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Opinion: Batten down the hatches or full steam ahead - Take your pick!

By Andrew Macdonald of NZPA

Friday 20th August 2004

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Most of the financials are in for the June quarter and what a bumper reporting season it's been so far.

There's been profits, lots of profits, with brokers waxing about the performances of stocks linked to the construction sector.

Why?

Because they - they being stocks like Fletcher Building, Steel & Tube and Nuplex - have been gems in a buoyant sharemarket.

Now, some pundits have said the economy will slow - its key driver, the red-hot property market, has cooled and the slap-up run of listed firms will wane.

Others disagree.

Take Macquarie Equities' investment director, Arthur Lim, who has the sharemarket growing by 12 to 15% in the year ahead.

He said firms like market heavyweight Telecom would continue to underpin the NZSX-50 index's performance, on which it has a 27% weighting.

Early this month, Telecom posted a June year net profit after tax (npat) of $754 million, up from $709m the year before.

Analysts had forecast a net profit of between $733m and $762m.

Telecom shares had rallied strongly in anticipation of higher dividend payouts, duly delivered, but have eased back to $5.84. They peaked at $6.27 shortly after the result was announced.

"Here's the interesting thing...on the numbers that the company has given the market, we are expecting a fully franked dividend of 39c for the next 12 months," Lim said.

"Put that against the share price of $5.89 and you getting a gross dividend yield of just under 10%," he said.

"Anybody who has sold in the last six months really hasn't done themselves a favour because the price just keeps going up."

Lim said other standout performers this reporting season included Steel & Tube, which posted a record June year npat of $28.5m, up 25%.

Other market watchers gave the following stocks the nod:

* Fletcher Building posted a spectacular June year npat of $240m, up 43% on last year's $168m.

* Chemicals and resins manufacturer Nuplex' June year npat rose 38% to $28.4m.

* Insurer AMP booked a June half npat of $A378m, up from a $2.2 billion loss for the same period the previous year.

* Contact Energy issued a nine months to June npat of $100.6m, up 36% on the same period last year.

* Medical supplies firm Ebos Group delivered a 31% increase in June year npat to $8.4m.

* Courier firm Freightways reported a npat of $15.4m for the June year, up from the $13.2m it had forecast.

* Sky Network TV posted a June year npat of $35.3m, against last year's $694,000.

With migration down, the dollar, oil prices and interest rates up and the property market easing, economic headwinds are on the horizon.

But plenty of companies routed in the domestic economy, such as Fletcher Building and Freightways, remain optimistic.

"From Freightways' viewpoint the domestic economy remains favourable and we are unaware of any material changes to our operating environment that may negatively impact on our performance," managing director Dean Bracewell said.

"Subject to economic and business factors beyond our control, the outlook for Freightways, its shareholders and all other stakeholders remains positive."

MasterCard's economic adviser for the Asia-Pacific region, Yuwa Hedrick-Wong doubts the New Zealand sharemarket can maintain its double-digit growth in the year ahead.

"The main reason is due to the uncertainty related to the interest rate outlook," Hedrick-Wong said late last month.

Growth would slow to a high single digit rate, he reckoned.

Could it be the days of halcyon trading fuelled by a robust economy and heady gross domestic product growth are at an end?

Since mid-August 2003, the NZSX-All capital index measuring all stocks has risen 16.5% to 922.15 on August 18.

Where to now for the the index, which strips out the dividends?

Forsyth Barr Frater Williams broker David Price said rising costs, many whipped along by global events, would see some firms report softer results in a cooler market.

"You start adding things in like... electricity, fuel and currency on top of wages," Price told NZPA.

Fisher & Paykel Appliances was an example of a firm that produced a superb 2004 result but was grappling with rising costs ahead, he said.

On Monday, Appliances' managing director, John Bongard, said costs - particularly raw materials such as steel and plastics - had adversely affected margins thus far in the 2004/05 year.

Like many exporters, it was also having to deal with the higher dollar as hedging contracts made a couple of years ago run out.

He warned the firm's profit for the year to May 2005 would be a flat $80m.

Investors punished the stock, as it lost 13% in the week.

ABN Amro Craigs broker Matt Willis said Appliances' warning clearly flagged a slowdown hanging over the sharemarket that was likely to be even more pronounced in Australia.

"If it's happening there it's inevitable that it'll happen here."

Willis picked growth on NZX to slow to high single digits - still a reasonable return in most books.

"Another factor you have to bear in mind is currency as we're still an export nation," Willis said.

"We probably haven't seen the impact of the high currency start flowing through to earnings... There's plenty of currency hedging that will start rolling out in the year ahead," he said.

However, it wasn't all doom and gloom.

Many companies have increased dividends and are returning investors healthy, tax-paid yields.

"The market's not overpriced and that's the key," Willis said.

"It's pricing in a slowdown and I don't think there's much downside if the economy slows and starts to bite on corporate earnings.

"There's some protection there in that stocks are trading at reasonable levels."

Factbox

Points of note in the reporting season thus far:

* Lyttelton Port Company (LPC) posted a 3% increase in its June half net profit after tax (npat) to $12.02m.

* Ports of Auckland said its June year npat rose 20% to $57.2m.

* Agriculture equipment maker Skellmax Industries said its June npat fell 8% $11.6m.

* Insurer AMP booked a June half npat of $A378m, up from a $2.2 billion loss for the same period the previous year.

* NGC Holdings posted a June year npat of $84.5m, down 43% on the previous year, which included a one-off gain of $78.9m from the sale of generation assets.

* Contact Energy issued a nine months to June npat of $100.6m, up 36% on the same period last year.

* Retirement village operator Metlifecare today issued a June half npat of $8.15m, up 30% on the previous same period.

* Financial services firm Tower, in difficulties two years ago, today said it had repaid all of its senior debt two years early.

* Electricity firm TrustPower posted a narrower first quarter npat of $15.7m, down from $17.2m for the same period last year.

* Medical supplies firm Ebos Group delivered a 31% increase in June year npat to $8.4m.

* Wood processor Tenon today reported a net loss of $42m for the June year.

* Independent Newspapers Ltd (INL) reported an 82% drop in June year npat to $70.94m.

* Michael Hill International posted a 30% increase in npat to $15.06m for the June year.

* Turners Auctions June half npat was $3.59m, up 12.8% on the same period last year.

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