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The latest results season has proven better-than-feared on both sides of the Tasman

Wednesday 7th September 2022

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What does this mean for the outlook for the New Zealand and Australian stock markets?


By Greg Smith, Head of Retail at Devon Funds


The earnings season which has just concluded will be remembered as one of the more pivotal ones in recent years. It comes after a period of market volatility in 2022, during which a significant amount of “bad news” was priced in during the first six months of the year. Markets rebounded in July and through much of August, but investors have been seeking some vindication that this has been justified, as well as an assessment of how companies are currently placed from a valuation perspective.


With many commentators, analysts and economists talking up the prospects of a recession, there has been keen interest on the view from the “coal face” in terms of how the corporate sector is seeing the landscape. Investors have also been focussed on the ability of corporates to protect their margins given still elevated levels of inflation. Alongside this, a primary question has been to what extent supply chain pressures (including the scarcity of labour) are easing.


There has also been interest in how Covid beneficiaries and “reopeners” see the environment as pandemic effects dissipate.  


Results have in most cases also been impacted by factors other than Covid. The war in the Ukraine has exacerbated inflationary and supply challenges, while labour shortages have remained prevalent. Extreme weather has also been a factor for some companies. The impact of rising interest rates and softening property markets have also added to the mix whilst political tensions, and global international economic concerns, particularly around China, have further muddied the waters.


This has left investors with a lot to unpick to try and make sense of results during the reporting period, and to seek clues about the outlook as trading conditions should start to normalise to a degree.


New Zealand


Broadly, the earnings season has shown that with markets still on edge about the economic landscape, disappointments have not been tolerated, particularly when valuations are elevated. Such situations have however been in the minority.


Over the New Zealand reporting period (which began on 15 August), our domestic stock market lost 0.7%, although this is more reflective of offshore sentiment headwinds (particularly following Jerome Powell’s hawkish speech at Jackson Hole) than anything else. Indeed, arguably a better-than-feared reporting season has helped the kiwi market hold up better than many other global indices. By way of comparison, the S&P500 is down nearly 7% over the same period to the end of August.




Results from the electricity companies were generally solid, with Contact kicking off proceedings. While reporting a dip in profitability, investors were receptive to the news that underlying earnings are expected to increase to $720 million over the next four years. Strong renewable generation was a feature of the result and this is bolstering the outlook. Another positive was that the company announced it was in discussions with Tiwai about extending the contract at the smelter out past 2024. An extension would be positive for Contact (and Meridian), along with the NZ economy generally.


The numbers and outlook were similarly strong from Mercury NZ, which had something of a “transformative” year. Mercury continued a track record of growth in the dividend, which has now increased for 14 consecutive years. Genesis Energy also delivered a good rise in operating earnings and an upbeat outlook.


For the reopening stocks it was something of a mixed bag. Air New Zealand came out with its Covid-impacted result, with the company reporting a loss before one-time items and tax of $725m. Despite this, investors are encouraged to see that the


borders are now open and the management at Auckland Airport are optimistic of a recovery in passenger volumes over the next 18 months. The International Air Travel Association has meanwhile predicted that the global industry will recover to pre-pandemic levels in the 2024 calendar year.


Sky City released a result in line with guidance, with a number of positives. Capital expenditure is at historic lows, and the company is clearly enjoying much stronger operating conditions post the Covid restrictions. July and August were 110% of pre-Covid levels and the company is indicating that FY23 will be back to pre-Covid levels of profitability. 


Results out of the telco sector were robust. Spark New Zealand was a star, reporting a 7.6% lift in profits, with their mobile business the standout. The performance was all the more impressive given that roaming revenues were suppressed during the period due to closed borders. The highlight of the result was the growth in their dividend. Spark plans to lift it to 27cps in the 2023 June year. This is good news for yield-seeking investors.


A much-anticipated capital return was also announced following the $900m sale of the TowerCo assets. Spark is returning up to $350 million to shareholders through an on-market buyback. Around $350m is being held for growth initiatives, while the remaining $200m will be used to pay down debt to support an investment grade credit rating – the tower sale is effectively a sale and leaseback transaction.  


EBOS also came in with a great result. The medical supplies and animal healthcare company reported a 21.3% lift in underlying profit after tax to a record A$228.2m. EBOS is actually in its 100th year of operation, but continues to evolve as a business, completing five acquisitions during the period.

Fletcher Building rose, post its results. Investors have moved on from the gib saga, and the results showed that the company is producing materials as fast as it possibly can, and indeed looking to build further capacity. Net profit for the year surged 42% on revenues which rose 5%. Earnings before interest and tax came in at $756m, slightly ahead of the company’s $750m guidance. Margins rose to 8.9%, highlighting the company’s pricing power in an inflationary environment. Looking ahead the company wants to beat the 2022 earnings result by more than $100 million in FY23. 


One of the leading performers in the earnings season was Freightways. The express packaging company reported a 9% lift in annual revenues and revealed an acquisition across the Tasman which will allow the company to enter the Australian market “at scale.” Freightways is also displaying pricing power by passing on input cost rises to customers through higher prices.


Another company held across the Devon funds is Port of Tauranga which reported that full year revenues rose 10.9% while net profits gained 8.7%.. It was a stellar performance for the Port given ongoing supply disruptions. Tauranga’s competitive strength is that it can handle bigger ships. It is a pity however that red tape is getting in the way of additional capacity, with the consent process for the berth extension taking some time to work through.


