Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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A LEFT-HAND SKEW

August saw the bulk of the June reporting companies deliver their earnings results. While actual results are normally pre-guided and therefore hold few surprises, fresh outlook commentaries enable analysts to assess trends and adjust forecasts. This was expected to be the main area of interest, given leading into the reporting season we had a weak Business Confidence survey and a number of pressures building in the economy, namely capacity constraints, as well as higher wage demands. More recently the weakness in the NZ dollar had also been more dramatic.

Less cautious outlooks but evidence of cost pressures

Surprisingly, the reporting season saw outlook statements that were more positive than we had anticipated. Rising cost pressures however were evident with revenue growth staying in line with expectations, but costs reducing the level of operating earnings. Here, misses were double beats 12:6 and hence revisions to FY19 earnings saw downgrades outpace upgrades by 16:10.

Scorecard skewed slightly negatively

From a scorecard perspective, (here we assign a positive or negative number to each metric and sum the result), this meant while results were normally distributed, there was a left-skew (negative).

Reporting Season Quantitative Scorecard (beat vs miss, EPS FY19 revision, price reaction, outlook)

 Source: Forsyth Barr analysis

Earnings revisions negative and absolute growth levels low

From an investment perspective, earnings growth remains low (4-5% p.a). There was a small uplift to our two year growth expectations; however, this wouldn’t have been enough to justify the +4% increase in the market valuation during August.

We would also note that while earnings for cyclical companies were revised lower (these are the companies most exposed to the economic cycle), earnings growth for this group remains high at +10% for FY20. This may prove optimistic given the maturity of the economic cycle and inevitable wage inflation. Accordingly further negative revisions should be expected.

Companies within Defensive Yield attributes appear to offer the best risk/return outlook with electricity gentailers being our preferred vehicles. Investors need to be very selective elsewhere and, while holding companies that have been appreciating is nice, investors need to ensure these share prices are adequately supported by fundamentals. Most of the recent activity can be attributed to momentum, rather than fundamental improvements in value, so profit-taking may be the best course of action. 

Normalised market EPS growth 

  Weighted Median Weighted ex Prop
  Jul-18 Current Jul-18 Current Jul-18 Current
FY19 +3.2% +3.1% +5.4% +4.4% +3.5% +3.5%
FY20 +4.2% +5.0% +5.0% +5.9% +4.8% +5.6%
Annualised: +3.7% +4.1% +5.2% +5.2% +4.1% +4.5%

Source: Forsyth Barr analysis

Brian Stewart
Senior Analyst, Strategy

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