MARKET CLOSE: NZ shares down, Fletcher and Sky TV drop on earnings, Tower gains on rival bid

Wednesday 22nd February 2017

New Zealand shares dropped, dragged lower after Fletcher Building's first half earnings disappointed, with A2 Milk Co and Sky Network Television also falling.

The S&P/NZX50 Index fell 53.22 points, or 0.7 percent, to 7,062.47. Within the index, 32 stocks fell, 16 rose and two were unchanged. Turnover was $148.7 million.

Fletcher Building, the second biggest stock by market cap, led the index lower, down 5.2 percent to $9.68. The company posted a 2 percent gain in first-half profit to $176 million that included unexpectedly weak earnings from its construction division, especially given its $2.7 billion backlog of work. Earnings before interest and tax (ebit) was $294 million, from $288 million the previous year. The shares had soared 54 percent in the past 12 months on optimism it would benefit from a boom in Auckland residential construction.

"Our market has been driven lower by what was a massive ebit miss from Fletcher, at one stage it did trade down to $9.45 so it's trading back up," said Peter McIntyre, investment adviser at Craigs Investment Partners. "It was well below what we were forecasting, the consensus was $333 million and the New Zealand construction division really drove that result. Fletcher is a company that tends to over-deliver, and we haven't seen that delivery today. Usually the surprise is to the upside not the downside, so we've seen a lot of selling today."

A2 Milk Co dropped 4.5 percent to $2.33. The milk marketer's chief executive and chair have sold down their stakes, less than a week after reporting first-half profit more than tripled.

"It's sent the market into a bit of a tailspin really, we've seen good volumes running through once news got out," McIntyre said. "They had a sound result, so whether the market has perceived this to be top of the market stuff - we've seen this historically with some companies as well when some CEOs or chairs sell their shares. They've completely forgotten about the result, the market has tended to overreact and we know A2's a very volatile stock, even more so since the Bellamy's issues towards the later part of last year."

Sky Network Television fell 2.7 percent to $4.35 and Spark New Zealand rose 0.6 percent to $3.49. Spark and 2Degrees have been granted a stay on the proposed merger between rival Vodafone New Zealand and pay-TV operator Sky to consider their legal options. If the Commerce Commission clears the merger tomorrow, it won't come into effect immediately, giving the opposing parties time to read the reasoning behind the decision and decide whether they will pursue a legal challenge.

Separately, Sky today posted a 32 percent drop in first-half profit to $59.3 million as content costs increased, and revenue and subscriber numbers fell. The pay-TV operator is looking to team up with telecommunications company Vodafone as it faces increased rivalry from online streaming video services such as Netflix and Spark's Lightbox.

"I don't think anyone really knows where that's going to go, it will provide a lot of interest for the market tomorrow," McIntyre said. "You can see with Sky's result today the struggles it's having maintaining what was a very successful business model. Technology and competition is really catching up with it, we saw today churn and weaker subscriber numbers coming through in that result - Sky really needs Vodafone to continue what they see as their growth strategy."

Mercury New Zealand was the best performer, up 1.3 percent to $3.09, and Metlifecare gained 0.9 percent to $5.49.

Ebos Group advanced 0.5 percent to $18.20. The pharmaceutical and animal health products maker's recent acquisitions helped it lift first-half profit 7.2 percent to $68.8 million and fatten its dividend to shareholders, while also bolstering the outlook for annual earnings to be at the upper end of a previous projection for growth of 7-to-10 percent.

Meridian Energy rose 0.2 percent to $2.67. A strengthening performance in its Australian business and less dry period insurance thanks to a wet spring and mild winter saw Meridian record a 6 percent lift in operating earnings for the six months to Dec. 1, allowing an increased interim dividend and a further special dividend payment.

Outside the benchmark index, Tower jumped 16.7 percent to $1.325. ASX-listed insurer Suncorp Group has built an 11 percent stake in Tower and put forward a rival takeover offer for the NZX-listed general insurer. The offer, worth a total $219.3 million, trumps a $197 million deal already on the table and backed by Tower's board and major shareholders Salt Funds Management and Accident Compensation Corp to sell to Canada's Fairfax Financial Holdings at $1.17 apiece.

"The volume that has gone through today has been quite significant, there's a bit of a bidding war developing here," McIntyre said. "I think a number of investors who held the stock below $1 were wondering what was going to happen next. The shares trading above the offer price would suggest there's more action to come."

BusinessDesk.co.nz

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