Companies remain under pressure from high inflation, interest rates

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Companies with greater exposure to international markets have had much more positive reports than those dependent on the domestic market, says Devon Funds Management head of retail Greg Smith.
Photo: RNZ / Angus Dreaver

The recent reporting season has been mostly disappointing with a few bright spots to lift the market.

“I think the expectations were low heading into this reporting season, given the economic backdrop, and it certainly was one of the weakest reporting seasons the (NZX) index has seen in recent years,” Milford Asset Management portfolio manager Sam Trethewey said.

He said weak consumer demand had hit a number of cyclical companies – those most exposed to economic trends.

“Fletcher Building did note a big pullback in activity during January, and consequently downgraded its earnings outlook and then surprisingly, two companies which were not scheduled to report, put out some very, very soft sales updates, trading updates – Ryman Healthcare and Kathmandu – and those stocks pulled back quite materially.”

Devon Funds Management head of retail Greg Smith said companies with greater exposure to international markets had much more positive reports than those dependent on the domestic market.

“I think it was a very mixed bag. And I think there was always a feeling that the experiences of companies that are domestically-focused might have been quite different to those with offshore exposures.”

Smith said Fletcher Building’s ongoing costs to complete projects, along with the resignation of the chief executive and chair of the board set the tone for the rest of the reporting season.

Port of Tauranga was weighed by a fall in imports, which also affected the retail sector.

On the plus side, Smith said export-led companies, such as speciality milk company A2 Milk, cinema software company Vista Group and Freightways, did better than those reliant on the domestic economy.

He said the travel sector highlighted the mixed fortunes of Air New Zealand, with increased competition driving down ticket prices, while Auckland Airport was benefiting from an increase in international passenger traffic.

The retirement village firms also delivered mixed results with Summerset delivering some growth, while Ryman Healthcare delivered a relatively poor result.

Smith said the standout result was delivered by infant formula exporter A2 Milk.

“China has been a concern and expectations are low around demand with birth rates falling. But yet (A2 Milk) had shown that if you can take market share it doesn’t matter so much,” he said, adding that the company was also making headway in the United States market.

The overall performance of the sharemarket was expected to remain under pressure as long as inflation and interest rates remained high, Smith said.

He said retailers were feeling the downturn in consumer confidence more than most other sectors.

“So it is tough out there for the retail sector. And that was also shown in a recent business outlook survey as well.”

Trethewey said some companies were trading at a significant discount, given their exposure to current economic conditions.

“Their earnings are subdued on the back of that, which does make them interesting for private equity players and potential companies that are willing to look to grow via merger or acquisition and can take a much more medium-term view on the company’s earnings and outlook.”