Brokers back a winner in Fletcher Building

Broking firms who chose Fletcher Building as their best pick for this year are vindicated. Markets writer ELLEN READ reports.

Why do weather forecasters exist?

To make economic (or in this case equity) forecasters look good.

It may be an old joke but it hasn't held true so far this year.

In January, brokers chose Fletcher Building as their pick for this year and they were on to a good thing as the company was the best-performing during the recent results season.

(Most of the results were for the six months to December 31 last year, although some reported full-year figures.)

Fletcher Building stood out with a 250 per cent increase in operating profit before unusual items and tax, to $63 million for the six months to December 31.

Its profit in the previous corresponding period was $18 million.

Of the 10 broking firms that picked their top five for the Business Herald, six chose Fletcher Building.

Their reasons included an expected strong performance from the building sector this year, a positive reception to more sales of the firm's non-core assets - especially those in South America - and a high regard for chief executive Ralph Waters.

Not surprisingly, Air New Zealand took its place at the bottom of the list, reporting a whopping 2100 per cent reduction in net operating profit before unusual items for the half-year.

That aside, Credit Suisse First Boston analyst Jason Wong said the season had been the best for some time.

Most companies reported earnings above the previous corresponding period, and there were more upgrades than downgrades to forecast earnings.

"Overall, the reporting season confirmed our belief that earnings momentum has turned up and that full-year 2001 represented the trough in earnings," said Wong.

Credit Suisse said analysts expected core market earnings growth to be about 10 per cent a year for the 2002 to 2004 full years.

Of the 22 companies analysed by Credit Suisse, Carter Holt Harvey, Sky Network Television, Auckland International Airport, Natural Gas Corp and Calan Healthcare Property Trust reported positive earnings surprises.

"Clearly the macro economic environment over the part-year had a positive impact on volume growth, while lower oil prices helped to reduce costs for many companies," Wong said.

Tight cost controls during tough times had paid off for many firms, he added.

Substantial write-downs of investments had also been a feature of the recent results season, although that process appeared to be drawing to a close.

Examples included Fletcher Forests writing off its residual investment in the Central North Island Forestry Partnership to the tune of $349 million, and Sky City writing out its equity in the troubled Force Corp subsidiary.

Credit Suisse downgraded earnings forecasts on five companies, including a slight downgrade on Telecom, which recorded a 16 per cent rise in tax-paid profit to $161 million for the December quarter.

"[The] headline result was better than expected but the result contained a number of non-trading or infrequent profit items," Wong said.

Other downgrades included Fisher & Paykel Healthcare, Tranz Rail, Sky City and Tourism Holdings.

Forsyth Barr research head Rob Mercer said the season's biggest surprise came from Auckland International Airport.

The good result followed on from a strong first quarter, he said, but given the events of September 11, it was "really quite spectacular".

Looking at some of the other sectors, Mercer said the best-performing areas were retail, building and ports.

The worst, notwithstanding Auckland Airport, were tourist-related stocks such as THL and Air New Zealand, "and they face a continuing risk".

Utility companies are back in favour with investors, especially after confirming strong earnings growth.

Port companies performed particularly strongly during the six months, accounting for three of Credit Suisse's eight post-results earnings upgrades.

The next reporting season must be completed within 75 days from March 31.

This season two companies missed the June 14 deadline - GPG Finance and Mission Contact Finance - but both have now provided the Stock Exchange with their figures.

NZSE Top 10 interim results

TELECOM

Telecom's net profit of $161 million bettered analysts' average forecasts by $6 million. It was 15.8 per cent up on the December 2000 quarter, but spread over more shares. Telecom's profitability rebounded in the last quarter of last year, and earnings per share were up 10 per cent on a year earlier. This followed two quarters in which earnings per share went backwards, by 12 per cent and 16 per cent, compared with the levels of a year earlier.

CARTER HOLT

Number two stock Carter produced a better-than-expected third-quarter profit result.

The company posted a $25 million December quarter profit, bringing praise from brokers for its ability to eke out a profit in an adverse environment. Analysts said that while Carter's sales returns remained poor, the profit beat forecasts and all units were trading profitably.

CONTACT ENERGY

Did not report during this season.

THE WAREHOUSE

The Warehouse, New Zealand's largest retailer, had a $59.1 million interim profit, in line with analysts' expectations. Analysts said margins in Australia were "skinny" but the market was comfortable with them as The Warehouse had acknowledged further work was needed on its operations there.

F&P HEALTHCARE

Fisher & Paykel Healthcare had a disappointing third-quarter result, its first since the company was spun off from Fisher & Paykel Industries and partly floated on the Nasdaq. The company's bottom-line profit for the three months to December was $14.1 million, a 287 per cent rise on the same period a year earlier. But foreign currency effects had a lot to do with that, and operating profit was down 6 per cent to $20 million.

INDEPENDENT NEWSPAPERS LTD

INL turned in a steady result as it reaped the tax benefits of Sky's losses. INL, which last year raised its stake in Sky from 47 per cent to 66 per cent, reported a 94 per cent increase in half-year profit to $27.1 million. The result included a consolidation of Sky's business for the first time. As a result, INL's six-month tax bill was slashed from $12.6 million to $900,000.

SKY TV

Sky TV reported a smaller-than-expected half-year loss and said it expected to make money by the end of next year. Sky, which has an effective monopoly on the pay-television market, notched up a bottom-line loss of $13.2 million for the six months to December 31. The result was a healthy improvement on the $19.6 million it lost in the same period last year, and was better than analysts' forecasts of a $14 million to $16.6 million loss.

AUCKLAND INTERNATIONAL AIRPORT

Auckland International Airport had another strong profit result and predicted improving traveller numbers as the impact of September 11 lessened. Total passenger numbers were up 4 per cent over the six months - international numbers were up 2.8 per cent and domestic numbers up 5.8 per cent. The $35.1 million profit was above analysts' expectations of a profit of around $32 million, and occurred despite difficult conditions after September 11.

NATURAL GAS CORPORATION

Natural Gas Corporation returned to profitability less than a year after it emerged, bruised and battered, from an ill-fated foray into electricity retailing. Announcing a net profit of $16.1 million for the six months to December 31, Natural Gas Corporation chief executive Phil James said all the company's business units had performed with distinction, and sales in natural gas, gas liquids and electricity generation had all increased.

F&P APPLIANCES

Did not report during this season

FLETCHER FORESTS

Fletcher Forests had a $302 million loss for the first half after further write-offs of its Central North Island forestry partnership. Analysts said the result was slightly disappointing, despite the company's earnings being more or less in line with forecasts.