Business & Investing: The Reserve Bank’s hold on interest rates and strong earnings results by some firms boost the NZX as other markets worldwide fall
Spring came early to the NZ sharemarket this past week with the NZX50 recording its second best day of the year on Thursday notching up a gain of 238 points or 1.9 percent.
The unexpected bonus of a postponed hike in the OCR by the Reserve Bank combined with a weaker kiwi dollar benefiting export stocks – and strong earnings results from companies such as Contact Energy, Skellerup Holdings and EBOS – gave investors renewed confidence to ‘buy the dip’, despite the Level 4 lockdown and the uncertainties created by the rapidly growing Delta outbreak.
Tourism related stocks, including Auckland International Airport, SkyCity Entertainment and THL all came under renewed selling pressure, while retailers including Kathmandu and Hallenstein Glassons also lost ground.
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The rise in the NZ market was in stark contrast to the Australian sharemarket which suffered its worst week since January, sliding 2.2 percent to 7,461. Mining giant BHP accounted for a significant part of the market’s A$50 billion retreat, falling 16 percent last week. The A$220 billion company coupled a bumper earnings report with news it was accelerating its exit from fossil fuels and consolidating its holdings into one ASX listing. The move will see it end its dual listing on the London Stock Exchange, forcing many European fund managers to sell. News that Sydney’s lockdown is set to continue for another month, with record daily Delta cases now numbering in excess of 850, only added to the negative market sentiment.
In the US, the benchmark S&P500 index fell as much as 1.6 percent at one point as investors renewed their concerns the Federal Reserve may begin to rein-in its bond buying program. However, a fall in US Treasury yields, with the 10 year easing almost 2 percent, meant the index trimmed its losses by week’s end to close down 0.6 percent at 4,442.
Oil prices ended the week sharply lower, falling to a four-month low, as continued fears about the surge in Delta cases globally is likely to mean reduced demand. Brent Crude futures fell 7.5 percent to US$64.96, their biggest weekly decline since October last year.
Meanwhile, the US dollar index gained 1 percent to 93.46 as investors retreated to the safety of the greenback. That, with the postponed OCR hike, saw the NZ dollar fall 3.1 percent last week to 68.24, its lowest level since November, with some traders now forecasting the kiwi to continue weakening in the coming weeks.
Also catching investors’ attention this past week was a sharp rise in the volatility index (VIX), sometimes known as the ‘fear gauge’, which surged 20 percent last week to 18.56 after trading as high as 24.74, its biggest weekly rise since February. The jump reflected growing nervousness among investors after the release of minutes from the latest Federal Reserve meeting revealed a growing majority of the central bank’s voting members are now in favour of reducing monetary stimulus.
This week’s Jackson Hole conference in Wyoming has taken on added significance, with Fed Reserve Chairman Jerome Powell widely expected to outline the central bank’s plans for ‘tapering’ its current bond buying programme which has the potential to further un-nerve investor sentiment. Powell is scheduled to speak in the early hours of this Saturday (NZ time), likely to be one of his most important and widely scrutinised addresses this year.
While not making the headlines here as it has in other parts of the world, a plunge in Chinese tech stocks in recent weeks has also added to the nervous tone. Stocks such as Alibaba, Tencent and other big Chinese tech names are now down almost 50 percent from their peak six months ago having lost a combined US$1 trillion in value since February.
The Chinese government continues to impose tough new regulations on the sector designed to increase competition and improve what it terms as ‘social fairness’ including the management of personal data. China’s biggest tech firms now trade at an average discount of 26 percent per dollar of sales relative to their American counterparts which has cost many fund managers with investments in China dearly.
Locally, investors will be focused on a swathe of earnings results this week with a total of 22 companies set to report their numbers including market leaders Chorus, SkyCity Entertainment, Genesis Energy and Port of Tauranga. But the most anticipated result is likely to be that of a2 Milk following a series of profit downgrades in the past 12 months. Investors will be keen to see if the company is finally beginning to turn around its sales performance in the wake of the Covid-19 pandemic. (Full list below of companies reporting this week.)
WEEK IN REVIEW
The Reserve Bank left the OCR unchanged at 0.25 percent in response to the unexpected Level 4 lockdown last week. However, the reprieve is likely to be short lived, depending on the outcome of the current Delta outbreak, with the bank widely expected to increase the OCR by 50bp to 0.75 percent by year’s end.
Contact Energy reported a tax-paid profit for the year to June of $187 million up 50 percent on last year due to higher wholesale electricity prices caused by gas shortages and low hydro lakes. Coming a week after around 37,000 electricity users across the North Island experienced unanticipated blackouts on the coldest night of the year, the company pointed to its investment in new generation to meet future demand and analysis showing strong growth in the customer bases of smaller, competing retailers. Total revenues increased to $2.57 billion, compared with $2.07b last year and $2.52b in the 2019 financial year. Pre-tax and interest earnings rose 24 percent to $553m. Contact shares closed at $8.20, down 1.3 percent for the week.
