With New Zealand entering a second year of recession, companies going into the forthcoming financial reporting season may have some unsavoury news for investors. Business reporter Simon Hartley profiles the upcoming season with Forsyth Barr brokers Suzanne Kinnaird and Tony Conroy and ABN Amro Craigs broker Peter McIntyre.
The forthcoming company reporting season is likely to reflect flat earnings before interest and tax and the likelihood of dividend downgrades by as much as 20% as listed companies continue the belt-tightening process with another wave of recession on the way.
With the Reserve Bank's interest-driving official cash rate plummeting to 3.5% in recent months and yields from deposits and bonds being pushed down, investors are finding it increasingly difficult to maintain income from their investments.
New Zealand investors rely heavily on dividend yields when choosing their stocks and it may come as a shock when company prudence overtakes its largesse towards shareholders.
Over the next five weeks or so, about 40 listed companies will deliver financial reports, generally for half-year trading performance.
ABN Amro Craigs broker Peter McIntyre is picking overall an up to 20% cut to dividend yields and earnings from the forthcoming season "The good companies have consistently been delivering 8%-12% yields.
"But this year, even the companies which have robust balance sheets and the ability to pay out may be cautious and cut dividends in order to retain more cash on their balance sheets."
Mr McIntyre said few short-term positives were to be taken out of 2009, with a slew of more recessionary-related news on the way, especially considering the interim company reports were likely to be "missing some accuracy".
"There's few positives to change investor sentiment in the short term. Dividend positions will be paramount this year," he said.
While yields may be down to an average 7%-8%, Mr McIntyre said that was better than many other options, whose yields were being driven down by the falling interest-driving official cash rate of the Reserve Bank.
"That [7%-8%] yield may become the major catalyst for the New Zealand markets to turn.
"It's more attractive than falling bank rates."
Forsyth Barr broker Tony Conroy said the overall listed market was looking at median earnings before interest and tax (ebit) growth, which was flat.
"There will be companies that have negative ebit growth, balanced off by those with positive ebit growth - resulting in a flat effect over the whole market," he said.
That was quite a turnaround from the preceding reporting periods, where there was 6%-12% ebit growth, Mr Conroy said.
"Earnings are likely to be flat, and reported profit is likely to be boosted slightly by tax changes."
AT the weaker end of the market, Forsyth Barr expected to see negative growth in the consumer spending and tourism sectors, affecting companies such as Tourism Holdings, Briscoes, Michael Hill and Hallensteins.
However, at the upper end are Steel and Tube, driven by high steel prices and stable volumes that have boosted earnings in the first half of 2009, and New Zealand Oil and Gas.
"They have considerable cash on hand [$212 million] boosted by a $35 million foreign exchange gain as a result of the recent US and New Zealand dollar cross rate.
Mr McIntyre said rural servicing company PGG-Wrightson had materially reduced its full-year 2009 guidance, and the broker's guidance was subsequently slightly lower again.
He noted earnings were weighted to the second half.
ABN expects the first-half after-tax profit at $9.3 million and full-year at $38 million.
"With agricultural commodity markets having deteriorated rapidly in recent weeks, earnings risk remains to the down side.
High levels of leverage and a perceived technical overhang add further uncertainty," Mr McIntyre said.
Given the economic conditions, with numerous agricultural commodity prices "heading south", ABN forecasts the risks to the group's second-half result are to the down side.
"As we have noted in previous reports, uncertainty as to the ultimate legal outcome of the group's failure to fulfil its unconditional obligation to acquire a 50% stake in Silver Fern Farms [for $220 million] is likely to continue to overhang the stock," Mr McIntyre said.
For defensive stock Contact Energy, Mr McIntyre said recent extremes inrainfall, coupled with interisland transmission constraints, were the biggest driver of the downgrades.
ABN is forecasting a first-half after-tax net profit of $45.1 million and full-year $169.2 million, after Contact announced a shock almost 25% profit downgrade late last month on the back of having to buy spot-price power for the South Island during a drought period, which has been estimated to have cost it $50 million.
"In addition, we calculate that higher-than-expected gas purchase costs, up 25% on last year when we expected an 11% rise, will contribute a further $37 million to Contact's downgrade," he said.
No upgrade of the HVDC link across Cook Strait was planned before 2013, which was causing disruption and this volatility would be ongoing, he said.
For New Zealand Oil and Gas, Forsyth Barr broker Suzanne Kinnaird was forecasting a first-half 2009 earnings before interests and tax of $62.6 million and reported profit of $78.2 million.
"The oil price peaked in July 2008 and has declined significantly, although this has been largely offset by the declining New Zealand dollar versus the US dollar, prompting the large foreign exchange gain of $35 million," she said.
Normalised profit without the foreign exchange gain would be $43.2 million.
"The main focus of this result will be progress updates on Kupe and their exploration activities," Ms Kinnaird said.
Forsyth Barr was expecting a "reasonably resilient result" from Sky City Entertainment Group, driven by its Darwin casino and management initiatives in Auckland helping to offset a weak environment.
Ms Kinnaird said the refurbished Auckland casino had the worst impact of full smoking bans and regulatory changes behind it, along with a relatively new management team with strong gaming expertise.
"Our forecast is $153 million, with reported profit of $53.8 million, only marginally lower than the same period last year," she said.
Sky Network Television's expansion of MySkyHDi and aggressive incentives to maintain positive subscriber growth would slow earnings growth, but Ms Kinnaird still expected a first-half reported profit of $52 million, a slight increase on the same period last year.
"We will be particularly interested in their update on MySkyHDi given recent comments of stronger than expected demand," she said.
Mr McIntyre, Mr Conroy and Ms Kinnaird are all expecting cautious, downplayed forecast statements in the coming weeks from most of the almost 40 companies reporting.
Mr McIntyre said the New Zealand market could possibly follow the recent trend in Australia where major companies were raising capital by going back to shareholders.
However, he expected similar New Zealand companies were more likely to first look at debt issuances, which offered investors a yield from fixed income.
Mr Conroy said the main focus of the reporting season would be not so much on the numbers but on the outlook statements, with an expectation forecasts would be cautious to negative, reflecting uncertainty both domestically and globally.
"We are not expecting there to be a lot of conviction in forecasts. Corporates are not going to forecast comfortable positions as it is simply too difficult to make predictions in this environment of slowing demand."
The financial investment disclosures of all three brokers are available on request.
