How fast will Chorus lift its dividend? Photo / Sarah Ivey
The New Zealand sharemarket has had a torrid start to the year, falling 9 per cent in January, although the past few days have seen a bounce-back.
Adrian Allbon, director, equity research at Jarden, says a "painful market" tends to sharpen investors' focus on company earnings.
"From our perspective when we look at the February reporting season the market is at quite a difficult junction. These external factors are by and large not helpful for stocks and not helpful for the majority of stocks. We just acknowledge that and have shifted to a bottom-up focus of going through the stocks that have got some genuine change."
Allbon's team have focused on 10 stocks that are due to report over the coming weeks.
Allbon says Chorus will be watched closely for the details of its refreshed dividend policy.
"After a long period of regulatory newsflow and ups and downs that is finally in the rearview mirror by and large and now the company has quite a difficult balancing act which they have indicated to the market they will present in a revised dividend policy.
"Now they have got regulatory certainty and finished the UFB build programme they are in for quite a different phase of their existence. This is quite a change for Chorus. The other thing that might come, they may indicate they will look to build up non-regulated earnings from somewhere but what they would come from is still on the drawing board."
Jarden is picking Chorus' dividend to rise from 30cps in FY2022, ramping up to 50cps in FY25.
Allbon said the retirement village sector had been difficult from a price perspective and Summerset had suffered the most.
"Summerset's earnings will be strong but it has been the worst performing stock since it last reported."
Since September 1, Summerset's total shareholder return has fallen 20 per cent, even though it had a strong interim result.
Among other reasons, Allbon said this reflected the fact that the sector was affected by people's expectations of future house price growth.
"The other thing is, building inflation has been rampant and these assets by the nature of the elderly they look after are a sensitive segment to manage from a Covid perspective.
"From an analyst perspective it is quite difficult because the old rule of thumb of earnings drive share prices is broken with this stock because the earnings are good but the price has decayed quite a bit."
Allbon said the market was expecting a weak performance from a2 Milk as the new management continued to work through issues with excess inventory and the Covid-interrupted Daigou market.
"The hard thing with a2 is that its existing guidance implies a significant second half turnaround and while that is possible, with Omicron and Daigou still present ... it is just really hard to work out what their overall system growth or lack of growth is."
Allbon said his team had looked at the earnings revisions from the analysts group that covered companies which were China-facing infant formula businesses.
"You are still yet to see their earnings estimates stabilise a couple of years out so it tells you even for a2 Milk the big judgment is, has momentum finally stabilised or can it turn around?"
Allbon said out of the gentailers, Contact Energy was going to be the one with a stand-out result.
"The operating statistics are already suggesting that." Allbon said it had been tracking the progress of the chief executive who had been there for a while now.
"The Achilles heel has traditionally been some of the execution at the edges, but that seems to have improved. They have got a geothermal build programme, they are trying to stimulate new demand in Southland to cover Tiwai."
The proposal to offload its thermal assets into a ThermalCo structure was also attractive.
Allbon said the brokerage was also watching Heartland Group Holdings, Skellerup and Comvita.
"Heartland is a reasonable barometer for the domestic market. We would be expecting strong receivables growth out of the motor business and they have got reverse mortgage proposition on both side of the Tasman which should be going well."
Allbon said Skellerup had been executing well and had a diversified exposure to global industrial markets.
"The issue is the company is priced like a growth stock now." He said that meant a strong result was required and it needed to maintain a higher growth rate to justify the share price.
When it came to Comvita, Allbon said the market was looking for improved execution on its simplification plan.
"I think that is the thing people will take from this result. Harvest should be good given the good summer weather we have had."
Allbon said Fletcher Building one which could surprise the market.
"Fletcher is definitely primed for strong activity across the second half flowing into 2023 - if there was a miss there, quality of delivery was lower. That one could be a shock."
Straight after a result is typically when a company will also announce any plans for capital raising.
Allbon said there were four companies it saw as having the potential for a capital raise.
"Air NZ - it's just a question of when and how much."
Milford Asset Management's Sam Trethewey said shares in both Air NZ and Auckland Airport had been strong this week in anticipation of the border reopening announcement.
"I think it will come as a relief from a cashflow standpoint for the entire sector. The more certainty provided by the Government around what it looks like and the less chopping and changing going forward, the easier things like that capital raise will be to execute."
Trethewey and Allbon are both picking that Auckland Airport could need more capital in the future. The airport has a new chief executive, who investors will be interested to hear from for the first time.
Allbon said the airport could muddle through without raising capital.
"But it's a question of how quickly do they want to be able to reset the business. They had huge capex programmes before the Covid outbreak and have quite a difficult reset of retail earnings and have a new CEO which is coming from an operational end.
"They may want to take the opportunity - the share price has been incredibly strong relative to their near term prospects. To proactively take some more equity to give them the ability to go a bit faster out of the recovery."
Trethewey said when the airport raised money back in May 2020, they did not see borders reopening until December 2021.
"It is up to the board and management team to decide what is the right capital settings for these businesses so Auckland Airport is in that scorched earth scenario now."
But he said at the same time the banks may give waivers to some companies which might be under pressure to get through that period.
Allbon said SkyCity also had the potential to undertake a capital raising.
"But I don't think it will in this period - the business has a history of a reasonable domestic play for Auckland. If we have further closures with Omicron that would be more of a May judgment for them."
The other one on his list is Ryman Healthcare, but he said the company was not due to report this time around.
Three infrastructure owners are said to be in the bidding for Waste Management NZ, with binding offers due in March, according to Australian media.
KKR & Co's infrastructure unit, First Sentier Investors and Morgan Stanley Infrastructure are all said to be keen on the acquisition, the Australian Financial Review reported this week.
It was first reported in August last year that state-owned Beijing Capital Group Co was exploring a sale of Waste Management for US$1 billion ($1.4b).
Beijing Capital acquired Waste Management for $950 million from ASX-listed Transpacific in 2014.
It was the first major international foray for the Chinese water treatment, waste management, mass transit railway, toll road and property company.
The waste management unit has five landfills in New Zealand and operates 29 refuse transfer stations and more than 800 specialised waste collection vehicles. It has more than 1200 employees and handles more than 8500 tonnes of waste per day.
According to its latest filing to the New Zealand Companies Office, Beijing Capital Waste Management turned in a $258,000 loss for calendar 2020, down from a $16.9m profit in the previous year.
Revenue came to $503.4m in 2020 from $519.7m a year earlier, while net financing expenses shot up to $79.6m from $67.2m.
Investment bank Citi is said to be running the sale on behalf of Beijing Capital while local investment bankers Jarden are reported to be advising Morgan Stanley Infrastructure Partners, while KKR is using Macquarie Capital as its financial advisers.
Private equity is seen as a likely buyer for Fonterra's consumer business.