Earnings season underwhelms investors as rising interest rates erode dividends appeal

"It is a modest growth market at the moment" – Mark Lister

New Zealand's listed companies delivered "solid but not spectacular" results in the February earnings season, providing little reason to drive up stock prices in a market where rising interest rates have eroded the appeal of dividend yields.

The latest round of reporting saw roughly two-thirds of companies on the benchmark S&P/NZX 50 Index report either first-half or full-year earnings, with the remainder generally using a March balance date and set to report in May.

Of the companies that did report, it was a roughly 60-40 split between those that produced good results relative to expectations and those with subpar earnings, Craigs Investment Partners head of private wealth research Mark Lister says.

"It was a reasonably steady reporting season but it certainly didn't set the world on fire," Mr Lister says.

"It is a modest growth market at the moment. We've got a lot of sectors like infrastructure, utilities and real estate, that are more slow and steady. We're seeing signs that we're starting to approach that peak in the earnings cycle and margins are starting to hit their limits."

Before the reporting season, analysts were predicting an average of 6.1% earnings growth in the 2017 financial year, which has now slipped back to 5.8%, Mr Lister says.

"The headwinds that people have talked about - the currency is still quite strong, you've got interest rates on the rise which will put a bit of a handbrake on things, and you've still got a bit of global uncertainty. There are a few mixed messages on that front, it's solid but not spectacular."

The local market has been attractive for international investors when global interest rates were low, with high dividend yields drawing foreign capital in, but as rates start to rise attention is shifting elsewhere.

The NZX50 reached a record 7571.1 last September, with very low interest rates making many listed companies highly attractive, but dropped as much as 12% in the final quarter of 2016 as global interest rates picked up. That correction has taken some of the heat out of the market and possibly spooked some investors, Mr Lister says.

Forsyth Barr broker David Price says international investors outside of Australia have become net sellers of New Zealand stocks.

Though total overseas holdings have been steady near an all-time high, the mix between investors from Australia and investors from the UK, US and Asia has changed in favour of Australians, who haven't been buying yield stocks.

"The market has had a fairly good run so it really needed something to kick it forward and we haven't had that," Mr Price says.

"We're really just treading water at the moment, though some markets offshore are rising sharply. On the whole, the way to characterise the season was above the line looked alright but was really boosted by lower interest costs and that's not something we are likely to see repeated, that won't be a tailwind."

Companies that did well, included retirement village operators Metlifecare and Summerset Group, which have both seen an uplift in earnings forecasts, with A2 Milk Co, Mercury Energy and Auckland International Airport also strong.

A2 is the best performer on the local benchmark index so far this year, up 15%, while Auckland Airport, Summerset and Metlifecare have all advanced 13%. The NZX50 index itself is up 4.1% so far in 2017.

On the flipside, Genesis Energy was weaker, with NZX, Comvita, New Zealand Refining, Fletcher Building and Sky Network Television also disappointing, Mr Lister says. Sky TV, Fletcher and Comvita are all in the bottom 10 for share price performance in 2017, while Metro Performance Glass is the worst performer, down 22%.

Mr Price says Forsyth Barr upgraded its rating for Air New Zealand to 'neutral' from 'underperform', but has downgraded Steel & Tube Holdings, PGG Wrightson and A2 Milk to 'neutral' from 'outperform'.


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