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Analysts downgrade earnings amid deepening business pessimism

Monday 2nd September 2019

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Despite a solid earnings reporting season from NZX-listed companies, analysts are pulling back their forecasts for the coming year as businesses generally remain in a deep funk.

In late July, analysts were expecting median earnings growth for the 2020 financial year of 5.5 percent but they've cut that back to 4.2 percent now, says Mark Lister, head of wealth research at Craigs Investment Partners.

“Before the reporting season, 73 percent of NZX 50 companies were forecast to grow earnings in 2020 but that forecast has declined to 67 percent,” Lister says.

ANZ Bank's latest survey showed headline business pessimism deepened to its weakest level since 2008 and firms' expectations of their own performance are now negative too.

The survey was “ugly from back to front and left to right,” Lister says.

A key message he took from the survey was that pricing expectations fell even as price pressures rose.

“Revenue growth is getting a little harder to come by – it's still growing but it's not growing to the same degree.”

Costs from wages to local body rates are rising and the falling New Zealand dollar is pushing up the cost of raw materials costs and petrol - anything that is imported.

The New Zealand dollar started the week below 63 US cents, down more than 6 percent from where it began this year.

The equities market had a strong week, the benchmark S&P/NZX 50 Index gaining 1.3 percent, but it was down nearly 1 percent for August.

“The best NZX 50 performers during August tended to be the companies that produced strong results or positive trading updates,” Lister says.

Kathmandu shares, up 22.5 percent in August, were the month's best performer after a profit upgrade early in the month when the company said annual profit rose as much as 13 percent.

The outdoor equipment chain said normalised net profit was $55.5-$57 million in the year ended July 31, up from $50.5 million a year earlier.

Kathmandu will report its actual results on Sept. 18.

Mercury NZ, with shares up 13.6 percent, and Contact Energy, up 11.3 percent were the second- and third-best performers after producing solid results.

“All the power companies had very good results but they wouldn't have been up as strongly as they were if it was just results,” Lister says.

“On the one hand, they've done a good job of the things within their control,” but they are also benefiting from “insatiable demand” for their dividend yields.

They received a very brisk tailwind early in the month from the Reserve Bank which on Aug. 7 cut its official cash rate by 50 basis points to 1 percent, making the interest available from investments such as term deposits even more meagre and the yields available from utility stocks look juicier.

Those yields benefit from being predicable and reliable, Lister says.

Mercury is paying a final dividend of 9.3 cents per share, taking the annual payout to 15.5 cents, up from 15.1 cents the previous year. Mercury shares ended August at $5.185.

Contact is paying a 23 cents per share dividend, taking the full-year payout to 39 cents from 32 cents the previous year. Contact shares ended the month at $8.38.

At the other end of the spectrum was cinema software company Vista Group whose shares tanked 35 percent after it downgraded expected annual revenue growth from its core Vista Cinema and Movio businesses to 14-18 percent from previous guidance of 20 percent as revenue from several large projects slips into the next financial year.

Overall group revenue growth is expected to be 10-12 percent for calendar 2019, the company says.

The downgrade follows five consecutive years of 20 percent-plus revenue growth and the 23 percent growth achieved in 2018.

Another high flyer, A2 Milk, was the second-worst performer, despite reporting a 47 percent jump in annual net profit to $287.7 million on a 41.4 percent sales increase.

“It's all great stuff but expectations were very high in the sense that the share price has performed extremely well,” Lister says.

“It was always going to be a challenge to deliver what the market was looking for” but the market has reacted to the company's comments that it will be spending more on marketing, suggesting margins could fall.

“You can argue that both ways. If you've got faith in the management, the product, the business and the opportunity, they should be spending money, shouldn't they?” Lister says.

“They should be doing everything they can to grab that opportunity. But obviously, that investment comes at the cost of size of margins and bottom line profits over the next two or three years.”

As well, “a lot of investors in that stock are quite fickle. They're there for the near-term gains,” and such volatility is par for the course, Lister says.

“I haven't lost faith in A2.”


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