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'Tis not so sweet now as it was before

By Shoeshine

Friday 14th February 2003

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Codes are useful only so long as the users agree on what they mean. Down these parts chief executives seem to have entirely different definitions of "satisfactory."

Fletcher Building's Ralph Waters, for instance, reports a 105% rise in first half earnings and says the full year will be satisfactory if the company earns only as much in the second half as it did in the same half a year ago.

Briscoe Group's Rod Duke is equally hard to please. Sales in the January year were up 16.6% to $295 million but he predicted the earnings result would be merely satisfactory.

His counterparts at The Warehouse, however, declared themselves satisfied with second quarter sales in Auckland and Wellington. But the market found national growth of a mere 3.2% highly disappointing and slashed $270 million from the company's market value.

Overall, the reporting season so far has shown corporate New Zealand in good heart but the omens for the second half of this year don't look nearly so promising.

Of the five top-10 companies that have reported ­ Carter Holt Harvey, Contact Energy, Fletcher Building, Fletcher Forests and Telecom ­ none has been bold enough to predict stronger earnings in the current half year, despite the unexpected strength of a range of economic indicators.

In Telecom's case the so-so outlook simply reflects the maturity of the New Zealand market. Earnings from local operations were up a mere 2.2% to $776 million. Revenue is still shrinking but the carrier is chopping costs even faster.

The big questions for the building products companies are when and by how much the transtasman construction markets will slow down from their current high activity levels.

Fletcher Forests' first half recovery was driven mainly by North American sales so neither the exchange rate nor a war will be welcome.

Both Carter Holt and Fletcher Building have noted signs of weakening in the thirsty land across the Tasman and a war with Iraq could send the Australian economy into a steep decline, particularly if the easy victory pundits are predicting doesn't come about and the US and its allies get bogged down.

For Fletcher Building's Waters that could prove highly embarrassing. This week he rubbed analysts' noses in it for worrying about the effects of spending $760 million buying Laminex "at the top of the market," saying the company expected to have to pay the $20 million top-up price due if Laminex meets earnings targets.

If it doesn't the market is likely to give Building the same harsh treatment it gives anybody who fails to live up to expectations.

Meanwhile, all eyes are on the exchange rate.

Both Carter and Building noted the strength of the kiwi, against the Australian dollar in particular, will affect earnings.

An ABN Amro research report a couple of weeks ago gave the listed sector a pretty good report card for hedging but that protection, as Fonterra noted this week, lasts only for so long.

Fonterra got a bad press for cutting the May year milksolids payout forecast by 10c to $3.60 a kilogram. Some "industry watchers" were quoted saying this was evidence of bad management but there isn't much CEO Craig Norgate can do about falling international prices or the dollar's rise.

Taking a longer perspective, anything above $3 looks like good times for cockies so there's a way to go yet before the pundits can call a "rural downturn."

Among the five top-10 companies still to report the picture is arguably just as mixed.

The exception will be Fisher & Paykel Healthcare, which reports today. It does most of its business in the US and Europe and although its earnings are well-hedged for now it can't be too comfortable with either the currency position or the prospects for those economies further forward, especially if there's a war with Iraq.

Sky City is next up on Tuesday. It doesn't need to worry too much about the exchange rate in itself but a rising New Zealand dollar makes it more expensive for foreigners to visit and the travel-suppressant effect of a war is another potential negative.

Wednesday brings reports from Independent Newspapers, which won't want the recent recovery in advertising to evaporate in the new mood of business spending caution a war is likely to foster, and from Sky Network Television, which is enjoying the cheaper local dollar bill for its predominantly US dollar-denominated programming but whose share price remains remarkably unexuberant.

Auckland International Airport reports on February 27 and is expected to turn in yet another record result. But an expected slowdown in visitor growth numbers, albeit only from 5.5% to a still-healthy 3.3%, will cool things down in the second half. Again, an Iraq invasion could see visitor growth go into reverse.

Hence the NZSE40 index is hanging around a seven-month low. Wise investors are keeping their powder dry for a bit of good cheap stock-picking later on in the year.

***

No doubt there's nothing in it, but the family trust of Tower chairman Colin Beyer and his brother, Guinness Peat Group director Trevor, bought 11,000 Tower shares on December 13.

One week later GPG began buying Tower stock. It was "outed" by Tower on January 27 and now has 9.9%. Tower's share price has risen by 26% since December 13 so the brothers have done OK.

As Colin Beyer didn't return phone calls Shoeshine hasn't been able to check who knew what and when.

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