Results galore

This month’s interest piece has been written by Devon’s Head of Retail, Greg Smith.

The results season, which has wound down on both sides of Tasman, was once again keenly watched. Markets had made a brisk start to the year in January on the prospect of better than feared outcomes in 2023. An array of results (and outlook statements) from companies covering a cross-section of industries was also going to be a useful sanity check on whether investors had gotten too far ahead of themselves (or not far enough) with respect to the broader market, and individual company valuations.

Markets globally gave back some of the gains to varying degrees in February. The messages from many big corporate blue-chips in countries including the US have been somewhat mixed, adding to the ambiguity around where economies and markets are likely to head in the coming months. Questions around the extent of further interest rate hikes, the persistence of inflation, and what type of economic landing is likely remain up for debate. 

In New Zealand further complexity was added to the mix with the advent of two extreme weather events. Some companies were clearly impacted more than others, and from a broader perspective there was also much ‘interest’ in how the floods and cyclone damage would influence the RBNZ’s decision on further rate hikes. In the end the central bank looked through the short-term financial impacts.

The New Zealand market held up better than many others during the month, rounding out February with a decline of just 0.6%. Part of the relative performance can also be attributed to an earnings season which was for the most part benign in terms of negative surprises, with several positive ones to boot. This was encouraging given that around 60% of NZ companies reported during this period. 

On the whole, it appears to us that the corporate results in NZ were ahead of expectations on a revenue basis. The number of beats exceeded misses by a substantial majority. Inflation is boosting the top line in many cases, as companies are seeing the same cost pressures that consumers are facing, but are looking to pass these on where they can. Underlying earnings surprised positively more often than not, with the ratio of beats to misses for EBITDA (earnings before interest, tax, depreciation and amortisation) registering a ratio of almost 2-to-1.

At the bottom line it was a different story, with honours evenly shared between companies coming in with better-than-expected numbers, versus those coming out on the other side of the ledger. This can in some way be attributed to rising interest rates which are lifting corporate debt servicing costs. The latter remains a key area of focus for investors in this environment, with Ryman Healthcare’s recent capital raise a high-profile response to burgeoning debt levels. 

With the world (and now China too) opening up at pace, a host of ’reopeners’ were in the spotlight. Amongst the earnings highlights was Auckland Airport. Profits have continued to recover, and guidance was lifted. Interim underlying earnings went back into the black, with a profit of $68m, and revenues more than doubled. January passenger numbers returned to 73% of pre-COVID levels. No dividends were paid but these could be back on deck in October. The airport could get a further boost as Chinese tourists and airlines in particular return and US services lift capacity. NZ has also been named as one of 20 countries open to Chinese travel agencies and tour operators. The Airport sees passengers returning to pre-Covid levels during 2025.  

Air New Zealand also got back into the black, but half year pre-tax earnings of $299m was a massive turnaround from the $376m loss a year ago, albeit at the bottom end of guidance. Operating revenues soared 174%, with the recovery fuelled by a strong rebound in passenger numbers post Covid (8 million versus 3 million a year ago) and airfares. Domestic capacity is running at around 95% of pre-Covid levels, while international is at 60%. There is a milestone on the horizon for shareholder pay-outs – the airline will consider the resumption of dividends at their full-year results in August. 

Also benefitting from the reopening has been Sky City Entertainment. The casino group reversed last year’s $33.7 million loss to a $22.9m net profit after tax. Half year revenues jumped 60% and are back at pre-Covid levels. Also back are dividends. FY23 earnings are tracking ahead of FY19 levels. Gaming machine revenues at the Auckland casino are powering ahead, at $156m for the half, compared to $139m in the same period just prior to the arrival of Covid.

Cruise ships are also back, including in the Bay of Plenty region, and Port of Tauranga’s result was another one of relative resilience with half year net profit up 11.3%. Container volumes ticked higher, and the Port expects full year earnings to be between $117 million and $124 million (the numbers contrast favourably with those from Ports of Auckland which expects a full year net profit after tax of $42-45m).

A2 Milk’s result was another solid one, with revenues and earnings both up around 20% for the period. China label Infant Formula sales rose 43.5% in the half year to December, an impressive effort as A2 continued to gain share in the Chinese market in the face of declining birth rates. Half year revenues hit $783m and the company seems on track to hit revenues of $2bn over the next 4-5 years. The company’s cash pile meanwhile remains robust, standing at $707m, which is helping to support share buybacks. 

Away from the reopeners, there were also plenty of highlights. Freightways delivered, with a 25% surge in half year revenues and earnings growth of 8%. Express package volumes took off during Covid, but Freightways have maintained a steady performance here. The acquisition of Allied Express across the Tasman also appears to have worked out well, with the unit increasing its market share and improving its financial performance, despite taking on additional warehouse space to boost capacity for future growth. Freightways have noted the challenges of a tight labour market and is also cautious about the impact of a slowing economy, in NZ in particular. That said, the company also said it would continue to consider ‘complementary’ acquisition opportunities.

Healthcare company EBOS also came through with a good set of numbers. The distributor of healthcare and medical devices saw its underlying earnings (EBITDA) surge 39% while total revenues lifted 17%, and the company also lifted its interim dividend. The Animal Care segment performed strongly but the Community Pharmacy unit (includes the Chemist Warehouse and TWC) was the star of the show. Like Freightways, the company also suggested (having acquired LifeHealthCare last year) that it would be open to further acquisitions if the right opportunities presented themselves.

