Spring still in market's step

New Zealand's sharemarket is still enjoying one of its best-ever rallies.

As the June financial year drew to a close, the benchmark NZSX50 gross index was up 20 per cent on the same time 12 months earlier and a staggering 62.2 per cent on June 2003.

The scale of the market's gains are impressive, but they are also underpinned by solid results.

"The best thing about this has been that it's a run that's been related to companies performing well in terms of earnings and providing dividend growth," said Gould Steele and Co broker Kevin Rendell.

"If you look back to some of the previous bull runs we've had there's often been a bigger element of speculative hype."

But while the market continued to hit fresh highs in the last couple of months on a wave of cash from corporate activity, the end of last financial year was marked by a growing consensus among economists, analysts, companies and investors that the economic cycle was waning.

"It was more difficult in the second half of the financial year but not as adverse as people feared," said Rendell.

"We saw a number of warnings in the April period that the second half was more difficult for a lot of companies. Expectations dropped. When the final results did come out, people were rather pleasantly surprised."

Amro Craigs broker Matt Willis said most forecasts were met if not exceeded, and Direct Broking's Peter Lynds said most companies came through the reporting season "pretty much as expected" but with a bias towards the upside.

Among our largest companies, Telecom posted a record profit of $916 million, up 21.5 per cent on the previous year, albeit thanks to one-time gains totalling $110 million. The gains allowed the company to pay a special dividend of 10c on top of its regular distribution which is good going for a company in a "heavy investment" period.

Contact Energy's profit for the nine months to June 30 at $138.2 million was up 37 per cent on the same period a year earlier as its generation arm continued to benefit from higher wholesale prices.

Fletcher Building drove its full-year profit 38 per cent higher to $330 million. Chief executive Ralph Waters said the company had benefited from acquisitions, internal performance improvement. A reduction in its reliance on New Zealand's new housing market and increased revenue from Australia and the infrastructure sector would stand the group in good stead during the current year, he said.

But Willis noted there was "cautious if not pessimistic commentary around the operating environment going forward", in many companies' results announcements.

The reasons for growing trepidation are well documented: net inward migration has slowed to a trickle, the housing market is no longer white-hot, our export sector continues to suffer from the stubbornly high currency and the Reserve Bank is indicating it may not be through with rate rises as it seeks to combat inflation, much of which is down to spiralling oil prices.

Even before Hurricanes Katrina and Rita, high fuel prices were weighing on companies' performance. The first to feel that were the transport firms.

Although Air New Zealand's full year profit rose more than 8 per cent to $180 million, the national carrier warned it could be financially crippled if jet fuel prices remained at current levels. The airline said its 2006 profit could wither to $102 million, and that was before the hurricanes.

While courier firm Freightways delivered another record full-year result of almost $22 million it warned its forecast-busting run was nearing an end, thanks to the slowing economy and higher fuel prices.

"We've had two very, very strong years off the back of a very positive economy," said managing director Dean Bracewell. But with things coming off the boil, "We're just saying, please be realistic with your expectations for the coming year," he told the market.

Higher oil prices would take time to work their way through to the wider economy and Willis said they might not be fully experienced until next year. While they also eat into disposable income, so far, that didn't seem to have happened too much. Last week's consumer confidence survey showed demand was surprisingly resilient and the Retailers Association still expects 5 per cent growth in sales this calendar year.

Listed retail giant The Warehouse's June-year profit was down to $39 million from $61.1 million, largely as a result of a $33 million write down on its Australian Yellow Sheds.

Briscoe Group's half-year profit rose 51 per cent to $10.15 million but managing director Rod Duke said he didn't expect the second-half performance to be as spectacular.

Hallenstein Glasson reported a 12.4 per cent increase in net profit to $19.3 million. Group managing director Cliff Kinraid said rising costs, driven by fuel prices and exchange rate uncertainty, offered a challenge but sales had been stable in the first six weeks of the present year.

Children's clothing retailer Pumpkin Patch more than tripled its June year profit to $24.6 million. Chief executive Greg Muir said tax-cuts and spending promises dished out by politicians in the run-up to the election could offer retailers a boost not yet anticipated by the market.

But the election also offered more uncertainty, plenty of commentators have said the market could suffer if a workable coalition is not formed soon.

While the market had lived "reasonably comfortably" with a Labour led Government for the last six years, Direct Broking's Peter Lynds said there were concerns about "the mix" of the likely new coalition.

"You've got the Greens trying to exercise more power ... but then you've got the Maori Party as well. The market needs time to see how the cards fall."

But despite all the uncertainty, pessimism doesn't appear to be running rife.

Willis noted most commentary picked a slowing economy rather than a recessionary one. In any case, after the good run companies were well placed to weather at least some hardship.

"Most businesses are being run in a very prudent way, most balance sheets look very, very tidy if not slightly undergeared."

ASB Securities head of advisory Stephen Wright echoed that view: "A lot of the long term fundamentals are there: low debt, strong management, all those sorts of things."

Gould Steele and Co's Rendell said there were few obvious bargains to be had on the share market.

"But while that makes it difficult to tell people what to do for the future, at the same time you don't really feel any imperative to tell people to exit the market.

"I think it's really a time to be a little selective and cautious."