild will take much longer to flow through to the company's bottom line than was previously thought.

The range of expectations now is for a net profit of $315 million to $350 million for the year, improving to $410 million to $520 million in 2011-12, compared with a reported net profit of $301 million for 2009-10. Fletcher Building's own guidance is for a net profit of $330 million to $340 million for 2010-11.

Forsyth Barr head of research Rob Mercer said Fletcher Building's second half is likely to be softer because of reduced demand in New Zealand and Australia, but he expects a solid improvement in 2011-12.

Analysts said opinion is still divided over the wisdom of Fletcher Building's A$740 million purchase of Australia's Crane, which was settled this year.

JB Were Private Wealth Management strategist Bernard Doyle said forecasts for many stocks had already been lowered, but he expected pockets of strength to show through in stocks with direct exposure to the improving Auckland economy, such as casino operator Sky City Entertainment.

There were also stocks with fairly limited exposure to the general economy, such as pay TV operator Sky Network TV, which should perform strongly, he said.

Forsyth Barr's Mercer said some stocks would show revenue growth, but from low levels. "The economic recovery is pretty subdued - you could almost say that it's crawling rather than doing anything dramatic," he said.

"We still think we are through the worst," Mercer said. "Agriculture and manufacturing have shown gains in the second half, and money is hitting the pockets of the farmers in terms of the dairy payout, and from higher prices received for quite a large number of different commodities."

Analysts said Mainfreight, the global logistics operator which reported a net profit of $14.22 million for the quarter to June (a 109 per cent increase on the same period last year) was likely to be the standout result for the season.

Telecom's result will be notable as being the final one before the company's operational separation.

Another big player, Auckland International Airport, is expected to return to solid earnings growth.

Forsyth Barr expects a net profit of $120.7 million, up from $105.1 million in the previous year. Analysts expect an upbeat earnings performance for the airport in 2011-12, which captures the extra activity surrounding the Rugby World Cup.

Contact Energy's result will be the third in a row that earnings will be low. The main causes will be low wholesale prices, high levels of customer "churn" and costs related to the Christchurch earthquake.

Air New Zealand's second half is expected to show a loss through high fuel costs, but the outlook should be positive, thanks to the World Cup. Forsyth Barr expects Air NZ's net profit to fall to $51.9 million from $82 million in the previous year.

Among the currency-sensitive stocks, carpet maker Cavalier is expected to show an improved net profit of around $17.9 million from $16.6 million.

"Strong Australian carpet sales and the favourable NZD/AUD cross rate will help offset weak residential and commercial carpet demand in New Zealand," Forsyth Barr said.

Looking ahead, Mercer expects more uncertainty and said it will be 2013 before a broader recovery gets under way.

Understanding annual results

Annual reports and results contain copious amounts of information but some key pieces of data help to build a picture of the performance and trends of a company.

Revenue & profit

Where: Income statement. If revenue growth has not filtered through to the net profit it could indicate a blow-out somewhere in costs. Companies sometimes highlight operating profit (earnings before interest, tax, depreciation or amortisation) or normalised earnings, taking out one-off or unusual items, to provide a picture of the underlying performance of the business.

Cash flow

Where: Cash flow statement. The net movement of money in and out of a business shows whether a company is able to pay its bills or is burning cash. Sales are generally recorded in the income statement at the time they are made. However, if a company has trouble getting customers to pay or in covering costs, this can create cash-flow problems. A seemingly profitable business can fail without sufficient cash flow.

Working capital

Where: Balance sheet. The difference between total current assets and total current liabilities. A good working capital ratio can vary between the types of company and the sectors in which they operate. A ratio of $2 of assets for each $1 of liability is comfortable, although a ratio closer to 1.2:1 can be run by companies with a strong cash flow.

Debt

Where: Balance sheet. High debt levels are not necessarily a problem but companies must have sufficient cash flow to cover the interest payments. A company's debt position is often referred to as its gearing. The most common gearing measure is a ratio of net debt to assets or equity. A good gearing ratio is subject to the type of company and sector.

Share price/dividend

Where: Stock market/financial notes. Growth in company earnings should be reflected in the share price or dividend. The price to earnings ratio is the share price divided by earnings per share. A high ratio could show the market pricing in expectation of growth, or the share price is over-valued. The payout ratio divides the dividend per share by the earnings per share and a result of about 50 per cent shows a good balance between giving shareholders income
and maintaining growth through earnings.

Outlook statement

Where: Commentary with annual report or results. Financial results often dedicate much space to analysing the past year but can include an outlook for the coming period. Continuous disclosure means companies inform investors of material developments as they happen, so the result should not contain great surprises.