As foreshadowed in yesterday’s column, the NZX50 has dipped into correction mode for the first time since March last year after falling more than 10 percent from its January peak. It closed yesterday at 12,141, down a further 1.2 percent, marking the sixth straight day of losses for the benchmark index.
With today being the final trading day for the month, the NZX50 is on course to record a fall of around 8 percent in February.
It’s a dubious title to have, but the New Zealand market is possibly now one of the first in the world to retreat back into correction territory after hitting a record high of 13,558 just seven weeks ago. A reminder perhaps of that well known adage that markets go ‘up the stairs but down the elevator.’ As we saw in March last year, it only takes a few weeks to wipe out significant gains.
Yesterday’s fall was in large part due to a2 Milk’s disappointing half year result which pushed the market lower after its shares fell a further 16 percent (more below). But what will be troubling investors is how out of sync the local market has become compared with Australian and US markets which have not seen anywhere near the same degree of selling and, perhaps more to the point, raises the question of what is going to stop the current market drop?
Unlike the US, New Zealand doesn’t have a 1.9 trillion-dollar stimulus in the offing, or for that matter much in the way of government stimulus at all. And of course in Australia a resurgent mining sector is keeping the ASX200 buoyed as market leader BHP hit an all-time record high yesterday, closing for the first-time above A$50. Despite a strong rally on Wall Street on Wednesday (NZ time) and reassuring comments by the Reserve Bank that it has no plans to lift interest rates anytime soon, local investors nervous about rising bond yields.continue to head for the exits
Not helping things of course is the kiwi dollar which continues to push higher, jumping another 1.3 percent in the past 24 hours to a new four-year high at 74.5 US cents. Since April last year the kiwi has ended higher every month, bar one, and its underlying strength is clearly being supported as it now eyes 75 and potentially even 80 US cents.
Given many exporters based their financial forecasts this year on the kiwi being at around 67 US cents, they are already more than 12 percent behind just on the exchange rate. Hence the mauling that export stocks such as F&P Healthcare have taken in recent days. There will be some nervous CFOs around the country rapidly redoing their budget projections based on a higher exchange rate. Something has to give.
While 2020 ended up being the year of the unexpected recovery, is it possible perhaps that in 2021 we begin to pay a price for all that stimulus and free money.
A2 Milk shares take another dive as earnings outlook disappoints once again
A2 Milk disappointed investors for a third time yesterday. While revenues were in line with its earlier guidance in December, coming in 16 percent lower at $677.4 million, it was its announcement that it was lowering its guidance for its full year result that had investors once again exiting the stock in droves driving the a2 share price to a three-year low.
The daigou and cross-border e-commerce channels continue to be the source of a2 Milk’s major problem, as they have been significantly impacted due to Covid-19 related issues.
However, China-label infant nutrition products continued to grow, with sales of $213.1m, being one of the few bright spots in an otherwise dismal outlook that continues to disappoint shareholders.
A2 Milk shares are now down more than 55 percent from their peak a little over six months ago.
Net profit after tax fell 35 percent to $120m compared with $184.9 in the same period last year.
Also impacting the result was the company’s gross margin percentage decreasing to 50.3 percent. This was primarily due to recognising a stock provision of $23.3 million, higher cost of goods sold for China-label infant nutrition (including lactoferrin and tamper evident lid) and an adverse product mix shift with a higher proportion of liquid milk to infant nutrition sales.
A2 Milk said its balance sheet remains in a strong position with no debt and a closing cash position of $774.6m.
Group revenue is now expected to be in the range of $1.4 billion-to-$1.55 billion for the year ending June compared to an earlier forecast of $1.8 billion-to-$1.9 billion which it had reiterated as recently as November at its AGM.
A2 shares closed down 16 percent at $9.34 after trading as low as $8.92 intraday.
Air NZ slows cash burn rate as it prepares for major capital raise
Air New Zealand yesterday reported an adjusted loss before significant items and tax of $185m in the six months ended December, compared to earnings of $198m a year earlier.
It posted a statutory net loss of $72 million, versus a profit of $101m a year earlier.
The result was broadly in line with expectations, given the airline’s challenging operating environment at present.
Revenue more than halved to $1.23b, due to a significant falloff in passenger revenue to $708m from $2.58b in the prior period. However, cargo revenue was up sharply almost doubling to $373m as a result of government support to keep aviation trade routes open in the wake of the pandemic.
The airline said it had also dramatically slowed its monthly cash burn to an average $79m between September and January from $175m in the June quarter of the 2020 financial year and expects to cut that again to between $45m and $55m in the six months ending June 30.
That would translate to a daily cash burn rate of around $1.5 million.
The airline reiterated plans for a fully underwritten equity raising before the end of June and last week received the Government’s commitment that it would support the capital raising provided Cabinet agrees with the proposal.
