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The full impact of monetary tightening is yet to be felt, which means corporate earnings will continue to suffer, says Morningstar.
The research group’s Australia and New Zealand Equity Market Outlook for the second quarter says there is a wide range of equity valuations across the market.
“Financial markets thriveon certainty, however, at present certainty is a scarce commodity,” it notes.
“The full impact of monetary policy tightening is yet to be felt and will continue to affect private sector consumption, particularly that of households,” said Morningstar’s head of equities research Peter Warnes.
“Corporate earnings will suffer to differing degrees, challenging both cash flows and valuations.
As of March 31, Australian and New Zealand stocks covered by Morningstar were trading at a 5 per cent discount to fair value on average, compared with a 15 per cent discount at the end of September 2022 and an average 5 per cent premium over the past 10 years.
“There is a wide disparity in valuations across the market. High-quality stocks with defensive earnings are expensive, while those with less certain near-term outlooks are being heavily penalised by the market,” said the report.
The real estate and financial services sectors appear to be most undervalued after selloffs caused by market fears of contagion from the failure of bank and real estate investment trusts in the US and Europe, Morningstar said.
“We acknowledge the risks and further downside to shares is possible, but central banks are moving quickly to address banking issues,” the report said.
Fletcher upside?
Among its stock picks, Morningstar said Fletcher Building offered valuation upside, trading at close to a 30 per cent discount to its fair-value estimate.
“While higher interest rates and falling property prices dampen the near-term outlook, we see long-term resilience in Fletcher Building’s earnings given a healthy backlog of residential development projects and relatively important position in the New Zealand market.
“We also see value underpinned by our long-term outlook for New Zealand residential and infrastructure activity.
“The fair-value discount appears excessive given the company’s competitive position and balance sheet strength.”
Genesis Energy’s 46 per cent ownership of the Kupe oil and gas field is “increasingly hard to justify”, say Forsyth Barr analysts.
Andrew Harvey-Green and Mark Robertson said in a report they had formed the view that selling the stake for nothing would be a better outcome than retaining ownership.
“The strategic rationale for owning Kupe no longer exists and the arguments for not owning it continue to grow, including sustainability and attractiveness to investors, single asset risk, and decommissioning risk,” the report said.
Genesis has shown an interest in selling Kupe, but the price has been the sticking point.
“Whilst a Kupe sale would be a positive catalyst, timing is uncertain and the commitment to sell is also uncertain,” Forsyth Barr said.
Genesis has had a long association with Kupe and was instrumental in the 2000s in getting the field developed, at one stage owning 81 per cent.
“However, times have changed and the reasons for selling Kupe outweigh the reasons for owning it, in our view,” the report said.
Genesis, at its first-half results announcement in February, said there had been further interest from third parties in acquiring its stake in Kupe, but that valuations have been “considerably below value in use”.
Summerset disappoints
Retirement village company Summerset reported weak first-quarter 2023 sales, with combined new sales and resales down 25 pe cent compared with the first quarter of 2022.
Forsyth Barr analysts said the first-quarter report was “disappointing, but (so far) not concerning”.
“The turnover in the New Zealand housing market is at record lows and days-to-sell at record highs,” they said in a report.
“Expansion of lead times is to be expected,” the report said.
Retirement village company Summerset reported weak first-quarter 2023 sales. Photo / Supplied
“Contracted sales, a strong indicator of forward sales and end demand, was up strongly versus an admittedly likely weak first quarter of 2022.
“Overall, we walk away with the impression that Summerset is not immune to the current well-publicised slowdown in the housing market, but that the weakness is primarily coming through in the form of extended lead times rather than lower prices or reduced end-demand.
“That said, the bears on aged care stocks are currently getting more support for their view than the bulls.”
Over the next 12 months, demonstrating an ability to generate cash will be key to share price performance, the broker said.
UBS loss
UBS New Zealand’s loss widened a touch to $0.83 million in 2022 from a loss of $0.79m the previous year.
Interest expense came to $1.04m, more than double the prior year’s expense of $0.45m.
Net fees and commission income jumped to $26.4m from $14.7m, UBS said in a filing with the Companies Office.
Before tax, UBS NZ’s operating loss came to $2.7m, from a loss of $1.1m in 2022.
Last month, the parent company UBS Group AG agreed to buy its main competitor in Switzerland, Credit Suisse, in an all-stock deal.
The transaction was brokered by the Swiss Government and the Swiss Financial Market Supervisory Authority after Credit Suisse got into financial difficulty.
Last year, the New Zealand operation was pinged $20,000 by the NZX for breaching capital adequacy requirements.
Under NZX and clearing house rules, the company must ensure that its capital adequacy requirement is greater than its net tangible current assets.
UBS NZ said it had complied with the requirement throughout the financial year, with a single exception noted on July 29 that was deemed by NZX Market Conduct to be a breach of a fundamental obligation, resulting in a $20,000 penalty plus costs.
