New Zealand markets buck the trend - for now

Amid talk of American recession, slumping sharemarkets and credit crises, investors could be forgiven for thinking companies are struggling to perform.

But the latest reporting season suggests the picture in New Zealand is not as gloomy as all that. Of the 34 companies to have reported their most recent results, 24 saw a profit gain. Of the 27 paying a dividend in the period, 15 gave a raise.

Those are not bad numbers but markets are forward looking and analysts see a growth outlook nowhere near as strong as it was a couple of years ago.

"It was a good reporting season," said Forsyth Barr analyst Rob Mercer. "There was a good mix of companies performing Nuplex, Michael Hill on the retail front, Sky City if you remove the abnormal [cinema write-down] there. We also had good performances from smaller companies such as Ebos. Mainfreight was a good result.

"But, all in all, it's not about the current results, it's about the crystal ball out to 2009."

Bernard Doyle, equity strategist for Goldman Sachs JBWere, focused on performance relative to GDP he measured median profit growth at 3%, versus nominal GDP growth of 6.8%.

"It's not markedly slower than last year," he said. "But it's starting to lag GDP growth by a fair bit. We're starting to see cost pressures as a drag on earnings growth."

Rising wages widen the gap, he said, because they push up GDP but are "corrosive for profit growth". As an example, he cites Telecom, whose wage bill blew out to $230 million for the latest quarter compared to $188m for the same period a year ago.

Underlining the point, the Reserve Bank on Thursday held the cash rate at 8.25% citing the labour market stoking inflationary pressure. "Ongoing tightness in the labour market has contributed to substantial growth in labour incomes in recent years as firms compete for scarce workers," the bank said.

"Growth in total weekly earnings has been running at about 7% for about four years. And while employment growth has slowed somewhat, wage inflation remains high."

The Reserve Bank's high interest rates and correspondingly high kiwi won't do much for many companies either. But that could offer opportunities for stockpickers, Doyle said.

"The thing about New Zealand is it's almost a collection of stocks rather than a market there aren't that many companies listed. So, while the market will be holding back a little bit, there will certainly be stocks that will continue to thrive."

Nuplex, for example, makes most of its money overseas so could benefit hugely if the exchange rate drops as some say it must.

There's also the benefit of good dividend yields. Falling share prices have pushed New Zealand's traditionally healthy yields to 5.5% on average a level Doyle describes as "pretty attractive, particularly if you believe cash rates will come down".

On the evidence of the latest reporting season, companies are well aware of investors' focus on dividends. Several big players had substantial dividend hikes, including Nuplex, PGG Wrightson, Air New Zealand (not counting the 10c a share special dividend this time last year), Sky TV and Auckland airport.

Sky City, having wasted $60m of shareholders' money in the cinema business, offered an olive branch with a 22% interim dividend boost to 11c a share taking its net yield at current share prices to 5.75%.

Conversely, investors will be wary of companies cutting payouts. Hellaby Holdings cut its interim dividend two years running; Skellerup Holdings took a dividend holiday (normal service should be resumed in October); Steel & Tube, which has delivered good returns, is suffering from volatile market conditions.

Doyle warned investors not to expect much from the coming year. "Earnings growth has come back over the past four years to low single digit. I expect low single digit growth for the next year," Doyle said. "And I wouldn't want to see that go negative."

- © Fairfax NZ News