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A2 shines, Fletcher disappoints in earnings season for high-priced NZ stock market

Thursday 1st March 2018

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A2 Milk was the standout performer in New Zealand's latest earnings season, posting a jump in profit and a new partnership that went some way to justifying its stratospheric shares. But for other companies on the NZX 50 Index, their results weren't flash enough to justify the high multiples their stocks trade at, while the extent of Fletcher Building's losses shocked investors.

A2 Milk posted a 150 percent gain in first-half profit and announced a strategic partnership with dairy giant Fonterra.

“After a year in which the stock price was already up by 300 percent it then delivers a result which, on every metric, was ahead of market consensus,” and follows that up with the deal with Fonterra, said Andrew Bascand, managing director of Wellington-based funds manager Harbour Asset Management.

"There were quite a few surprises," but overall the earnings season was mixed, he said. A2 shares may have more upside. "Even with the 42 percent appreciation over the month in that share price, I don’t think it’s possible to say those shares are fully reflecting the long-term potential of what this company could deliver for New Zealand."

A2 last traded at $13.12 and has gained 64 percent so far this year. 

Fletcher, which announced bigger losses at its Building + Interiors unit last month and lost its chairman Ralph Norris, fell to $6.39, the lowest level in more than five years, having dropped 17 percent this year.

Bascand said investors had been expecting Fletcher Building’s new chief executive Ross Taylor to carry out an in-depth review of some of the previous contracts and progress after losses at the company’s B + I unit. However, the market was “totally blown away and shocked” by the extent to which some major projects at Fletcher Building had been mispriced.

Fletcher Building reported a first-half loss, reflecting losses at its B+I unit and also said profit was down at its other construction businesses and in building products. Taylor said he would provide a more detailed assessment of Fletcher's businesses in June and has hinted there could be asset sales or other changes to the company's balance sheet.

Brad Gordon, an investment adviser for Hobson Wealth Partners, said the construction sector "obviously was a major disappointment,” falling well short of expectations.

Steel & Tube, which supplies steel products to the building trade, posted a 64 percent decline in first half-profit as it wrote down the value of inventory and bore the cost of restructuring its business.

"There are some major issues in the sector, with import competition and obviously contracts with too tight margins," Gordon said.

Steel & Tube last traded at $2.09 and is down 0.5 percent since the beginning of January. 

Bascand said companies that are facing some structural headwinds or disruption also disappointed, pointing to Sky Network Television, Trade Me Group and Chorus.

Sky Network Television saw a lift in its first-half net profit but slashed prices in an effort to slow an exodus of customers quitting its pay-TV service in favour of cheaper on-demand rivals and cut its interim dividend. The stock last traded at $2.48 and is down 10 percent so far this year. 

Trade Me posted a flat result as profit growth was less than revenue growth and said it expects full-year profit to grow at a slower pace than last year.  The stock last traded at $4.38 and is down 9.1 percent so far this year. 

Chorus reported a 29 percent decline in first-half profit as the telecommunications network operator faced heightened competition for customer connections from the likes of Spark New Zealand's wireless technology, and has signaled plans to trim its workforce by a tenth. The stock last traded at $3.74 and shed 11 percent since early January.

Both Bascand and Gordon were upbeat on the retirement sector after a solid result from Summerset Group, which lifted annual earnings 44 percent, ahead of its forecast, after the retirement village developer and operator built more units and improved its margins. Summerset last traded at $6.34 and is up 16 percent so far this year. 

While the market was disappointed when Metlifecare - New Zealand's second-largest listed retirement village operator - posted a 66 percent drop in first-half profit, both Bascand and Gordon said the company is dealing with some legacy issues. They said, however, there may also be a sentiment issue as the Auckland housing market is showing signs of slowing and all of Metlifecare's assets are Auckland based. It last traded at $5.91 and has shed 2.5 percent. 

Gordon noted that some tech companies like Vista Group did better than expected. The cinema software and applications company, posted a 57 percent jump in full-year operating profit as more cinemas bought its products and sales growth ran ahead of costs. Vista shares last traded at $2.70 and have lost 4.2 percent so far this year. 

Grant Williamson, a director at Hamilton Hindin Greene in Christchurch, said the market was looking slightly expensive in the wake of earnings season but given that interest rates are forecast to remain at record lows until well into 2019 there aren't a lot of alternatives.

"On a historical basis, market valuations are probably a little bit stretched on a price to earnings ratio but investors have to take into account other factors" like record low-interest rates when it comes to investing, he said. 


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