Stock Takes: NZ corporate earnings in transition as challenges loom

Results from aviation are expected to show a sector still struggling to recover from Covid-19 travel restrictions. Photo / Grant Bradley

Next month's reporting season is set to show that companies enjoyed solid earnings over the six months to June, but also to reflect an economy that's heading for more challenging times.

The big power companies - Meridian, Genesis, Mercury and Contact - are reporting, as are many of the other large-cap businesses: Fletcher Building, Auckland Airport, Air New Zealand, SkyCity Entertainment and Ebos.

Mark Lister, head of private wealth research at Craigs Investment Partners, said earnings in the first six months of 2022, and the June quarter, looked to be solid enough but the challenge would be in the second half of the calendar year.

"We are obviously talking about slowing growth, lower confidence, weaker sentiment, falling house prices, higher interest rates, higher labour costs and all the rest of it - stuff that we are aware of.

"There is a theme out there of caution, which is fair, but I think we need to remember that this reporting period will cover the six months to June and for the most part businesses will have performed reasonably well through this period.

"The weakness that we are talking about is something that is beyond this reporting period - probably the second half of this calendar year, so I don't think that you will see that caution show up in the latest numbers completely."

Some elements, however, will be revealed, such as margin pressures, consumer caution, higher costs, labour shortages, higher interest rates and lower house prices.

The New Zealand dollar, which has dropped by just under US8c since early April, will make its presence felt - beneficially for export-oriented stocks but to the detriment of importers.

"Despite all these themes I think by and large it's going to be a decent reporting season," Lister said.

Investors will be more than usually interested in companies' outlook statements.

"We are transitioning from a very buoyant post-Covid recovery period into a period where there will be many more headwinds," said Lister.

"I think the economy is in better shape than some might think at the moment, but I do look ahead at the next six months and I get a bit nervous about where we might be come the end of the year."

Lister also said he expected corporate debt levels to come into sharper focus due to rising interest rates, but that the market could take comfort from the fact that many companies have quite solid balance sheets after recapitalising in 2020.

Powering up

Following two years of declining earnings for the electricity sector, Forsyth Barr expects that to reverse in 2022.

The broker forecasts the big four to report combined 2022 earnings before interest, tax, depreciation and fair value adjustments (Ebitdaf) up 10 per cent on 2021 to $2.3 billion.

"Contact was the only generator/retailer to grow first half Ebitdaf versus the first half of 2021 but that has reversed and we now expect it to be the only generator/retailer to report lower full-year Ebitdaf than 2021," Forsyth Barr said in a research note.

"Mercury is leading the way with growth as its new wind farm and recent acquisitions contribute to earnings for the first time," it said.

The big power companies are likely to perform strongly in the upcoming reporting season. Photo / Brett Phibbs

Looking further ahead, Mercury is likely to lead the way in 2023 as well.

Mercury and Genesis would report the greatest earnings growth, albeit for different reasons. "We are forecasting Mercury to report Ebitdaf of $596 million, up 29 per cent on 2021 due to its acquisitions and a new wind farm.

"Genesis's 24 per cent Ebitdaf growth to $443m is mainly due to the lack of one-off costs that impacted its 2021 result."

In contrast to its peers, Meridian's result is likely to be "relatively benign", Forsyth Barr said.

Construction hot

A red-hot construction sector is expected to show up in the Fletcher Building and Steel and Tube results.

Fletcher Building has issued its earnings guidance - Ebit of around $750m before significant items.

A year earlier, Fletcher Building reported Ebit of $88.4m.

Steel and Tube expects to continue the strong performance seen in the first half of the year and is anticipating 2022 normalised Ebit of not less than $45m and normalised Ebitda of not less than $64m.

For the 10 months to the end of April, Steel and Tube's revenue was up 25 per cent on the prior comparative period to $479.3m.

Aviation not

Results from aviation are expected to show a sector still struggling to recover from Covid-19 travel restrictions.

Air NZ now expects its loss before significant items and taxation to be less than $750m - better than its previous forecast of a $800m loss.

Auckland International Airport's guidance is for an underlying loss after tax of between $25m and $50m.

In entertainment. Casino company SkyCity expects to report group normalised Ebitda of $135m-$140m and normalised net profit of $3.5m-$7m. Sky Network TV's result is due the same day and the company expects a net profit between $40m and $47m.

A2 Milk improving

A2 Milk is expected to show a steady earnings recovery after being hit hard by the impact of Covid-19 on its sales channels and increased competition in China, its main market for infant formula.

The consensus of market expectations for a2 is for a net profit around $112m, up from $80.7m in the 2021 year.

Port of Tauranga is expected to report an improved profit of $108.5m, up from $102.4m.

The consensus for medical products distributor Ebos is for a net profit of $210m, up from $185.3m.

In manufacturing, another record profit is expected from specialised rubber products maker Skellerup.

The consensus is for Skellerup's net profit to come in at about $47m, up from $40.2m a year earlier, and at the top end of the company's previously-advised guidance range.