•Brian Gaynor is an executive director of Milford Asset Management which holds shares in all 16 companies listed in the accompanying table.
The interim profit announcements for the six months to December 31 met market expectations but little more.
The problem is that most of our largest listed companies have a limited growth outlook as the domestic sharemarket is dominated by low-risk and high-dividend-yield companies with utility characteristics.
The accompanying table contains the normalised net profit after tax figures for 16 of the 25 largest listed companies that reported for the six months to December 31.
The other nine companies - F&P Healthcare (ranked 5th), Ryman Healthcare (6th), Z Energy (11th), Xero (15th), Mainfreight (17th), Kiwi Property (19th), Infratil (22nd), Goodman Property (23rd) and Trustpower (24th) - have different balance dates.
As the sixteen companies have a total sharemarket value of $60.2 billion, representing just over 50 per cent of the total value of the NZX, they give a good indication of the earnings performance of our largest listed companies.
The first point to note is that the combined net profit of these 16 companies increased by only 4.2 per cent, from $1.535 billion for the six months to December 2015 to $1.599b in the latest period. This compares with an 18.9 per cent increase in the previous corresponding periods, from $1.291b to $1.535b.
However, these figures are strongly influenced by Air New Zealand which reported net earnings of $133m for the six months to December 2014, followed by $338m for the following interim period and $256m for the latest six months. Air New Zealand's net earnings declined by 24.3 per cent in the six months to December 2016 but this still represented an impressive result that was ahead of analysts' expectations.
If Air New Zealand is excluded from the accompanying table the remaining 15 companies had a combined net profit increase of 12.2 per cent between the December 2015 and December 2016 ending periods compared with a minimal 3.4 per cent growth between the December 2014 and December 2015 interim periods.
These are modest profit increases in the current booming economic environment.
The problem with the NZX is twofold. Firstly, it is strongly influenced by the performance of five electricity companies, Meridian Energy, Mercury NZ, Contact Energy, Genesis Energy and Vector, as well as Spark and Chorus. These seven companies have a combined market value of $28.3 billion yet their total net earnings have increased from only $610m to $611m to $694m in the last three December-ending interim periods.
The other issue is that a large number of cyclical companies, particularly in the building and construction sectors, have not been able to take full advantage of the buoyant economic conditions. This is extremely frustrating as one of the clear signs of a competent management team is its ability to maximise earnings when industry conditions are favourable.
Fletcher Building revealed a large loss on one of its major fixed-priced construction contracts. There are also reports that other listed building supply companies are failing to deliver orders on time and, when they are on time, they often have to be returned because they haven't met specifications.
The clear message from recent results is that senior management teams in New Zealand are extremely good at managing low-growth utility companies but the stewardship of cyclical and high-growth companies leaves a lot to be desired.
This issue is highlighted in recent reports on Wynyard Group and Pumpkin Patch, which are covered in the associated article.
The standout performer in the accompanying table has been A2 Milk, which has grown earnings from just .1m in the six months to December 2014 to $10.1m in the following corresponding period and $39.4m in the latest six month period. This growth has been achieved since A2 effectively moved to Australia and has had a senior Australian management team.
A2 is a typical growth company as it doesn't pay a dividend.
However, the company had $108.4m of cash and short-term deposits at the end of December 2016 and "the board expects to adopt a dividend policy following the completion of FY17".
Sky Network Television has been the worst performer as it reported a 32 per cent decrease in net earnings in the latest six-month period following a 5.4 per cent fall in the previous corresponding period. The company has been the subject of a particularly harsh decision by the Commerce Commission and will be challenged to repeat the net earnings of $92m achieved in the first half of 2014/15.
The dividend growth of the 16 companies was steady, if not spectacular, in the latest six-month period. Total dividends per share increased by 5 per cent on a year-on-year basis in the interim period to December 2016 compared with 17.3 per cent in the previous corresponding period. The latter increase was mainly because Chorus went from paying no dividend for the six months to December 2014 to 8c a share for the first half of the 2015/16 year.