Hot stocks’ mid-year review

Brokers and fund managers told us last year which listed company shares might do well in 2013. It's time for a half-year assessment. What a ride.

Well, what a ride.

The Greens/Labour power plan to install a single market buyer wiped hundreds of millions of dollars off listed electricity companies and turned Mighty River Power’s big splash into a damp squib.

Mainzeal, the country’s third biggest builder, collapsed in a Waitangi Day storm that garnered unwelcome attention for Genesis Energy chairwoman and former Prime Minister Jenny Shipley, plus financial headaches for the many tentacles of Fletcher Building.

More recently, EBOS shareholders endorsed a $1.1 billion acquisition of Symbion, which will triple its annual sales as it attempts to become Australasia’s biggest pharmaceutical wholesaler and distributor.

The NZX50 gross index was up 8.2% for the year, as at Friday morning, but down 5.3% from mid-May’s high. Cloud accounting company Xero continues to lead share price returns on the NZX50, more than doubling this year and becoming the highest-priced local stock.

This year, gold prices, Apple shares and Japanese equities have tanked and global stock markets have experienced a modest correction since mid-May – an extended inhalation thought to be related to further announcements on the United States’ monetary intentions.

Plenty to chew on, then, after a bumper 2012.

But what of our 2013 hot stocks?

Last year, broking firms Hamilton Hindin Greene, Craigs Investment Partners and Forsyth Barr, as well as fund manager Brook Asset Management, told NBR ONLINE their top three listed company picks for the year.

Three emerged as favourites – PGG Wrightson, Mainfreight and Fisher & Paykel Healthcare.

Unfortunately, it hasn’t been plain sailing.

PGG Wrightson (NZX: PGW)

AT A GLANCE
Share price (Jan 1-Jun19): 44c-30c, -32%
Earnings: Profit warning in May, -13% to -27%
Dividend: 2.2c paid in March, first dividend since April 2009
Net yield: 7.6%

Long-suffering shareholders of the New Zealand rural services firm received their first dividend for four years but they surely knew the drought would hurt them. And so it was. In May, PGW revealed the country’s drought will hit annual earnings by up to 27%, as dry conditions conspired to drop livestock prices. Two weeks later the company announced managing director George Gould – who was apparently employed on a fixed and “relatively short” term basis – would step down in August. His replacement is Livestock Improvement Corp’s Mark Dewdney. Questions remain over what, if anything, cornerstone shareholder Agria Corp brings to the table.

Mainfreight (NZX: MFT)

AT A GLANCE
Share price: $11.70-$10.56, -9.7%
Earnings: EBITDA to year ended March 31, $137.5m, -0.5% (no detailed guidance)
Dividend: 12c (interim, December); 15c (final, July)
Net yield: 2.5%

Record revenue couldn’t stop a slight drop in earnings, as the transport group’s recently-acquired European arm continues to cause problems. Mainfreight bought Netherlands-based Wim Bosman Group in 2011 to cement a foothold in Europe and boost earnings. But it lost key accounts in the first 12 months and is grappling with a European recession. Deutsche Bank and Forsyth Barr are backing a turnaround. They have a buy/accumulate recommendation and are picking at least 7.5% increase in EBITDA next year.

Fisher & Paykel Healthcare (NZX: FPH)

AT A GLANCE
Share price: $2.47-$3.34 +35.2%
Earnings: EBIT year ended March 31, $112.7m, +21%, outlook: NPAT $85m-$90m
Dividend: 5.4c (interim, December), 7c (final, July)
Net yield: 3.6%

Finally, a good story. The Auckland-based maker of breathing masks and respirators lifted its full-year guidance several times before beating its own estimates with a record $77.1 million profit in the year ended March 31. That figure should lift to between $85 million to $90 million in 2014. The lift came from a combination of revenue growth, improved gross margins and operating efficiencies, as it increased the range of products made in Mexico and expanded sales in North America, Europe and Asia Pacific. The prime minister opened its $95 million, 32,000sq m Auckland building in March.

Chorus (NZX: CNU)

AT A GLANCE
Share price (Jan 1-Jun19): $2.94-$2.49, -15.3%
Earnings: EBITDA $331m, -2.6%, dividend guidance of 25.5c per share
Dividend: 10c (interim, April)
Net yield: 10.4%

“Regulatory risk” is a phrase that hangs like a gloomy cloud over this Telecom spin-off; too risky, as it turns out, for Deutsche Bank's analyst. If that wasn’t enough, the company has flagged increased costs for building the country’s ultra fast broadband network. Twice last year, in May and December, Chorus’s share price slumped after draft regulation announcements from the Commerce Commission on what the the telecommunications network operator can charge other companies for access to its infrastructure. Chorus chief executive Mark Ratcliffe used a speech at a Commerce Commission conference to say broadband regulation is “weird” to foreign investors, could be redundant in the end, and should be halted. International investors have fled. At the time of the demerger 75% of Chorus shares were held offshore, compared to 45% earlier this month.

