NZ stocks getting cheap, not yet 'screaming buy'

Thursday 10th July 2008

New Zealand stocks snapped two days of gains amid further signs of an economic slump. While value is emerging, the market isn�t yet a �screaming buy,� according to First NZ Capital research manager Barry Lindsay.

The NZX 50 Index fell 1.6% to 3128.443, the biggest slide since July 3. The biggest stocks in the market, Telecom, Contact Energy and Fletcher Building paced the decline. Hallenstein Glasson Holdings fell 6% after the clothing chain cut its profit forecast by 30%.

�Value is improving but it doesn�t yet look like a screaming buy,� Lindsay said in a Businesswire interview. �It does look as though the market has a little bit more downside.�

A survey today showed New Zealand manufacturing activity dropped in June amid soaring costs for raw materials and less ability by companies to raise prices. Business NZ chief executive Phil O'Reilly said manufacturers are bracing for the possibility a recession will extend through to the end of 2008.

The New Zealand Institute of Economic Research�s Quarterly Survey of Business Opinion showed companies became the gloomiest about profits in more than 25 years.

Still, there�s evidence the market is bottoming out, according to First NZ Capital. A measure of the core P/E ratio for the stock market shows stocks on average are trading at 13 times prospective earnings, down from about 17 times a year ago. In the past 15 years, the P/E ratio has sunk as low as 12 times.

Stocks have also become better value on a measure of earnings yield to government bond yields, at 0.8, versus an average 0.9 to 0.95, Lindsay said. The measure has dipped to 0.7. Stocks look less attractive versus cash rates, reflecting the central bank�s decision to keep the official cash rate at 8.25%, a record high, to quell inflation.

Better Prospects

Lindsay said retailers aren�t yet attractive, though there are companies with better prospects, including Fletcher Building, which is cheap versus its peers in Australia, �notwithstanding the rather dismal outlook for housing in New Zealand and Australia.�

Contact Energy, the biggest utility on the NZX 50, is good value, with a price target at First NZ Capital of NZ$10.40. The stock fell 0.9% to NZ$7.55 today. Casino operator Sky City Entertainment Group, which has a resistance level of about NZ$3, fell 2.3% to NZ$3.02 today. The company�s restructuring should help it to lift earnings, Lindsay said.

Fisher & Paykel Healthcare, which sells its breathing aids into the US market, stands to benefit if the New Zealand dollar falls, as expected, he said.

Listed property investors such as AMP NZ Office Trust and Kiwi Income Property Trust may also revive, as they offer �sky-high yields,� Lindsay said. Kiwi Income fell 0.9% to NZ$1.13, having been hammered on concern about returns from shopping malls.

By Jonathan Underhill

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