Reporting season: what to expect

Photo / NZ Herald

Eyes will be on listed companies as reporting gets under way in the next week. Tamsyn Parker finds out what will affect their results.

Currency risk

Analysts say the biggest concern on their minds is how the strong New Zealand dollar against the aussie will affect earnings.

Many of New Zealand's largest corporates have exposure to Australia, including SkyCity, which will be one of the first to report on Wednesday.

Mark Lister, head of private wealth research at Craigs Investment Partners, says companies with Australian earnings face being hit by a "double whammy" - the weak Australian economy and the poor translation into the New Zealand dollar.

"The New Zealand dollar against the aussie is obviously going to be a big theme. It's up 16-17 per cent in the last 12 months and it's looking like it's going to stay up."

Most companies will report on the period covering July to December. Lister says the kiwi wasn't at a high level through that entire time which means investors will also be keen to know how companies plan to deal with the high dollar in the future.

"It could have quite a big impact. It depends on how much of their business is based over there."

Lister said companies like pharmaceuticals business Ebos, which has about 80 per cent of its business in Australia, and top stock Fletcher Building, which attributes more than half of its earnings to Australia, could be among those most affected.

Matthew Leach, a quantitative researcher at Forsyth Barr, says currency translation impacts will provide a headwind for New Zealand companies with Australian operations but forecasts put the impact only at the margin.

"... the change to forecasts is still only at the margin and this should remain the case unless the NZ/Australian dollar cross rate breaches historic top-of-cycle measures," he told clients recently in a reporting season preview.

Forsyth Barr investment strategist Brian Stewart said the kiwi tendedto trade in a cycle range of A75c to A92c.

"We are right up near the top of that. That should mean we are near the top, therefore it becomes a tailwind next year rather than a headwind."

Stewart said Australia was in a very different place in its economic cycle from New Zealand at the moment.

While New Zealand is being described as a "rockstar economy", Forsyth Barr is forecasting the outlook for Australia to be driven by rising unemployment as companies respond to slow income growth.

"They are in a different place in the cycle than us. It's going to be pretty flat for them."

Interest rate challenge

Within New Zealand Forsyth Barr predicts the other major issues to consider will be higher interest rates and companies with political or regulatory risk.

Lister also picks interest rates as a key issue and said analysts would be looking closely at balance sheets to check company debt levels ahead of predicted interest rate rises.

"Companies with higher debt levels will see a bigger impact from interest bills."

Rising rates are also pushing investors to look more closely at growth stocks as those who pay a dividend look less attractive relative to bank savings rates and bonds.

"The recent strengths in all of the growth stocks - Air New Zealand, Wynyard, Xero - they are all the rage. No one wants to talk about the boring high dividend stocks."

But Lister said those growth stocks would also need to back up their recent stock price runs with good news in their result numbers and forecasts.

"People are expecting big things from them. The market will want to see upbeat commentary and good numbers to back up the share price run up."

Those who disappoint face an Amazon-style backlash. Its shares fell 11 per cent in one day last month when it gave a financial update which failed to meet expectations.

Election yearThe other big challenge for companies is election year.

Leach said the lead-in to the election had already begun raising the perceptions of political and regulatory risk for a number of sectors.

"Asset sales, SkyCity's convention centre, building product prices, subsidised film studios and deep-water oil drilling are being portrayed as corporate favouritism, as is the overruling of independent regulators or public wishes. Most of these issues will however be dealt with prior to the election."

But the one which is highly dependent on the election outcome is the electricity sector and Labour's plans to introduce a single buyer model.

Leach believes the market has already priced in the Labour plans but is picking Contact Energy as the safest bet. Recently listed Meridian Energy and Mighty River Power are predicted to be the most affected by the policy proposal.

As well as being watched for the political risk, Lister said Meridian and Mighty River would attract attention because of their newness to the sharemarket.

"When these new companies come to market it's very important they get off to a good start in terms of delivering on forecasts. People will be watching to see if they deliver."

It will also be the first reporting season for a number of other newly listed companies.

Despite the challenges Forsyth Barr expects modest growth across the listed sector.

"Our analysts are forecasting revenue growth of 9.8 per cent plus at an aggregated level with operating profit forecast at 9.3 per cent."

But it also notes that the utility sector, retail and food, beverage and agriculture have negative growth expectations. Already some retailers like Hallenstein Glasson have warned of lower profits.

Brad Gordon, a senior investment adviser at Macquarie Private Wealth, said that despite the improving economy retailers were still under the gun.

"We are in a very different retail cycle than when the economy was pumping. That was a debt cycle, people were prepared to borrow. People are a lot less prepared to borrow now."

The industry was also facing structural change with the move to online shopping.

Gordon said retailers could overcome the challenge but it meant they had to get the product right.

Best performersThere are some stocks that are expected to have good results.

Gordon said Air NZ, Trade Me, Summerset, Metlifecare and Briscoe Group were Macquarie's top picks.

"Air NZ is set to benefit from falling oil prices and bringing on board new planes with greater capacity. The company is relatively well positioned in its competitive space. Most things are going right for it. It is also seen as a pure economic exposure to New Zealand."

Summerset appeared to be hitting all its goals in terms of new developments in the retirement village sector.

"The key with them is how their margins are doing and whether they are achieving them."

Summerset is also on Forsyth Barr's list of 10 companies which it expects to have earnings per share growth in excess of 20 per cent.

Its other top performers include: Bathurst Resources, Cavalier Corporation, Fletcher Building, Hellaby, Heartland New Zealand, Nuplex, NZ Oil & Gas, Oceana Gold and PGG Wrightson.

Lister is also a fan of Fletcher Building despite its Australian headwinds.

"I think Fletcher Building will have a good result. They have got domestic exposure and the Christchurch rebuild."

He is also picking Steel & Tube and Freightways to benefit from the building boom in New Zealand and strong economic growth. Air NZ tops off his positive picks.

"I think Air NZ will have a great result. They are looking very well positioned and the stock still looks good value compared to other airlines. It's the pick of the bunch."