Along with a devastating cyclone, New Zealand investors have this week been confronted with a slew of unexpected downgrades and worse-than-expected financial results.
Typically, “confession season” lands in January, when companies which don’t want to surprise their shareholders with bad news ‘fess up with forecast downgrades well ahead of actually reporting their results.
But in an unusual move, Fletcher Building gave its downgrade on Monday - just two days out from its result.
Sam Trethewey, portfolio manager at Milford Asset Management, said the timing of the announcement was a surprise.
“If the company was going to adjust its guidance or materially surprise the market, you would expect that to come out through January. The timeframe for Fletchers to bring that news to the market was a surprise. Two weeks into February and only a couple of days before the result.”
Fletcher Building shares fell 29c or 5.35 per cent to $5.13 on the day of the downgrade, then dropped further to $5.05 on Tuesday and closed yesterday at $5.01.
“I think what we are seeing, and this characterises the market generally, is we are moving through the earnings cycle in NZ now clearly - the downgrades we have been talking about for almost a year and a half are finally starting to come through.”
However, Trethewey said many stocks, including Fletcher Building, were already priced for weakness in their earnings, on the expectation of tougher times ahead.
“Any share price reactions we are seeing perhaps aren’t as large as what you would normally expect.”
Fletcher cited the wet weather as the cause of its downgrade.
Forsyth Barr analysts Rohan Koreman-Smit and Paul Koraua lowered their target price on the stock by 10c to $6 because of the guidance, but said a slower housing market was also a driver.
“Whilst wet weather is likely having an impact, we suspect the abrupt slowdown in the housing market over the latter half of 2022 also played a significant part,” they noted.
The analysts said Fletcher’s 2023 financial-year earnings before interest and tax guidance range broadly equated to 250 property settlements but the company only had about 200 contracts on hand to settle in the second half of that year.
“The top end of guidance requires a further 400 sales and settlements over the next four months — a challenge in the current environment.”
The Ebit guidance was for $800m to $855m. The Forbarr analysts said their revised Ebit forecast was now $803m - at the low end of Fletcher’s range, reflecting expectations that its residential development volumes remain subdued.
But they retained an outperform rating on the stock, noting that despite the change to earnings, the company was still trading on “unchallenging valuation metrics”.
Another company that disappointed was Vulcan Steel.
Vulcan reported a flat half-year net profit of $54.4m but that was largely due to the addition of five months’ worth of trading from the newly acquired Ullrich Aluminium business.
But adjusting for significant items including the gain on its acquisition and the company’s listing costs, its first-half profit fell 22 per cent from $69.7m.
Trethewey said Vulcan had essentially walked away from volume in the business by not taking orders that weren’t up to acceptable margins.
“They have foregone some revenue to keep their margins up and believed they were in line with market expectations but were relying on the acquisition of Ullrich Aluminium to get them there. The whole business was a lot weaker than the market was expecting, which again is a sign of the economic impact coming through.”
Jarden analysts Grant Swanepoel and Luan Nguyen labelled it an “aluminium-coated result”.
“What made this result poorer quality in our view is that Ebitda was saved by a far better performance from the recent Ullrich Aluminium acquisition, whilst the core business was down materially.”
They dropped their target price from $9.45 to $9.30 after revising their forecasts, but due to recent weakness in the share price upgraded the stock from “underweight” to “neutral”.
But the analysts noted the company was sensitive to demand for steel, other metals and aluminium as its customers operated in cyclical industries, with commodity price fluctuations, supply disruption of input products and exchange rate movements.
Trethewey said the third company to present negative news was Mainfreight, whose core transport business was starting to show signs of a slowdown after the strong run it had had during the Covid years.
Mainfreight told the market last week that it expected to deliver a “satisfactory” 2023 financial-year result despite more subdued trading conditions in late December and into January.
The company said the softer conditions were noticeable in its US and Asia operations.
That saw Jarden analysts downgrade the stock from “overweight” to “neutral” and trim its target price from $88 to $80.
“Mainfreight’s 43-week trading update for the period to the end of January was notable for the stark slowdown in profitability across all regions and products.”
On the other end of the spectrum, some companies are doing well as they recover from Covid’s impacts.
Trethewey said when he looked across the market there were still a lot of businesses in the “lift phase” that were still recovering from Covid.
He pointed to SkyCity Entertainment Group and Tourism Holdings.
“They are reporting some pretty strong numbers as they bounce back from that Covid headwind they have had.”
Trethewey said he expected that theme to continue next week with Air New Zealand and Auckland Airport likely to deliver substantial revenue growth.
Analysts will also be waiting to hear what the reopening of China means for a2 Milk.
“It’s always a stock that is volatile and can move a lot on a good or bad result and its operating environment - we are seeing China reopen and it will be interesting to see what sort of boost that has been.
“I think reopening generally is good for their business it’s just a matter of how much.”
Ryman capital raising
Ryman’s long-talked-about capital raising announcement finally arrived this week with the company revealing it will seek $902 million to repay debt, largely to pay down its US private placement (USPP).
Fund managers were reluctant to talk about the offer, given that they were in the midst of deciding whether to commit to backing the raise.
Jarden’s Arie Dekker noted the repayment of the USPP came with significant exit costs and there were still “a lot of questions to work through”.
As well as repaying the debt, Ryman said it had slowed and/or paused construction at six existing sites and revised its development pipeline towards lower-density developments, reflecting prudent management decisions made in response to elevated debt levels, changing market conditions including rising interest rates and the outlook for residential house prices.
In an investor presentation, the company said lower-density developments would mean a streamlined design and consenting process, lower peak debt requirements due to the ability to sell units and a shorter time to complete.
Dekker said that while targeting an unwinding of development work in progress for a neutral total cashflow outcome would stabilise total debt, it was not the same as addressing how the company would correct a lack of free cashflow from its large existing asset base.
“Ryman has a broad list of initiatives to position for growth in a changing market but the lack of visibility on what it is responding to and lack of detail around its large existing asset base and cost structures is of concern to us.”
Dekker also noted that Ryman was not stepping away from its growth ambitions, with the company on track to deliver 1000 units and beds in the 2023 financial year and 750 to 900 over the following two years. Beyond that it was targeting 1300 units and beds and 10 per cent annual growth after the 2027 financial year.
“It will be interesting to consider how this is achieved with pro forma gearing of 34 per cent.
“Sensitivity to book valuations and any change in approach to accommodate the broader costs of villages, or market conditions is a risk.”
UK stock popularity
Research by CMC Markets has revealed the most-researched UK stocks by New Zealanders. Ironically, the most searched-for company is Australian miner Rio Tinto with over 53,000 monthly searches. It is listed on the London Stock Exchange as well as the Australian Securities Exchange.
Second is Ashtead, which makes industrial equipment, and third is pharmaceutical company AstraZeneca, whose name many will associate with Covid vaccines in recent years. The top five are rounded out by Scottish Mortgage Investment Trust and BP.
BP recently announced record profits of US$28 billion and is also the most searched-for UK company on a global basis. Despite New Zealand’s clean, green reputation, it looks like many investors are still keen to invest in oil and gas companies.