However, it stopped short of providing specific details as to how the capital raise would be structured.
Air NZ secured a $900 million loan from the Government at relatively high interest rates. The terms of the deal allow the Government to seek repayment through a capital raising or converting that debt to equity.
To date the company has only drawn down $350m of the first $600m tranche, to avoid incurring the 8-9 percent interest rate. The interest bill incurred in the final six months of 2020 totalled $12 million.
Combined with its cash on hand, the airline said it has about $700m to draw on.
Air NZ shares closed up 1.3 percent at $1.60.
Genesis Energy reports strong lift in profit due to increased wholesale prices
Genesis, the country’s biggest energy retailer, yesterday reported a 30 percent lift in pre-tax interest and depreciation earnings of $217m for the six months ended December as it generated more electricity at higher prices than a year earlier.
It said wholesale power prices had been high for most of the past year due to low lake levels and reduced supplies from the country’s Pohokura gas field.
Its net profit surged to $53m from $9m a year earlier. After removing the effect of fair value adjustments, the underlying net profit rose to $60m from $16m.
Retail earnings climbed from $64m to $88m, boosted by lower cost to serve customers, increased commercial and industrial volumes and increasing LPG market share.
Genesis will pay an 8.6 cent interim dividend, up from 8.525 cents a year earlier. It will be paid on April 1 to shareholders registered at March 18.
Genesis said it had embarked on a future-gen strategy to develop, or contract the output from, wind, solar and geothermal projects so that it can displace 2,650 gigawatt-hours of gas and coal-fired production by 2030 to reduce its emissions and its long-term generation costs.
Genesis operates the Tongariro, Waikaremoana and Tekapo hydro schemes but is also the biggest provider of gas and coal-fired generation.
Genesis shares closed up 1.75 percent at $3.48
Businesses plan to start hiking prices according to latest survey
ANZ’s latest Business Outlook survey for February shows that a significant number of business plan to start hiking prices this year.
While headline business confidence fell a couple of points to a net 7 percent of respondents, firms’ own activity outlook eased 1 point to 21.3 percent.
But it was the rising inflation risk that was the main feature of this month’s survey.
Cost expectations rose 15 points to a net 72 percent of respondents reporting higher costs. A net 46.2 percent of respondents intend to raise their prices, a historically high level. General inflation expectations rose to 1.76 percent.
Investment intentions lifted 7 points, to 15.6 percent while employment intentions lifted 2 points, with a net 10.6 percent of respondents planning to hire more staff.
Businesses are busy on the whole, with capacity utilisation up 6 points to 15.3 percent. The construction sector is the busiest by far.
A net 1.3 percent of firms expect higher profits, down from 6.8 percent in December.
Fonterra lifts forecast earnings guidance
Fonterra Co-operative Group has lifted the bottom end of its 2021 forecast earnings guidance and narrowed the range to 25-35 cents per share, from 20-35 cents per share.
Fonterra CEO Miles Hurrell said while it is still in the process of preparing its interim accounts for release on March 17, it now had enough information to provide more clarity on its full-year earnings guidance.
“That is why we have come out with a narrower forecast earnings range of 25-35 cents per share, which still reflects the usual uncertainties we face over the course of any given year.
Fonterra is expecting its earnings performance to be heavily weighted to the first half of the financial year.
Hurrell says a forecast Farmgate Milk Price range of $6.90-$7.50 per kgMS, is great for farmers and the New Zealand economy, but dairy prices increasing through the first half of the year does put pressure on the co-op’s sales margins and this would be seen through the second half of the year.
13,600 weather related insurance claims in 2020 sets new annual record
Insurance support for communities around the country hit by extreme weather events hit a new annual record of $248m, with insurance customers making more than 13,600 weather related claims for the twelve months to December 2020.
The revised figure includes the preliminary cost of the severe weather and floods across the Greater Wellington region 29 November – 1 December, and the freak hailstorm that hit the Nelson-Marlborough region on Boxing Day.
The major loss events included the Napier flooding in November, ($73m provisional), Upper North Island flooding in July ($44m), Nelson-Marlborough hailstorm ($41m provisional), Lake Ōhau fire in October ($35m), Southland flooding in February ($30m) and the June Upper North Island storm and tornado ($17m).
NZ Insurance Council CEO Tim Grafton said New Zealand had to start adapting to adapt to our changing climate.
“Sadly, the impacts of climate change are very real for all New Zealanders. We must take steps to reduce risks where possible [by] building more resilient communities. This could mean improving infrastructure such as stormwater systems, not consenting new properties in higher risk areas, as well as building more resilient residential and commercial buildings,” he said.
Coming Up ….
Tourism Holdings Port of Tauranga and Steel & Tube will all report half year results to the end of December, while horticulture exporter Scales Corporation will report its full year results.
