Air New Zealand has downgraded its earnings forecast. Photo / valio84sl
Ongoing inflation and the “higher rates for longer” interest rate scenario is a theme the sharemarket has begun to accept and price in.
The benchmark S&P/NZX 50 index has so far flirted with just over 12,000 points - hitting 12,105 in late March - but has since dropped back as the prospect of rates remaining elevated for most of the year sinks in.
A profound change in interest rate expectations from the US Federal Reserve, coupled with news of a 4 per cent increase in the New Zealand consumers price index (CPI) for the March year, have seen rate rises across the New Zealand yield curve.
“Ongoing inflation and higher rates for longer is very much a theme that the market has begun to accept and price in,” Salt Funds managing director Matt Goodson says.
Goodson says the issue is non-tradeable - or domestic - inflation, which chiefly comes from the service sector, with labour costs in turn being the major component of that.
“We are experiencing recession-like conditions, but in the words of [former Australian Treasurer] Paul Keating, it’s the “recession we have to have” - it’s payback for the fiscal and monetary laxity of 2020-22,” Goodson said.
Auckland Council’s sell-down of its stake in Auckland International Airport looks to have given one local investment bank a timely financial boost.
UBS New Zealand saw its after tax profit for the 2023 financial year climb to $10.1 million following a net loss of $830,000 in 2022.
The turnaround was largely due to a big lift in income from fees and commissions, which increased from $26.4m in 2022 to $38.17m in the year to December 31, 2023.
Some of that would have stemmed from UBS’s mandate to sell down Auckland Council’s holding in Auckland International Airport.
The council sold 7 per cent of its 18 per cent shareholding to pay down debt. UBS NZ, which is involved in advising, underwriting, financing and brokerage, has been in New Zealand for more than 60 years.
The firm was recently involved in advising Goodman New Zealand on a deal to internalise management of Goodman Property Trust.
In January this year, Matthew Beggs, UBS Group’s head of equity capital markets for Australia and New Zealand, told Bloomberg the investment bank was looking at alternatives to new share listings after the lowest amount in over a decade was raised in those two countries.
Alternatives included block trades and capital raises for takeovers.
With a slew of bank results coming up, Fitch Ratings said the stand-alone credit profiles of New Zealand’s four largest banks, ANZ Bank NZ, ASB Bank, Bank of New Zealand and Westpac NZ, continued to be resilient.
But the agency says the banks face a challenging economic backdrop and their net interest margins would become constrained.
“We expect New Zealand’s GDP growth to remain subdued during 2024 and joblessness to rise as a result, although the unemployment rate should remain resilient,” Fitch said.
“The full effect of rapidly rising interest rates is likely to be felt by the economy and lead to a deterioration in bank asset quality,” Fitch said.
However, this should be manageable for all four banks given their disciplined underwriting standards and risk management, the agency said.
“Earnings headwinds are likely to continue in 2024 as we expect net interest margins to fall as the cash rate peaks and funding costs rise, while cost management will be challenged by inflation, ongoing investment spending and higher impairment charges.”
National Australia Bank - owner of the BNZ - reports its result on May 2, followed by Westpac on May 6 and ANZ on May 7.
Was it coincidence or was it Air New Zealand trying to draw attention away from a significant earnings downgrade?
Air New Zealand is overhauling its “Seats to Suit” products on short-haul international routes to give passengers more affordable flexibility - and drive more revenue for the airline. It will offer cheaper ways to buy more flexible tickets and at least snacks and seat-back entertainment for all passengers.
On the same day, the company cut its pre-tax earnings guidance for this financial year by $40m to $50m due to worsening market conditions.
The company’s share price dropped after it announced it now expects its pre-tax profit to come in at $190m to $230m, down from a previous guidance of $200m to $240m.
On an underlying basis, the company now expects profit before tax to broadly break even through the second half of 2024.
“The trading backdrop has deteriorated further, with no support from fuel prices,” Forsyth Barr said in a research note.
“Forward bookings for fourth-quarter 2024 are weak, and with consumer sentiment unlikely to improve materially over the near term in key source markets, any profit recovery in 2025 will be muted,” Forsyth Barr said.
Air New Zealand is trading at 13 times its two-year forward price earnings ratio, well in excess of its historic pre-Covid average of eight times, meaning the broker now rates Air NZ stock as “underperform”.
Forsyth Barr said a sustained downturn may require “meaningful” cost-out measures.
A rare bright spot on the corporate news front was Kiwi insurer Tower, which upgraded its earnings guidance.
Tower now expects its net profit to be greater than $35m, up from a previously advised range of $22m and $27m.
“This updated guidance assumes full utilisation of the 2024 large events allowance, which is conservatively set at $45m,” Tower said.
No large events have been recorded in the financial year to date.
Tower will provide further details on its performance at its half-year results on May 28.
“They’ve had several really tough years where huge lifts in reinsurance costs and cost inflation couldn’t be kept up with as their policies only gradually matured and were repriced over the year,” Salt Funds’ Goodson said.
“Besides the significant excess that Tower faced before their reinsurance kicked in, this crunched their margins as the policies they had written had been on old cost assumptions.
“Now, the cycle is turning as cost pressures start to ease a little and they’ve had the time to reprice their policies.
“This is a classic insurance cycle playing out, but investors had been pricing Tower as though it was structurally impaired.”
Goodson, by way of disclosure, said Salt is a substantial shareholder in Tower.
The stock is also Salt’s selection in the NZ Herald’s stock-picking contest.
- Additional reporting Duncan Bridgeman.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
The airline sold its last slots at Heathrow in 2020.