Several confessions from listed companies underline the tough trading conditions. Image / 123rf
The recent mini-reporting season has shed more light on the difficulties companies are facing amid tepid economic activity.
Firms still recovering from an inflation shock are now dealing with much-reduced consumer spend, while costs remain high.
There is hope on the horizon, however, with expectations for interest rate cuts and most companies do appear to be navigating their way through the choppy economic conditions.
The May 2024 reporting season, dominated by the property and aged care sectors, showed earnings per share (EPS) growth was negative and one of the worst on record, according to a Forsyth Barr analysis.
It was, however, slightly better than expected. Of the 22 NZX-listed companies that reported results, 10 reported ahead of Forsyth Barr’s EPS expectations, four were in-line and seven were below. One company was deemed not available.
That led to some upgrades to Forsyth Barr’s expectations for the 2025 and 2026 financial years.
“Complementing the net positive earnings revisions were the number of companies that iterated, in our view, positive guidance,” Forsyth Barr’s research team wrote in a report titled A Month in the Market.
“We view this as encouraging and saw the season close with a ‘slightly positive/positive’ change in outlook.
“On a positive note, it was encouraging to see a number of ‘slightly positive/positive’ outlook statements made.”
The dividend story was not so encouraging with various companies dialling back dividend growth forecasts and in some cases suspending payments.
Retirement sector companies Oceana Healthcare, Ryman Healthcare and Arvida fell into the latter category, along with electronics manufacturer Rakon, while fishing company Sanford declared a reduced payout.
“Whilst the overall actual dividend per share growth has finished in-line with expectations across all three sub-groupings, the final count of beats versus misses slightly disappointed, with three companies exceeding expectations, five below and 13 in-line,” Forsyth Barr said.
“Post result, our analysts have made seven positive and four negative revisions to FY25 dividend estimates (using a tolerance level of +/-1.5 per cent). Revisions to FY26 dividends are of a similar nature, with seven upgrades and three downgrades.”
Of the companies that did report, Ryman was perhaps the biggest disappointment.
New Zealand’s largest listed retirement owner-operator increased total revenue by 18 per cent to make $689.9 million but reported net profit after tax plummeted from $257.8m to $4.8m.
The company, which was last year forced into a $902m capital raise, has taken a bath via asset write-downs and one-off costs.
“We know we need to improve our financial performance and the board and management are aligned on this intent,” said chair Dean Hamilton.
Meanwhile, there have been several recent confessions from companies not involved in the May reporting season that underline the difficult trading environment.
SkyCity Entertainment, Spark, Fletcher Building, Air New Zealand and Tourism Holdings have all announced downgrades to earnings guidance and had their share prices punished accordingly.
Fletcher and SkyCity are both dealing with issues separate from economic headwinds but softening domestic demand is starting to bite.
New Zealand businesses emerged from the Covid-19 pandemic era to face new challenges, including continued uncertainty, inflation, higher interest rates and supply chain disruption.
While labour shortages subsided as cross-border migration surged, the change of government and associated policies hasn’t yet delivered a material change to the investment outlook.
However, according to consulting firm BCG, a clearer picture of the “new normal” has emerged, setting local businesses to make decisions on how to compete in the coming years.
BCG consultants Philip Benedetti, Kelly Newton, Bill Kelsall and Grant McCabe recently explored the top 10 areas of focus for New Zealand executives in 2024.
Here are their top 10 areas:
1. The decade of ultra-low interest rates is over: “Higher rates are here to stay, and even though some investment decisions will carry greater risk, it will be costly to remain idle. Focus your capital investments where rigorous business cases, aligned with your strategy, provide high rates of return.”
2. Productivity is the only no-regrets move in an inflationary environment: “Understand and pursue improvement in the productivity measures suited to your company, and look for potential partnerships or Government engagement to drive innovation and international competitiveness.”
3. Consumer spending will remain stretched: “Despite the view that the official cash rate may not rise further, mortgage and rent expenses for consumers will continue to rise in 2024. Companies need to prepare for further pressure on disposable income and even higher consumer price sensitivity.”
4. The ‘brain drain’ remains real and persistent: “Despite high recent rates of incoming migration, New Zealand still faces a gap versus what we would expect based on pre-pandemic trends. Do not expect the war for talent to subside. If your company hires international students graduating from New Zealand universities, expect next year’s recruitment cycle to be particularly competitive.”
5. GenAI is reaching a tipping point; early adopters will leap ahead in 2024: “To unlock the majority of the value promised by GenAI, organisations will need to transform their operating models to leverage the technology at scale. Companies that do this successfully stand to create sustainable competitive advantage.”
6. The most important geopolitical bellwether for NZ remains China-US: “New Zealand firms should consider how potential changes in the US-China relationship could impact their business and integrate these potential impacts into their strategic decision-making.”
7. Global supply chains are (permanently) resetting for a ‘tripolar’ world: “Evaluate the resiliency of your supply chain in a ‘tri-lateral’ future with more re-shoring/on-shoring/friend-shoring and less global connectivity. Importers must assess supply chain resilience, considering risks and hierarchy of importance, while exporters can leverage reliability to compete globally, given New Zealand’s unique position.”
8. More risks are under-insured or, worse, un-insurable: “Increasingly, business leaders cannot simply rely on purchasing insurance to manage risks. Leaders need to assess potential cyber and social risks and address them through their operating model. As physical risks increase due to climate change, leading companies will use geoanalytics and partner with insurers to assess extreme weather risks during development. Having a perspective on what public-private partnership structures would be in the interest of your business may become valuable if certain risks become un-insurable in the private market.”
9. It is time to start budgeting for carbon: “Creating a robust view of the cost of carbon will help support cost-efficient decarbonisation and preserve margins – exporters of lower-margin, commodity products may seek ways to increase value-add of products to preserve margins. Consider expanding the CFO role (or introducing a new role) to maintain a ‘carbon P&L’ and ‘carbon balance sheet’ to actively manage the carbon budget.”
10. 2024′s investments will determine whether or not NZ will meet its 2030 targets: “While a clear path to delivering the required emissions reductions by 2030 and beyond exist, many of the steps will take years to fully implement. These timelines mean that if sufficient action is not started by next year, we risk missing 2030 reduction targets. Organisations need to accelerate their emissions reduction actions and proactively engage the Government to ensure public support for their decarbonisation journeys.”
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