Earnings downgrades could be looming for a variety of listed companies with large exposure in Australia, given the ongoing strength of the New Zealand dollar against its transtasman counterpart.
While the kiwi is still to reach 1:1 parity with the Australian dollar, its close proximity and likelihood of staying well above the historical A84c average is expected to weigh heavily on numerous companies' balance sheets, when the weakened Australian dollars are converted into kiwi dollars.
The listed retail sector in particular, already grappling with temperamental weather, competition and consumer sales fatigue appears at most risk, including beleaguered Pumpkin Patch, Kathmandu and Hallenstein Glasson.
Also likely in line for a possible rerating is Fletcher Building, already suffering declining returns from the Australian downturn in mining and infrastructure, SkyCity Entertainment with its casinos in Darwin and Adelaide, plus Mainfreight, which had $450 million revenue from Australia last year.
Depending on recent investment in Australia, and whether Australian revenues are above 20% of the total, Mainfreight, Freightways, Ryman Healthcare, Scott Technology, Fonterra, Delegats, Infratil and a2 Milk could also all be scrutinised for a future rerating, Craigs Investment Partners broker Peter McIntyre said.
''Australian earnings are not a whole of the part, such as Scott Technology with 20% of its $60 million total revenue from Australia. Quite a number of the companies are sufficiently diversified in other markets and already have foreign exchange cover,'' he said.
Aside from the obvious implications of losses from near parity, Mr McIntyre highlighted the performance of the ''sluggish'' Australian economy will run a close second as being of most concern.
From a record high of A99.78c on Monday, the kiwi had eased off to just above A98c during the week, after the Reserve Bank of Australia surprisingly left its interest-driving official cash rate at 2.25% on Tuesday.
Forsyth Barr broker Andrew Rooney said the RBA's holding of the cash rate had given parity ''a stay of execution'', but he highlighted the future negative risks to company valuations would be driven down by the time it takes for the currencies' cross rate to begin weakening.
''Approximately 12 of the NZX50 revenues are derived from Australia, although secondary impacts are also likely to suppress margins,'' he said.
Alongside Fletcher and SkyCity, Mr Rooney also ranked Ebos, Xero, Infratil, Trustpower and Kathmandu as companies with revenue exposure of note in Australia.
He noted that mitigating some of the risk were several companies which held the majority of their debt in Australian dollars, including Abano, Ebos, Michael Hill Jeweller, SkyCity and Trustpower.
While the RBA could cut the cash rate in the future; which would dampen the likelihood of parity, the macro-prudential tools of the Australian Prudential Regulation Authority could be brought into play, dampening the RBA cut.
''Accordingly we believe Australia continues to provide a headwind for New Zealand companies with Australian operations that can not grow market share,'' Mr Rooney said.
Mr McIntyre said any rerating would likely be considered, if a company's revenue was 20% or more from Australia, or, like Ryman Healthcare, was making its first inroads and large investments into Australia.
''There will be a material impact for some,'' Mr McIntyre said, given the strength of the kiwi against the Australian was expected to remain for some time yet.
''[However] New Zealand's listed companies have become adaptive in dealing with a strong New Zealand dollar, having been so strong for so long against the US dollar,'' he said.
He also noted the strength of the US dollar could also provide some reprieve, given that at present estimates it had double the positive impact on New Zealand company earnings.
''Of course, there will be beneficiaries and losers from this change,'' he said.
Those with US dollar earnings will enjoy ''significant tailwinds'', while those with costs in US dollars, and unable to pass them on, will face greater profit margin pressure, he said.
Craigs head of private wealth research Mark Lister said there was still room for Australia's Reserve Bank to carry out two interest rate cuts, The New Zealand Herald reported.
''I think we will hit parity and ultimately push up into the $A1.02 region.
''I think there will be consequences for companies that have got big Aussie operations,'' Mr Lister said.
Research analyst and portfolio manager Shane Solly, of Harbour Asset Management, said sustained strength in the exchange rate could result in downgrades of companies' earnings guidance and cuts to analysts' forecasts.
''A large proportion of the New Zealand market has some exposure to Australian revenue and earnings,'' Mr Solly said.
Exposed
Candidates with Australian exposure for possible rerating: Fletcher Building, SkyCity Entertainment, Mainfreight, Freightways, Ryman Healthcare, Scott Technology, Fonterra, Delegats, Infratil, Hallenstein Glasson, a2 Milk, Ebos, Xero, Vital Healthcare Property Trust, Pumpkin Patch, Cavalier, Michael Hill International, Infratil, Trustpower, Kathmandu, Abano Healthcare.
SOURCES: CRAIGS INVESTMENT PARTNERS/FORSYTH BARR