Mercury Energy blamed a lack of rain in the North Island’s central plateau for the second year running for a 33 percent fall in its net profit to $141 million as a result of paying high wholesale electricity prices from other providers to make up for the shortfall from its Waikato river hydro stations. An unplanned outage at its Kawerau geothermal station also affected earnings. Pre-tax earnings fell 6 percent on the previous year to $463m, although the company expects this to increase to $590m in the current financial year. Mercury shares closed at $6.74, down 2.2 percent for the week.
PGG Wrightson reported a $15m increase in its annual net profit to $22.7 million. Revenues climbed 7.6 percent to $847.8m following strong farm gate returns with pre-tax earnings lifting more than 30 percent to $56 million for the year to June. Chief executive Stephen Guerin said strong performances across its retail, livestock, wool, real estate and Fruitfed horticultural supply businesses had all contributed to the result. PGG Wrightson shares closed at $3.52, up 0.2 percent for the week, but well off its $3.80 high earlier in the week.
Fletcher Building was finally able to deliver a dramatically improved annual result, beating its own annual profit guidance and crediting a successful turnaround strategy for its better financial performance. After reporting a $196 million loss last year arising from cost blowouts and project delays, the company reported a $305 million profit for the year to June and a better than expected pre-tax earnings result of $669m compared with a guidance range of $610m to $660m. It will pay a dividend of 18 cents per share, taking the annual payout to 30cps. There were no dividends paid last year. It also plans to continue its $300m on-market share buyback programme. Fletcher Building shares closed at $7.73, down 1.4 percent for the week, after trading as high at $7.96 before the result being announced.
Spark reported an 8.6 percent fall in its annual net profit to $384 million for the year ended June, as a shift to shorter-life assets and increased lease activity lifted its depreciation and amortisation costs. Revenue fell 0.8 percent to $3.59 billion, reflecting the loss of roaming revenue last year due to Covid-19, although pre-tax earnings lifted 1 percent to $1.12b, as a small reduction in headcount and shift to digital channels helped cut costs. While the company said its mobile market share rose slightly to 41.5 percent and is accelerating its investment in building 5G mobile networks, it said it faced tougher competition in broadband, where it was well short of its 40,000 wireless connections target. Spark shares closed at $4.78, up 1.1 percent for the week.
Auckland International Airport reported its first ever underlying annual loss as the Covid-19 pandemic significantly reduced international air travel. Reporting an underlying loss of $41.8 million for the 12 months ended June, its first loss since listing in 1998, the result was a dramatic turnaround from its $188.5m underlying profit last year when the pandemic was only in its early stages. Total passenger numbers more than halved for the year to 6.4 million and revenue fell 50.4 percent to $281.1m. However, including $527.3m of unrealised valuation gains on its $2.64 billion property portfolio, the company reported a net profit of $464.2m, more than double the $193.9m result in the prior year. It said it plans to further develop its property portfolio in the next year. Auckland Airport shares closed at $7.15, down 1.9 percent for the week.
Skellerup lifted its annual net profit 38 percent, beating its own upgraded guidance for the year to June for a second year. Net profit rose to a record $40.2 million compared with $29.1m the previous year. In April, the rubber goods manufacturer said it expected to report a net profit between $37m and $39m, up from its guidance in February of $33m to $37m, having earlier given profit guidance of $30m to $35m. Skellerup also announced it had acquired fellow Christchurch company, Talbot Technologies, for $10 million.
Plexure announced it will pay $125 million to acquire transaction platform Task in a merger deal paid mostly in new shares and cash. Task CEO Daniel Houden, will take the helm of the merged entity replacing Plexure boss Craig Herbison, who resigned abruptly two weeks ago. The Auckland based software developer has seen its share price slide more than 50 percent since the start of the year due to a range of issues that have impacted its performance. Sydney-based Task is privately owned and has been self-funded since its founding in 2000.
Mediaworks announced the departure of a second senior figure in the wake of a damning report into the radio and advertising group’s workplace culture. People and culture director Alex Nicholson stepped down from her role following the completion of a highly critical report conducted by Maria Dew, QC. Dew found evidence of a “boy’s club” culture, bullying, sexism, harassment and drug use at the media company which owns and operates several national radio networks including More FM, The Rock and The Edge. The media company’s people and culture department was singled out for specific criticism in the report with Dew saying employees did not trust the processes in place to handle complaints. Board chair Jack Matthews announced his resignation a fortnight ago.
COMING UP THIS WEEK…
- Freightways Full Year Result
- Michael Hill International Full Year Result
- Chorus Full Year Result
- Vector Full Year Result
- Summerset Half Year Result
- Heartland Group Full Year Result
- Restaurant Brands Half Year Result
- NZME Half Year Result
- Retail Trade (June Qtr) – Stats NZ
- SkyCity Full Year Result
- Meridian Full Year Result
- Sky Television Full Year Result
- Scales Corporation Half Year Result
- NZ Automotive Investments AGM
- Overseas Merchandise Trade (July)
- Residential Mortgage Lending (July) – RBNZ
- NZX Half Year Result
- Comvita Full Year Result
- Tourism Holdings Full Year Result
- Genesis Full Year Result
- A2 Milk Full Year Result
- Burger Fuel Group AGM
- Port of Tauranga Full Year Result
- Delegates Full Year Result
- Vector Half Year Result
- Geo Full Year Result
- Asset Plus AGM
- General Capital AGM
- Employment Data (July) – Stats NZ