Air New Zealand got back into the black with its half-year pre-tax earnings and will consider the resumption of dividends at its full-year results in August. Photo / NZME
ANALYSIS:
The results season, which has just wound down, 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.
Further complexity was added to the mix with the arrival of two extreme weather events. Some companies were clearly affected more than others, and from a broader perspective there was also much interest in how the floods and cyclone damage would influence the Reserve Bank’s decision on further rate hikes. In the end, the central bank looked through the short-term financial impacts.
On the whole, it appears to us that New Zealand corporate results 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 results 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 the cost of servicing corporate debt. The debt issue 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. Among the earnings highlights was Auckland Airport. Its profits have continued to recover, and guidance was lifted. Interim underlying earnings went back into the black, with a profit of $68 million, and revenue more than doubled. January passenger numbers returned to 73 per cent 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 capacity is lifted on US services. New Zealand has also been named as one of 20 countries open to Chinese travel agencies and tour operators. The airport company sees passengers returning to pre-Covid levels during 2025.
Air New Zealand also got back into the black, and 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 revenue soared 174 per cent, with the recovery fuelled by a strong rebound in passenger numbers post Covid (8 million versus 3 million a year ago) and in airfares.
Domestic capacity is about 95 per cent of pre-Covid levels, while international is at 60 per cent. There is a milestone on the horizon for shareholder payouts: the airline will consider the resumption of dividends at its full-year results in August.
Also benefiting from the reopening has been SkyCity Entertainment. The casino group reversed last year’s $33.7m loss to a $22.9m net profit after tax. Half-year revenue jumped 60 per cent and is back at pre-Covid levels. Also back are dividends. Earnings for the 2023 financial year are tracking ahead of FY19 levels. Gaming machine revenue at the Auckland casino is powering ahead, at $156m for the half, compared to $139m in the same period just before 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 per cent. Container volumes ticked higher, and the port expects full-year earnings to be between $117m and $124m. The numbers contrast favourably with those from Ports of Auckland, which expects a full-year net profit after tax of $42m-$45m.
A2 Milk’s result was another solid one, with revenue and earnings both up around 20 per cent for the period. China-label infant formula sales rose 43.5 per cent in the half-year to December, an impressive effort as a2 Milk continued to gain share in the Chinese market in the face of declining birth rates. Half-year revenue hit $783m and the company seems on track to hit revenue of $2 billion over the next four to five years. The company’s cash pile, meanwhile, remains robust at $707m, which is helping to support share buybacks.
Away from the reopeners, there were also plenty of highlights. Freightways delivered, with a 25 per cent surge in half-year revenue and earnings growth of 8 per cent. Express package volumes took off during Covid, and Freightways has 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 growth.
Freightways has noted the challenges of a tight labour market and is also cautious about the impact of a slowing economy, in New Zealand 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 per cent, while total revenue lifted 17 per cent, and the company also lifted its interim dividend. The animal care segment performed strongly but the community pharmacy unit 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 electricity gentailers also highlighted the defensive attributes of the New Zealand market. Genesis Energy reported a 42 per cent jump in earnings, with wet weather driving generation higher, to a record 2034 gigawatt hours (GWh) from the company’s three hydro schemes, up 43 per cent on a year ago. Wet weather and better-than-average hydro inflows were also a tailwind for Meridian — inflows 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 revenue 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 its materials and distributions businesses expected to fall by 10-15 per cent. 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 Fletcher.
In a similar vein, Vulcan Steel fell sharply after the company reported a 3 per cent fall in adjusted earnings to $115m for the first half. However, the numbers were embellished by the performance of the 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 New Zealand and Australian markets.
Overall, for all the uncertainty that continues to exist around the economic outlook, the earnings season 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
- Greg Smith is the head of retail at Devon Funds, devonfunds.co.nz.
Private equity is seen as a likely buyer for Fonterra's consumer business.