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First NZ Capital tips slower earnings growth for August reporting season

Thursday 2nd August 2018

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First NZ Capital anticipates smaller earnings growth for the majority of companies reporting in August amid ongoing signs that businesses are worried about profitability. 

FNZC analysts Paul Turnbull and Arie Dekker also forecast average normalised earnings before interest, taxes, depreciation, and amortisation to rise 5.9 percent, slowing from 12 percent a year earlier when A2 Milk Co and Mercury NZ provided upside surprises.

The forecasts are based on recent earnings revisions, with electricity generator-retailers Mercury NZ and Meridian Energy among nine companies that stock analysts are more optimistic about, while exporters a2 Milk and Comvita and refinery operator New Zealand Refinery were in the eight downgrades in what's still expected to be a positive reporting season. 

"We observe that earnings momentum for the stocks reporting in August was broadly balanced between upgrades and downgrades across the 12- month period to July 2018," they said in a note to clients. 

On a market capitalisation-weighted basis, which excludes A2 Milk and Fletcher Building due to a transition in analyst coverage, FNZC predicts ebitda growth of 4.5 percent compared to 2.8 percent a year earlier, when A2 Milk was excluded and Fletcher, Air New Zealand and Sky Network Television all posted weaker earnings. 

FNZC's earnings outlook comes as recent business surveys such as this week's ANZ Business Outlook and the Federated Farmers' farm confidence survey showed heightened concerns from the companies themselves. A net 45 percent of 340 firms surveyed in the ANZ survey for July expect general business conditions to deteriorate in the coming 12 months, a 10-year low. Importantly for earnings, the survey showed profit expectations dropped 4 points to net 16.8 percent negative. 

Regarding specific companies, based on earnings momentum and FNZC's expectations relative to consensus, Turnbull and Dekker identify positive earnings risk for stocks including Meridian, Mercury and Spark New Zealand. 

On Mercury, FNZC says extraordinary hydro inflows will dominate the 2018 financial year figures while on Meridian they said growth track guidance for Powershop Australia earnings and potential for new wind developments "could generate modest excitement." 

On Spark, the analysts expect broadband to remain subdued but see some scope for the telecommunications company to generate bigger mobile revenue than anticipated. 

They see negative earnings risk for stocks including Comvita, jewellery chain Michael Hill International, power company Contact Energy and NZ Refining.

They said Comvita recently announced the disbandment of the chief innovation officer role and a concentration of focus on its mānuka honey and bee products business. "In our view this could be symptomatic of low sales run rates across non-honey ingredient platforms in 2H18 that could weigh on FY18 performance."

On Michael Hill, despite it announcing its exit from the US and the winding down of Emma & Roe "these two businesses present margin risk in the short-term with the potential to surprise to the downside on reported sales weakness," they say. 

Turnbull and Dekker said Contact faces uncertainty related to erosion of LPG profitability but that risk is removed for FY19 due to the sale of Rockgas while on New Zealand Refining they said the company is "sensitive to dividends and the market may, therefore, dislike the possible (but prudent) choice to avoid an interim dividend payment."

Based on consensus forecasts, current market pricing of New Zealand equities remains close to cyclical highs, FNZC said. "The market is pricing in similar equity risk as it enters the August 2018 results season to what was priced in the period immediately preceding the February 2018 results season," said Turnbull and Dekker.  They note that the stock market has gained around 6.5 percent in that period. 


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