Stock Takes: Calm before the storm? Reporting season looms

Contact Energy is due to report its first half result on Monday. Photo / Supplied

In what may prove to be the calm before the storm, a slew of NZX-listed companies are expected to report strong earnings when they release their first-half results over the next few weeks.

Most of those results will cover the six months to December 31, and many will reflect a Covid rebound as this country opened up to the outside world.

Current concerns about the economy and high inflation will probably not show up until those June 30 balance date stocks report their full-year results around August, says Adrian Allbon, director, equity research, at Jarden.

Expect good first-half results from Auckland International Airport, a2 Milk and Ebos, but Allbon says their strong share prices are probably already reflecting that.

“If you had to characterise the whole market, I think the earnings season will be quite strong,” he says.

“If you take the border-exposed stocks like SkyCity, Air New Zealand, THL and Auckland Airport - think about where they were in the previous year - they were all Covid-exposed periods.”

Allbon points out that it will be the first time in two years that SkyCity could report a first-half result devoid of any Covid-related constraints.

Jarden says SkyCity is returning to a pre-Covid earnings run-rate and is probably in a position to reinstate dividends.

Key issues for the casino operator are proceedings brought against the company by Australian financial surveillance agency Austrac and state regulator reviews, coupled with negotiation of an Auckland carpark buy-back.

Fletcher Building is also likely to post strong earnings but the market remains wary of future downgrades as the outlook for construction activity wanes.

“If Fletcher Building can maintain balance sheet discipline and provide a solid dividend profile through a likely downturn, we think the price already captures the resultant earnings risk,” Allbon said in a research note.

Air NZ has already signalled strong first-half results, and a second-half upgrade may be on the cards.

In telecommunications, Jarden expects stable operating environments to show in the Spark and Chorus results.

Both companies offer solid income yields and are executing well in a stable industry structure, with little in the way of immediate risks, Jarden says.

Across the smaller cap companies reporting, the broker says manuka honey company Comvita, tourism and motorhome firm THL, and Sky TV are worth watching.

“Notwithstanding some weather-related current harvest issues, Comvita should demonstrate a solid result on the execution front and maintain guidance,” Jarden says.

THL last year merged with Australia’s Apollo Tourism & Leisure.

Jarden said THL’s earnings were in strong recovery mode and these will be its inaugural results as a merged entity.

A wet first half

The first half was wet for both North and South Island hydro generation.

The recent North Island storm has lifted dam levels sharply, made even better for the North Island hydro-exposed stocks by the fact that South Island dams are starting to move below average levels for this time of year, benefiting Mercury the most, then Genesis and Manawa, said Jarden’s Grant Swanepoel.

He expects to see earnings guidance upgrades from Mercury and Genesis when they report.

“We expect first-half 2023 results to be driven by lower wholesale prices and stronger North Island generation, with second-half 2023 looking exceptionally strong for North Island hydro and good across the board,” he said in a research note.

Contact Energy, which is due to report on Monday, had a poor first half with an estimated Ebitda of $247 million as its generation was down on the previous comparable period and wholesale prices halved, Swanepoel said.

“This means it is the only gentailer we expect to report a decrease in Ebitda,” he said.

“In the second half of 2023, we expect profit to be driven by healthy short-term contract for difference sales into an elevated forward market price environment and the roll-through of material retail price increases.”

Jarden has forecast full-year 2023 Ebitda of $514m, below the company’s guided normalised profit of $550m.

However, Swanepoel said Contact remained Jarden’s “value pick” in the sector.

Mercury’s first half was driven by above-average generation and the second half started with overflowing dam levels, plus likely healthy wholesale prices to sell this into as South Island dam levels moved below average levels, he said.

Genesis Energy (February 27) had a materially stronger-than-expected first half.

Jarden estimates the company to report Ebitda of around $306m, up $96m on the previous comparable period and on track to beat the top end of the guidance of $500m issued in October.

“With Genesis Energy North Island lake levels currently overflowing, we forecast full-year Ebitda of $525m, so we expect a material guidance upgrade,” he said.

Meridian Energy, due to report on March 1, had a good first half, with estimated Ebitda of $425m, up $31m on the previous comparable period.

However, this included the impact of one-off sales during the period adding $51m to Ebitda.

“We expect a slightly above average second half 2023, resulting in 2023 Ebitda of $801m.”

Pushpay takeover

Data and research firm Morningstar has come out in favour of a proposed acquisition of Pushpay by Pegasus Bidco, a company associated with the Sixth Street and BGH Capital consortium.

All Pushpay directors except John Connolly (an adviser to Sixth Street), who own around 2.2 per cent of Pushpay shares, have endorsed the deal.

Pegasus’ consideration of $1.34 per share is within the independent expert’s valuation range for Pushpay of $1.33-$1.53 per share.

The stock currently trades around $1.32, down from its October 2020 peak of $2.35.

Morningstar lowered its “fair value estimate” for Pushpay, a donation management company, to $1.34 per share from $1.40 previously.

“We now ascribe a 100 per cent probability (previously 75 per cent) that Pegasus Bidco will acquire Pushpay,” Morningstar said.

“The acquisition, priced at 30 per cent above Pushpay’s trading price on April 22, 2022, gives investors an opportunity to accelerate a capital return without potentially experiencing hiccups in Pushpay’s organic growth,” it said.

“This is likely the best available deal for shareholders. While the consideration is below our standalone $1.65 intrinsic assessment, we don’t see an alternate scenario where investors can realise value over the medium term, if the deal were to fall through.

“Given we expect limited earnings growth at least until fiscal 2025, together with compression in valuation multiples for technology stocks, Pushpay’s share price could fall if the deal does not proceed, and subsequently recommence creeping on-market.”

The directors have stated they do not expect a superior competing proposal.

Pushpay has reconfirmed and narrowed its previous guidance Ebitdaf range for the March 31, 2023, year of between US$55.0m and US$57.0m.

The company has been granted initial orders from the High Court in respect of the Scheme of Arrangement proposed by Pegasus Bidco.