Stand by: earnings season good news might not last
And they are off!
The half-yearly earnings reporting season for New Zealand’s listed companies kicked-off on Thursday 10 August with the first horse out the gate being Vital Healthcare Property Trust. Vital, a specialist owner of healthcare property, announced a seemingly healthy 18% lift in net property income for F23, 99% occupancy in its properties, a weighted average lease term of 17 years, $255mn of divestments and one and half tonnes of CO2e of greenhouse gas reductions. Looks OK to me… One would have thought that such a good result would be a sign of a positive earnings season and a decent share market reaction. Au contraire: as I write this article with two days left, the benchmark New Zealand share market index, the S&P/NZX 50 Gross Index (NZ50G), comprising New Zealand’s 50 largest listed companies, has given up all of its gains (notwithstanding they’ve been comparatively meagre) for the year so far!
I’ve had to look back at the Bloomberg screen and it looks as if the New Zealand share market hasn’t had such a bad performance in a reporting season since 2015, with the NZ50G index down more than five percent since the start of the month. The sell-off has been driven by a number of factors, including investors concerns about the effect on companies’ performance of persistent and broad-based cost pressures, rising interest rates, and further economic slowdown both here and overseas – China in particular given its significance to NZ’s trade. The general election, which mainstream media tells us is neck and neck between the centre-left and centre-right blocks and is looking likely to be hotly contested in October doesn’t help matters either. Contrary to what one might infer from the weak share market performance of late, corporate profit margins have so far recovered and/or held-up nicely, as they have largely been able to pass on cost increases to customers. But research analysts and local fund managers are warning that this good news may not last, and one should consider taking profits on their winners. With the NZ50G now trading on a forward price-to-earnings ratio of nearly 23 times, according to Bloomberg, valuations look to be somewhat complacent against the challenges ahead. That’s share market speak for “expensive”. Investors are confused by the current economic cycle, which has failed to play out as they had expected, and this appears to be reflected in the earnings outlook.
After Vital, Contact Energy was the first major listed company to report earnings a week later. Net profit was up a strong 16% driven by higher electricity prices and a profit on the sale of its Te Rapa co-generation plant. This sale keeps Contact on track to be over 95% renewable by 2027. It wasn’t much of a revelation to hear the past year saw the highest hydro inflows across the country since Contact listed in 1999 with North Island rainfall the highest on record. This heavy rainfall and subsequent water reserves depressed spot prices and Contact bought excess renewable electricity instead of generating it via its thermal assets.
Other electricity companies faced similar challenges, as excess rain depressed pricing. Mercury Energy had to spill more than 1,000 GW hours’ worth of power during the year to keep its hydro lakes within their consented operating limits. Weird huh? The rainfall was good news for Genesis Energy, which is often tarred with the brush of being our dirtiest gentailer given it owns the fossil-fuel (actually imported coal!) powered Huntly power station. Favourable hydro conditions led to 65% of Genesis’ generation coming from renewable sources, the highest proportion since the company was formed in 1999.
Isn’t it great to see travel coming back! Auckland Airport results reflected a more normalised environment, international punters are coming back to Sky City and Air New Zealand had it is second highest revenue ever! That’s what happens of course when fares are on average 35% above those from 2019…The country’s national airline is making so much money they announced a special dividend. Sadly, it doesn’t look like it will be able to repeat this growth in the coming year given it was off a much lower base last year as the world came out of the restrictions related to the covid pandemic.
Speaking of special dividends, Vector announced one following the successful sale of half of its metering business. Not that it did much to move the share price. That seems to be the recurring theme from this month’s earnings season – announce something good and your shares are more than likely to sell off.
A case in point, we had Channel Infrastructure’s CEO and CFO in the office on Tuesday. For a now very predictable business that has pivoted to a 100% import only terminal model (so predictable in fact that the company can commission an independent report that forecasts the business model out to 2050) it seems odd the share price is down since they reported. Go figure!
It does say to me, and our investment team here at Hobson Wealth agrees, the outlook for the New Zealand share market remains uncertain, and investors should be prepared for further weakness and potential volatility as we come into the October general election.
On a much more positive note, spare a thought for the dads on Father’s Day this Sunday. If my children are reading this, I saw a very nice present I’d like (but might be a bit above your budget): the Candela C-8 Polestar boat, a hydro foiling electric-powered zero-emission 28-foot power machine that’s the ocean equivalent of an EV. Nice for some…