Solid earnings season, but outlook darkening - analysts

The August reporting season delivered largely positive results. Photo / File

The August reporting season delivered largely positive results, analysts say, but clouds are gathering on the horizon for some NZX-listed firms.

With the New Zealand sharemarket trading near record levels there were big expectations for companies to report earnings that supported their elevated stock prices.

First NZ Capital analyst Chris Green said the results were mostly in-line with expectations.

"On the basis of actual EPS [earnings-per-share] growth relative to our expectations, 30 per cent of companies reporting showed EPS growth above expectations, 49 per cent were in-line, while 21 per cent disappointed," Green said in a research note.

He said increasing dividend payments continued a trend seen in previous earnings seasons.

"In particular, of the 33 companies monitored, 58 per cent increased their dividend payment relative to the same period last year," Green said. "From our perspective, this reflects the continuation of relatively robust company balance sheets, together with a reluctance of firms to disappoint investors."

With bond yields and interest rates at record lows, dividend-paying stocks are providing much needed income to many investors.

Firms including Mercury NZ (formerly Mighty River Power), Air New Zealand, Spark and Meridian Energy rewarded investors with special dividends.

"Companies are acknowledging that dividends are in high demand, but it's also a reflection of the strength of their businesses and the fact that they've got very manageable debt levels," said Mark Lister, head of private wealth research at Craigs Investment Partners.

"It's just a prudent use of capital."

Lister said it was a solid earnings season, on the whole, with average earnings growth of around 7 per cent.

"Four out of five stocks met expectations or beat them," he said. "It's a pretty good hit rate - certainly better than what we saw in Australia."

Green said reporting season had revealed a "generally less positive tone" to companies' outlook statements.

Around 20 per cent of firms had a broadly positive outlook, he said, while 65 per cent had a mostly neutral tone and 15 per cent a cautionary or negative tone.

"While the majority of companies reiterated earlier earnings guidance and noted a generally supportive domestic backdrop, a number of companies noted still challenging conditions - particularly in the dairy sector."

Air New Zealand reported the best result in its 76-year history, including a 42 per cent jump in net profit to $463 million.

But the national carrier also warned of a sharp drop in underlying earnings in the current financial year as a result of increasing competition.

Stephen Bennie, a partner with fund manager Castle Point, said analysts had reduced their 2017 earnings forecasts for the airline by an average of 29 per cent following the renewed management guidance.

"They really caught analysts out with how much they were being impacted by increased competition and fuel prices rebounding," Bennie said.

He said the New Zealand sharemarket - whose benchmark index, the S&P/NZX 50, has gained 16.9 per cent this year - went into reporting season "priced for perfection" and companies had largely delivered.

"Right now, there are limited catalysts in sight in the near-term for a reversal in New Zealand shares," Bennie said. "But you do have to be concerned about fundamental values."