In terms of results reactions, one of the best was saved for last. There was relief at A2 Milk’s results, with the infant milk formula company reporting a 42% surge in net profit, as the company’s key Chinese business performed much better than expected despite an ongoing decline in birth rates in that country. Revenues jumped nearly 20% and the company announced a big share buyback. A2 is positive about the outlook for 2023 with high single-digit revenue growth and margin improvement expected going forward. The shares rose but, have had a torrid time of it over the past couple of years.


Two notable absentees from the results season were Mainfreight and Fisher & Paykel, both of which have March balance dates.  Fisher & Paykel Healthcare did however issue a guidance downgrade. A huge pandemic beneficiary, investors are now looking to determine what the company’s long-term earnings profile looks like.


Despite rising interest rates, and elevated levels of inflation, corporate New Zealand still appears to be in good shape. Companies with strong, defensive business models, and robust pricing power appear to be doing the best, but there are also many companies which are leveraged to the ongoing reopening of the global economy. A weak currency has also been supportive for our exporters. Many companies are sharing the spoils with shareholders, through higher dividends and buybacks. What recession?




The Australian earnings season was also a positive one, and arguably contributed to a stronger relative performance in the ASX200 versus over those of other indices over the reporting period, which began on 27 July with results from Rio Tinto. The ASX200 rose 2.6% from 27 July through to the end of August versus a less than 1% gain for the S&P500, but behind a 3.9% lift for the NZX50.




At the top line, performances were robust, with 45% of firms hitting the mark, while 31% beat expectations according to Goldman Sachs. Demand remained strong across many industries, contrary to fears of a weakening economy. At the bottom line, 30% of companies met earnings per share projections and 28% came in ahead. Cost inflation has been a factor here, and those firms which have able to display pricing power were best able to protect margins. All that said, the earnings misses that did occur were generally fairly small.




Source: Goldman Sachs


Sector-wise, Healthcare was one sector leading the way in terms of positive surprises. CSL saw full year profits fall 5% to US$2.3 billion on revenue which was 2.9% higher at US$10.6 billion. CSL is nonetheless expecting a record profit in 2023, as plasma donation volumes return to pre-pandemic levels. CSL’s CEO said the company had “never been stronger.” Sleep apnea disorder and breathing devices manufacturer ResMed delivered a 12% increase in full-year revenue to US$3.6 billion. Net profits surged 64% to US$779.4 million. The company has benefitted from a product recall by Philips, a major competitor, which has seen ResMed capture market share. 

Ramsay Healthcare posted a 25% fall in profit before tax on sales which rose 3.3%. The group has been disrupted by Covid, but has a strong business, and sees underlying earnings growth in FY23 as a result of additional capacity and recent acquisitions in Europe. The market however has been perhaps more focussed on the move by private equity group, KKR, to vary the terms of their takeover proposal.


Resource stocks also generally reported ahead of expectations. The mining and energy sectors have been huge beneficiaries of elevated pricing during the pandemic, and this was reflected in results from the likes of BHP, Rio and Woodside. Whilst peak operating conditions are likely in the rear-view mirror, most management teams are optimistic about the outlook.


BHP’s underlying profit was a standout, coming in 26% higher, than last year, at US$21.3 billion. Leveraging off the resources price boom, the company also announced they are delivering capital returns of US$36 billion ($16.3 billion in dividends + the pay-out from the Woodside merger).


ASX 200 earnings beats/misses by sector.




Source: Goldman Sachs


Encouragingly, from a macro perspective , many companies reported that supply chain bottlenecks and logistic costs were continuing to “normalise”. However these are not back to a pre-pandemic state yet. Pricing power has therefore still been important. One of the more impressive results was from global pallets supplier Brambles which reported a 13.5% lift in profits and raised its dividend. The company is pushing through price increases to customers to offset input inflation (particularly soaring timber and freight costs).


At a time when many firms have been battening down the hatches, and cutting back on capital expenditures, success with these measures has meant that boards have been able to announce increased returns to shareholders through higher dividends and buybacks. 




Telstra’s results gave outgoing CEO Andy Penn a good send off. The telco reported full year underlying earnings increased 8.4% with a strong performance in mobile. A parting gift to shareholders was also the first increase in dividends since 2015.


Results from the banks also provided some cause for optimism around the Australian economy.  National Australia Bank reported that third-quarter profit rose 6%. Net interest margins slipped slightly, but the bank said that credit quality remained “benign.”

Results from the media sector also provided cause for cheer. Nine Entertainment came out with a 35% lift in profit, with a record result in TV and publishing.  Sales have also accelerated at The online auto classifieds posted a record full year result and lifted its final dividend. Revenues rose 19% while net profits raced 23% higher.


Some of the bigger disappointments came from the tech sector. Xero’s shares fell after management warned that net subscriber additions in the UK would “continue to be more subdued than we would like.” The company’s FY23 outlook was left unchanged, but the reaction highlighted the markets sensitivity to any sort of disappointment in stocks where the valuation is elevated, and with interest rates on the rise.


Many results from the retail sector (such as JB-Hi-Fi) were better than feared (and mirrored the strength of the consumer shown in retail sales prints). Still there is some evidence that consumers are “trading down” in some areas.


Overall, the reporting season in both New Zealand and Australia highlighted the general health of the Australasian corporate sector but plenty of operating challenges remain. Some companies will do better than others  and as such the importance of astute stock and sector selection remains as paramount as ever.


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