Reporting Season draws to a close

Now the reporting season is behind us we thought it would be useful to recap on how New Zealand and Australian companies performed during the past month, as they delivered their profit outcomes and guided the market as to their expectations of future performance.

The earnings season in New Zealand saw our local companies report profits broadly in-line with analyst forecasts. This was an important milestone for the NZX to have met because, after delivering a return of greater than 120% over the past 5-years, the tolerance for any disappointment here would have been low.  In summary, market earnings growth achieved by the S&P/NZX50G for the year to June 2016 was up 12.6% versus what was produced in the prior comparable period. Included in this were notably impressive results from companies Fletcher Building and Metlifecare. The outlook statements released as part of these results typically described the domestic operating environment in constructive terms, although any business with exposure to the Australian economy generally caveated their assessment by highlighting that conditions there have been more challenging. Subsequent to the receipt of all the information during August, the market is now forecasting 10% earnings growth for the S&P/NZX50G in FY17.

Australia also saw the majority of its companies deliver results which were broadly in-line with expectations but it is important to highlight that many of these expectations had been lowered in the months prior. The results that were reported demonstrate that the June half was a challenging time for Australian corporates. The most significant drag on the markets came from the Resources sector. Subsequent to a decline in commodity demand from China and an over-supplied market in key materials such as iron ore, Resource sector earnings in the June-half were down around 20% year-on-year. Bank earnings also fell as they dealt with a mild rise in bad debts, pressure on their net-interest-margins and softer non-interest income. The Industrials, which are the final major sector category, reported a mixed set of results. Domestic cyclical businesses such as those operating in Retail and Construction benefited from ongoing strength in their housing market while the more traditionally defensive stocks such as Woolworths and Telstra experienced negative earnings growth. 

Interestingly though, from a number of the discussions that we had with Australian management teams over the past month, and from reviewing many recent corporate outlook statements, it does feel as if the platform for overall Australian earnings is beginning to improve. This will most likely be led by a reversal in fortunes for those companies exposed to the mining sector. Commodity prices have recovered recently and together with a greater focus by management on cash-flow over volume, the Resources sector looks well positioned to see its FY17 earnings recover strongly. In fact, at the time of writing, consensus expectations are for an almost 50% lift in their profits over the next 12-months. The opportunity for the Banks though is not as exciting. Although their executive teams are working hard to support operating margins through cost management, their ultimate fortunes over the next year will be heavily influenced by funding competition, subdued credit growth and an expected lift in their required capital levels. Expectations are that this sector will generate low single-digit EPS growth in FY17. The Industrials will continue to be a mixed bag with those companies that have international earnings being influenced by the direction of the Australian Dollar while the domestic “cyclicals” will remain at the mercy of local growth conditions. With interest rate settings at their currently accommodative levels and recent data highlighting improving business and consumer confidence, the settings for these stocks continues to look reasonably accommodative. In an aggregate sense, the expectation for the S&P/ASX200G in FY17 is for earnings to grow by around 8%.

One thematic that did remain a notable feature during the past month was a continuation of focus by local management teams on dividends. A large number of New Zealand companies that reported their earnings during the month also reported an increase in their dividend payments relative to the year before, while in Australia the pay-out ratio remains elevated. In an environment where global interest rates remain anchored at historically low levels, the dividend yields on offer across Australasia remain of particular interest to investors and company Boards are accommodating this demand. The forecast gross yields for the New Zealand and Australian markets over FY17 are around 5.5% and 6.0% respectively.

In summary, investors in the Australasian markets should have been reasonably pleased with their companies during August, as expectations were generally met. The tone from many of the outlook statements could be described as cautiously optimistic and again this should comfort the investor base. The caveat remains valuations, and in an absolute sense markets do look expensive. Given that valuations are the “shock absorber” in investing, we will continue to take a very cautious approach to managing your funds but believe that the opportunity for stock picking in this environment is an exciting one.

Slade Robertson - Portfolio Manager at Devon