Big Chill's parent company Freightways is seen as a bellwether for the economy.
Now that the Reserve Bank has slashed its Official Cash Rate by half a percentage point, the market’s focus has gone to the companies investors believe will be the biggest beneficiaries.
The immediate winners look to be those companies with direct exposure to the New Zealand economy, as more people feel the impact of lower borrowing costs.
Zoe Wallis, investment strategist at Forsyth Barr, said midway through the reporting season, cyclical stocks were in the spotlight.
“We’re closely watching companies that are most cyclically exposed to the New Zealand economy, such as Fletcher Building and Freightways, for signs that we are passing the trough in economic activity,” she said.
“We aren’t seeing too many green shoots yet. We expect they will come – but likely to be a second half of 2025 story.”
In results so far, a2 Milk has been the standout, with the company’s first-half net profit rising 7.6% to $91.7 million, easily beating market expectations in the process.
Post-result, a2 Milk’s share price has rallied by 23%.
A2 Milk is benefiting from a shift in China towards cheaper English-label infant formula, a pop-up in China’s birth rate, and stronger milk sales in the US.
“Momentum appears strong and a2 Milk is further investing in marketing to capitalise on this at present,” Craigs Investment Partners said.
Craigs noted a2 Milk’s forward price-earnings ratio is now at 27 times – in line with its five-year average, but well above its peers.
“With over $1 billion in cash, M&A and capital management remain highly likely,” the broker said.
Freightways’ first-half revenue was up by 6.7% and its net profit was up by 9.5%.
“Whilst interest rates are beginning to fall in NZ and business confidence is slowly returning, we remain cautious about any rapid recovery in NZ and to a lesser extent Australia,” the company said.
Salt Funds managing director Matt Goodson said Freightways' result, as a cyclical bellwether, was a little better than expected for the half, although the company’s outlook comments were muted.
“So that’s the key question – the shape of the upturn as this monetary easing gradually feeds through,” he said.
“The problem is it takes a while, just because of the shape of people’s fixed-rate mortgages as it takes time for them to reset.
“And when you look at the levels they were when they were just taken out, some of those were taken out quite some time ago when interest rates were a fair bit lower.
“So it’s more the second half of the year when the easing starts to kick into gear in terms of less money going out on mortgages.”
Goodson noted there was scepticism around the “green shoots” theory after a deep and long recession.
“We’re seeing varying outcomes and there are all sorts of differing outcomes.”
On the day that Fletcher Building reported another big first-half loss, the stock rallied as investors got on board with the cyclical recovery theme.
Goodson said offshore investors might have bought Fletcher’s shares on hopes of a cyclical turnaround for the construction and building materials firm “but for me, it’s still extremely messy”.
Perhaps the clearer turnaround story lies with another cyclical stock, Vulcan Steel.
The dual-listed company’s share price has rallied by 11.4% since its result early this month when the company said Australia and New Zealand were at a turning point.
While the green shoots theory has its doubters, Mark Lister, investment director at Craigs, says he’s a believer.
“Over the next six months we will see that turn into something more real, although there are plenty of others who are in the ‘I’ll believe it when I see it camp’,” he said.
“I think the second half of this year will be a lot better,” he said.
“The turning point for the economy is behind us, in my opinion.”
Air New Zealand’s decision to launch a $100m share buyback raised more than a few eyebrows, given its plans for $3.2 billion in capex over the next five years and an uncertain outlook for the second half.
The company said given the degree of uncertainty surrounding the number of grounded aircraft across the second half, the airline was not in a position to provide guidance.
“That’s a bit of an odd one and it certainly surprised people,” Salt Fund’s Goodson said.
Analysts have slashed their target prices for Heartland Group Holdings after the specialist lender surprised the market with a $50m impairment charge and downgraded profit guidance.
Forsyth Barr cut its target price by 15c reducing it from $1.10 to 95c warning that the company’s shock market update had shaken confidence in Heartland and rebuilding trust would take time.
“Heading into Heartland Group’s 1H25 result we thought there were downside risks, but the pre-announcement of an about $50m impairment charge and 1H25 net profit guidance of $2m–$5m was worse than expected.
“Significant impairments in motor and business lending are disappointing, especially given the known economic softness and the lack of further material deterioration in the economy since HGH’s late-November 2024 update.”
Forsyth Barr’s analysts said the impairments “raise concerns about HGH’s systems and policies; concerns that cannot be erased overnight”.
They were also concerned about the lender’s higher operating costs, with first-quarter opex of $30.5m, up 16% year on year.
Heartland has said it is investing heavily to improve its collection processes and it expected costs to remain elevated.
Forbar forecast total opex to be up 34% year on year for the 1H25 and up 31% for the full year. They have a neutral rating on the stock.
Jarden analysts also cut their target price from $1.68 to $1.60 but remain overweight on the stock.
They said it remained difficult for them to assess how much of the recently elevated impairment expenses could or should have been booked earlier and how much of the first-half increase reflected a balance sheet reset under new leadership.
The company’s forecast guidance of $2-5m sat around $22m below its forecasts after adjusting for the higher impairments, the analysts said.
“While the ongoing impairment issues are clearly disappointing, we highlight the supportive demographics for reverse mortgages and the NIM [net interest margin] opportunity in Australia as key to the growth story over coming years.
“However, we expect investor sentiment is likely to remain subdued while the risk remains for further elevated impairments.
“We believe improved disclosures are required to demonstrate where the underlying problems lie and provide confidence to the market that lending standards have improved as the company states.”
Heartland shares were trading around $1.08 before the impairment charge and opened at 93c yesterday.
- Additional reporting Tamsyn Parker
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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