Results from the gentailers also highlighted the defensive attributes of the New Zealand market. Genesis Energy reported a 42% jump in earnings, with wet weather driving generation higher, with a record 2,034 GWh (giga watt hours) from the company’s three hydro schemes, up 43% on a year ago. Wet weather and better than average hydro inflows were also a tailwind for Meridian – those in the Waitaki catchment during winter were the highest on record. During this reporting period, Meridian also more than doubled the size of its renewable development pipeline of buildable options to 11,100 GWh. 

There were some misses, and perhaps not surprisingly in more cyclical industries which appear to be turning lower. Fletcher Building came out early with its first half year results, with revenues and earnings ticking higher, but the focus was on a downgrade to full year earnings guidance due to the adverse weather in January and February. The company also issued a somewhat downbeat forecast for the next year, with volumes in the company’s materials and distributions businesses expected to fall by 10-15%. This is due to softening residential markets in New Zealand and Australia. The cyclone-related damage that will need to be repaired or rebuilt may however be a silver lining for Fletchers. 

In a similar vein Vulcan Steel fell sharply after the company reported a 3% fall in adjusted earnings to $115m for the first half. The numbers were however embellished by the performance of the company’s recently acquired Ullrich Aluminium business. Vulcan narrowed full year earnings guidance, but stripping out the acquisition, it would have been an earnings downgrade. The company said the second half was unlikely to improve materially across the NZ and Australian markets. 

Source: Forsyth Barr

Across the Tasman the results season was also generally resilient, although this was depending on what ‘line’ investors looked at. Many companies are doing better at the top line than the bottom. Around 38% of ASX 200 stocks beat at the revenue line, while only 18% missed, but the challenge was more about passing on rising costs to customers. Nearly 50% of companies fell short of earnings expectations. That said the misses were generally smaller in magnitude. Encouragingly, many companies reported that cost pressures appeared to have peaked.

By sector, the number of beats versus misses was fairly consistent, although the Telecom’s sector was the standout, with Telstra coming in with a strong result. Stocks exposed to the Consumer Discretionary space lagged, with spending being pressurised by cost of living and interest rate increases. There remains much uncertainty about how the latter will all play out for the economy, and possibly also explained why many corporate management teams are cautious about the outlook.

Source: Goldman Sachs

Telstra was one of the highlights, with the shares jumping after reporting a 26% jump in half year profits to A$934 million, ahead of expectations. Guidance was reaffirmed and the company said it has made “good early progress” on its new cost-out initiative, dubbed T25. The company’s performance in mobile was good, with ARPU (average revenue per user) ahead of expectations. The company is also looking at a monetisation event, with the prospective sale of a stake in the unit which houses their fibre infrastructure.  

There was also a positive reaction to results from industrial property giant Goodman Group. The company raised guidance, projecting full-year operating earnings per security growth of 13.5%. Industrial demand and quality had been very strong with robust rent growth demand for Goodman’s developments. 

Given cost inflation, the area of pricing power was of keen interest to investors. This is something that the insurers appear to have in spades. QBE Insurance shares rallied after reporting that their annual net profits increased 5% to A$847 million. The insurer has benefitted from rising premiums and is seeing these increases accelerate in Australia. Gross written premium growth was 13%, and the company sees this in the mid-to-high single digit range in 2023. Management are sharing the spoils with shareholders, lifting the dividend significantly.

Premiums are also on the up in the healthcare sector. Medibank shares surged after underlying net profit rose 6.7% and the interim dividend edger higher. Rising premiums have been a tailwind, and Medibank has moved on from the cyber-attack last year with policyholder growth restored. Ramsay Healthcare shares were also in demand after its results. The country’s largest private hospitals operator said that first-half net profit rose 22.3% on revenues which jumped 10.7%. Post Covid surgical activity in the company’s hospitals are rebounding. While slower to bounce back, the company also expect non-surgical admissions to improve going forward. The company lifted the dividend.

Themes in the banking sector were somewhat consistent, with competitive pressures intensifying but margins holding relatively firm. The resilience of the Australian economy was evident in credit quality remaining robust, despite rising interest rates and cost of living pressures. Within the Big Four, the quarterly update from National Australia Bank was encouraging as first quarter earnings rose by 18%. Margin performance was solid, and while there was some discussion around margins peaking, credit quality was very good, with bad debts at low levels.

Peak conditions were certainly in focus as the miners reported their results, with dividends being cut by many of the big names. BHP reduced its interim dividend to US$0.90 a share, down from US$1.50 a year ago. Half-year profits after tax dropped 32% as commodity prices eased. Costs were also higher than expected. BHP has been a huge benefactor of strong commodity prices, as have shareholders, and these appear to be moderating from peak levels during the pandemic.

That said, China is reopening, and is the biggest customer of the Resource sector as it is for Australia. China will need lots of commodities to hit economic growth targets. Recent data has shown that China’s manufacturing segment is expanding at the fastest rate in over a decade.

Overall, for all the uncertainty that continues to exist around the economic outlook, the earnings seasons in both Australia and New Zealand gave some cause for comfort. ‘Resilience’ appears to be a common theme across the board, although less so in some sectors than others. Many high-quality names though remain in a strong place to withstand, and in some cases benefit, from any further twists and turns that the rest of 2023 may bring. This environment also remains a productive one for active, valuation-aware investors in our view.