Credit ratings service surprises with NZX

By Duncan Bridgeman

Friday 23rd July 2004

A credit rating service that deemed Enron and Parmalat financially risky years before their accounting scandals surfaced has run its microscope over NZX companies and come up with a few surprises.

Brisbane-based Rapid Ratings has ranked Sky Network Television as the lowest-risk investment, highest-rated stock on the market among the top 50 by market capitalisation.

Its latest analysis also boosts Trust Power's rating to an investment grade B1 and describes Telecom as "without doubt" the best-performing telecommunications company among the seven countries Rapid Ratings investigates.

At the other end of the spectrum, wood processors Carter Holt Harvey and Tenon carry the worst ratings, E1 (17) and E1 (19) respectively, despite both companies' recent efforts to restructure their businesses.

Rapid Ratings chief executive Patrick Caragata said the NZX top-50 index was in good health, scoring an investment grade rating of B3.

However, the rating would be significantly higher if Carter Holt, which represents about 10% of the index, was taken out.

About 40% of the top-50 companies on the market indicated a positive outlook while 37% showed a negative outlook, he said. The other 23% were stable.

"This could be telling us that we are in the midst of an upturn in the cycle; the question is are we peaking here or do we have further to run beyond 2004?"

Touted as an "early-warning system," Rapid Ratings assesses 62 financial ratios gleaned from companies' financial statements.

It then benchmarks them against data from more than 250,000 companies over 30 years.

Using only its short-term credit rating, which is the core of its proprietary software, Rapid Ratings has correctly anticipated the deterioration of companies leading to either serious financial distress or demise. Examples were the financial distress of HIH Insurance, energy company Enron, Air New Zealand and AMP, among others.

Caragata said Sky TV scored an excellent rating of A3 (87) based on half-yearly data.

The company had pulled itself up from a below investment grade D3 to its current high quality/low risk rating in just two years with a dramatic turnaround in profitability.

"Both upstream (earnings before interest and tax) and downstream (net profit) profitability are now world class," Caragata said.

While most investors had followed the signals that the company was returning to profitability, the rise in share price lagged the turnaround in fundamentals by about a year, he said.

Telecom, which slipped to an A4 (84) rating from A3 (88) last year, was still regarded top of its class, with its performance consistently operating within 1-2% of its long-term trend.

Telecom's performance rated the best of any of the telecommunications companies in Australia, Singapore, the US, Canada and the UK, Caragata said. However, the share price had suffered, largely due to institutions going significantly underweight in the stock following the "telco wreak" in 2001.

Caragata said the irony was that Telecom had not entered the 3G race with the same gusto that saw many telcos regarded as high-risk, high-tech stocks that were no longer seen as utilities.

"The re-weighting often did not reflect the credit risk quality of many of these companies."

Conversely, notwithstanding its efforts to restructure since 2001, Carter Holt Harvey had continued to deteriorate, he said.

The company was systematically weak across the board, after poor profit performances over the last three years, he said.

On the flip side, the company's cost structure was starting to show improvement, a signal the recent restructure was paying off.

The problem was, according to Caragata, the restructuring started far too late. "They should have started in 1997 ... it's an easy thing to say but we see that trend over and over again not just in New Zealand but in other countries as well."

Not everyone shares the same view. Better-known ratings agency, Moody's Investors Service, has placed its Baa3 long-term rating on the stock on review for a possible upgrade.

Brokerage ABN Amro has upgraded its recommendation on Carter Holt to "buy" and raised its target price to $NZ2.60 a share. The sale of Carter Holt's entire forest estate and contracting back the required volumes would probably attract a significant re-rating of the stock, analyst Dennis Lee said.

"In our view this is a highly probable outcome."

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