Tower (NZX: TWR)

AT A GLANCE
Share price: $1.93-$1.95, +1%
Earnings: First-half loss from continuing operations $7.8m, -225%, $51.4m gain on sale
Dividend: 6c (February, final), 5c (interim, July)
Net yield: 5.6%

It seems this insurer has been running fast to stay still. It has been selling assets – namely, its health, life and investment units – to transform itself as 34% shareholder Guinness Peat Group has been winding down its own portfolio. It’s a transition year which will see its result affected by one-off items and the cost of restructuring. Tower’s asset sales have released $370 million of capital, of which $120 million has been distributed and $114.5 million more is expected to be returned to shareholders.

Sky City (NZX: SKC)

AT A GLANCE
Share price: $3.78-$4.33, +14.6%
Earnings: EBITDA $162.7 (normalised, 1H13), -1.7%,
Dividend: 10c (interm, April)
Net yield: 4.2%

You’ve got to spend money to make money and SkyCity Entertainment is a prime example of this. Its first half result reflected a drop from the year-earlier Rugby World Cup, but the main focus this year has been on its controversial plans for a $402 million convention centre in Auckland, in exchange for government regulatory concessions. It has snapped up Queenstown’s Wharf Casino, indicated an interest in Philippines and announced a $350 million redevelopment plan for Adelaide Casino, after selling its 50% interest in Christchurch Casinos.

Ryman Healthcare (NZX: RYM)

AT A GLANCE
Share price: $4.55-$6.30, +38.5%
Earnings: Underlying profit $100.2m, +19.2%
Dividend: 4.6c (interim, December), 5.4c (final, June)
Net yield: 1.62%

One of the NZX50’s best performers last year, the retirement village developer and operator’s share price keeps rising on the promise of its building activity in New Zealand and Australia and on the growing demographic of elderly people. Its underlying profit broke $100 million for the first time, the company announced in May. Earlier this year it broke ground on its development in Melbourne and bought new sites in Auckland’s Birkenhead suburb and Petone, near Wellington, to add to its 26 villages serving more than 7000 residents. Since 1999 it has invested more than $1.2 billion building new villages and it says there will be more land acquisitions in the year ahead.

Diligent Board Member Services (NZX: DIL)

AT A GLANCE
Share price (Jan 1-Jun20):$5.47-$7.55, +38%
Earnings: 1Q13 operating profit from ordinary activities $US3.46m, posted in April, +77%
Dividend: None
Net yield: n/a

Gun. Foot. Kaboom. This US-based maker of corporate boardroom software has enjoyed huge share price gains as its profit has grown in the last two years and prompted a new league of technology companies to list. But it is less than diligent with following regulations, shooting itself in the foot again and again. This week confidence in the company has been rocked by admissions it incorrectly recognised revenue and the resignation of director Rick Bettle, as he faces trial for his role of failed lender Dominion Finance. The company also admitted problems with exceeding incentives caps for executives, including chief executive Alessandro Sodi, and possibly wider compliance issues. Former NZX ceo Mark Weldon hasn’t been immune to the slew of administrative errors, as his shareholding interests were filed in an untimely manner.

Summerset Group Holdings (NZX: SUM)

AT A GLANCE
Share price: $2.24-$2.89, +29%
Earnings: $15.2m underlying profit FY 2012, +88%
Dividend: 2.5c (final, March)
Net yield: 0.9%

This operator and developer of retirement villages is starting to establish itself beyond the shadow of bigger rival Ryman. It has announced plans to list on the Australian stock exchange and is meeting building targets. Major shareholder Quadrant Private Equity took advantage of Summerset’s high share price last month to sell 30.7 million shares, or 14% of the company, to Australian and New Zealand investors. It retained 49.1 million shares, or about 23%.

2013 stocks to watch

HAMILTON HINDIN GREENE
• PGG Wrightson
• Chorus
• Tower

FORSYTH BARR
• Mainfreight
• PGG Wrightson
• Sky City

CRAIGS INVESTMENT PARTNERS
• Fisher & Paykel Healthcare
• Ryman Healthcare
• Diligent Board Member Services

BROOK ASSET MANAGEMENT
• Fisher & Paykel Healthcare
• Summerset Group Holdings
• Mainfreight

DISCLAIMER: Information in relation to these stocks to watch is intended as general information and not financial advice. Readers should obtain professional advice before making investment decisions. Copies of disclosure statements of NZX adviser firms mentioned in this article can be obtained by contacting the firms.

dwilliams@nbr.co.nz