Earnings up for ‘big six’ but caution prevails

The first few June-year results from our major companies have given investors plenty to cheer about.

All six companies announced an increase in earnings compared with the June 2010 year and four of the six (Fletcher Building, Freightways, Port of Tauranga, Steel and Tube) have raised their annual dividend. The only exceptions were Telecom, which cut its dividend from 24 cents to 20 cents, and SkyCity, which reduced its annual distribution from 17.25 cents to 16 cents (see table).

Broker analysts are optimistic about the year ahead, even though chief executives believe economic conditions remain uncertain and are unwilling to give earnings guidance for the June 2012 year.

Analysts expect the six companies to report higher earnings this year and raise their dividends. They’re especially optimistic about Fletcher Building even though the Christchurch rebuild will be delayed because of insurance and building code consents.

The Crane acquisition in Australia and its success with the Waterview contract is expected to boost Fletcher Building’s earnings and compensate for the deferred Christchurch reconstruction, which may not be in full swing until the June 2014 year.

The one disturbing feature is that all six companies have focused on “normalised or adjusted” earnings instead of audited figures. This worrying trend began a few years ago and has accelerated in 2010 and 2011.

Auditors are signing off IFRS (International Financial Reporting Standards) compliant profit figures yet directors are claiming another, usually higher, figure as normalised earnings. Five of the six companies reviewed reported normalised earnings in excess of audited profits, Port of Tauranga the notable exception.

The highly successful port company announced a normalised profit of $57.9 million compared with an audited figure of $58.4 million. The difference is due to deduction of a deferred tax adjustment of $0.5 million relating to properties.

Many of these adjustments, from audited to normalised earnings, are justified but they’ve created dangerous precedents. Companies seem to be able to make any adjustments they wish and these adjustments are not subject to auditors’ scrutiny. The potential problem is that less scrupulous directors will follow the example of our largest companies and produce their own “creative normalised” earnings.

Creative accounting and poor standards were major contributors to the 1980s sharemarket boom and bust. This encouraged a substantial number of New Zealanders to invest in residential property instead of the sharemarket.

Ironically the NZX, which announced its interim profit for the six months to June 30 this week, has one of the largest gaps between audited and normalised profits. The NZX had an audited profit of $4.51 million for the interim period to the end of June but reported normalised earnings of $6.62 million.

These adjustments from audited to the higher normalised profits raise the question of whether staff bonuses and incentives are based on the lower audited figure or the higher normalised number.

Fletcher Building announced normalised earnings of $359 million for the twelve months ended June compared with an audited profit of $283 billion. The higher normalised figure was due to a number of items including the exclusion of asset and stock write-downs as well as costs following the Crane deal.

The group’s annual dividend was increased to 33 cents but it’s still well below the 48.5 cents paid in the June 2008 year.

Australian activity slowed towards the end of the financial year although chief executive Jonathan Ling noted this was due to a loss of confidence, instead of economic fundamentals, and this confidence could turn around quickly.

Ling said the current environment was extremely uncertain and it was unlikely the Christchurch rebuild would be in full swing until the June 2013 year at the earliest. Nevertheless analysts are forecasting net earnings in the $410 million to $460 million range for the current year compared with $359 million for the recently completed year.

Freightways is an excellent barometer of domestic economic activity and its recent results have reflected this. Earnings have been relatively flat but managing director Dean Bracewell said this week he believed the outlook was more stable than it had been for some time. Analysts’ forecasts reflect this, most expecting the company to achieve earnings in excess of $34 million this year compared with $31 million in 2010/11.

Port of Tauranga has been the outstanding performer over the past four years, in terms of both earnings and dividends, and clearly demonstrates that public/private partnerships can work.

The port is 55 per cent owned by the Bay of Plenty Regional Council and the controlling shareholder has given full support to the company’s excellent management team.

Port of Tauranga has benefited from buoyant log trade and its ability to gain container trade market share in recent years.

The company faces a number of challenges in the year ahead because of uncertainties over log and kiwifruit volumes, but broker analysts are forecasting net earnings of around $64 million compared with $57.9 million for the June 2011 year.

SkyCity, operator of casinos in Auckland, Hamilton, Queenstown, Adelaide and Darwin, had an audited profit of $123 million but normalised earnings of $130.9 million.

The improved result was due to a number of factors including better trading in the Auckland and Adelaide casinos as well as higher VIP earnings.

The company has a large number of initiatives in Auckland that should boost earnings during the Rugby World Cup and beyond.

Analysts are forecasting net earnings between $148 million and $160 million for the current year compared with $130.9 million last year. However, that’s forecast to flatten out in the 2013 year unless there’s substantial improvement in performance of the other casinos, particularly Adelaide and Darwin.

Steel & Tube announced normalised profits of $17.3 million compared with audited earnings of $17.0 million, a vast improvement on its June 2010 year.

However, the company reported the 2011 financial year finished weakly “as several key sectors continued to deteriorate thereby offsetting those sectors showing signs of improvement”.

Chief Executive Dave Taylor noted the residential and non-residential construction sectors continued to deteriorate and farmers seemed to put a high priority on reduction of debt.

Broker analysts have fairly cautious earnings forecasts for the June 2012 year, although they expect a better 2013 year as Steel & Tube benefits from Christchurch’s rebuild.

Telecom announced normalised earnings of $388 million for the June year compared with audited net earnings of $166 million, the adjustments due to several pluses and minuses including the write-back of an asset impairment charge of $257 million.

Most of the normalised earnings improvement was due to cost reductions as the company continues to face pricing pressures on its products and services.

The telco did not give any guidance because of regulatory issues associated with the demerger of Chorus, its network division. This is expected to happen before the end of the current calendar year.

Market sentiment towards Telecom has changed and the stock has outperformed the New Zealand sharemarket over the past few months. However the company’s break-up presents considerable challenges ahead as does the continuing pressure on product prices.

Though all six companies produced positive results, there’s no hint of complacency in corporate New Zealand. The year ahead presents enormous challenges, as well as opportunities, and we can expect a number of adjustments to analysts’ June 2012 year earnings forecasts before these results are announced.

Normalised earnings & dividends – Something to cheer about

June 30 years