Stock Takes: Reporting season - so far, so good, and the verdict on a2 Milk

Fletcher Building's first-half result has been a stand-out. Photo / File

Midway through the reporting season, company results have generally been favourable, although many have highlighted the challenges that lie ahead in the form of inflation, labour shortages, supply chain issues and Omicron.

Some of the large-cap companies have reported their results, among them Fletcher Building, which for years has disappointed the market.

"Generally, it's been pretty decent so far," said Craigs Investment Partners head of private wealth research, Mark Lister.

"There have not been too many issues and more often than not, we have seen companies do pretty well," he said.

"The general tone has been a positive one.

"The issues that we are seeing are either ones that we would expect - Omicron, tight labour markets, supply chain problems. And inflation pressures are coming through thick and fast."

Those issues aside, company outlooks have been upbeat and their balance sheets have generally have been in good shape.

Lister said that among the large-cap stocks, Fletcher Building had been a standout, delivering a 41 per cent increase in its first-half net profit to $171 million.

"It's been a poor performer for quite a while and they are finally getting their house in order," he said. "The stars seem to have aligned for them."

Lister also singled out results from EBOS, Chorus, Spark, Summerset and Freightways for honourable mention.

Work in progress

A2 Milk's first-half result met with an enthusiastic response from the market, with the stock rallying by 12 per cent.

On Monday, the infant formula marketer reported that its net profit had dropped by 53.3 per cent to $56.1m in the first half.

However, the company's outlook for second-half revenue has improved. It is still expected to be significantly higher than the second half of 2021, with growth now expected to be ahead of initial expectations due mainly to growth in both China-label and English-label infant formula.

However, the company was at pains to point out that the revenue improvement is not expected to translate into higher earnings because it will be ploughing more money into brand reinvestment.

Craigs Investment Partners head of research, institutional equities, Stephen Ridgewell, said the improving sales guidance had not been accompanied by an upgrade to earnings guidance, implying the additional revenue growth will be at nil or low incremental EBITDA margin, and "not supportive of the bull case for a V-shaped recovery in earnings".

Milestones

Jarden director, equity research, Adrian Allbon, said the a2 Milk result provided the first milestone for investors to judge the refreshed management team executing against the strategy outlined at the company's October 2021 investor day, amid what remains a difficult climate in China, with declining birth rates and strong competition from both domestic and international players.

"Our discounted cashflow-based 12-month target price remains unchanged at $6.40 and we retain our neutral rating given the limited capital upside and acknowledging at this stage of the a2 Milk turnaround, prospects could change materially up or down from our base-case assessment," he said in a report.

Positives v negatives

Forsyth Barr analysts pointed out that the first-half profit was up on the market's expectations, with the hangover of elevated inventory of infant formula proving less significant than expected.

The commentary about higher revenue but greater costs implied a broadly unchanged full-year 2022 earnings outlook relative to Forsyth Barr's previous expectations, the broker said.

Forsyth Barr said the positives outweighed the negatives in the half. But despite early signs of execution, a recovery for a2 was still some way off.

Summerset and Sky

Lister said retirement village company Summerset's $141.1m profit was ahead of market expectations.

"Investors have been very nervous about the retirement village sector over the past six months, which has impacted share prices, but I think Summerset is looking good at these levels and the business certainly has momentum."

Craigs Investment Partners head of private wealth research Mark Lister. Photo / John Borren

He said Sky TV also looked solid, with streaming customer numbers coming in well ahead of where many analysts had expected.

"The company left its guidance unchanged for the full year, dividends are also on the horizon, and with Spark maybe taking a lesser interest in Spark Sport, a few things are looking up for Sky TV."

Mercury noise

As expected, there was a lot of noise in power company Mercury's result due to a large number of one-off factors.

The $65m payment to close out Mercury's Norske Skog electricity contract, while negatively impacting first-half 2022 earnings, had enabled Mercury to resell that electricity at materially higher prices, boosting future earnings, Forsyth Barr said.

Stripping out the one-offs and accounting non-cash amortisation adjustment, Mercury's EBITDAF was largely flat on the first half of 2021, with new wind generation, rising sales prices and high carbon trading revenue offsetting lower hydro generation and higher operating expenditure.

S&P's view

Looking ahead, in a report on Mercury, ratings agency S&P Global said the second half to June 30 and the 2023 financial year, the completion of the southern Turitea windfarm development, and the successful integration of Tilt Renewables' New Zealand-based assets and Trustpower Retail would be critical.

Following the acquisition of Tilt last August, Mercury is now New Zealand's largest generator of wind power.

Its generation portfolio now comprises hydro-electric, geothermal and wind assets.

"We anticipate this expanded portfolio will better position Mercury to manage instances of dry weather and the knock-on effect on cashflow," S&P concluded.