The New Zealand Reporting Season is over, so what do the results tell us about our economy? Ryan Bridge talks with Co-Portfolio Manager Michael Luke about the listed companies that performed well, and what the results reveal about business confidence and the economic outlook for 2025.
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Bridge talks Business: 3 September 2024
Episode Transcript
Ryan Ridge
Kia Ora. I’m Ryan Bridge. Welcome to Episode 4 of Bridge Talks Business with Milford. If you haven’t already… like/follow/subscribe wherever you choose to watch or listen.
It’s reporting season here in New Zealand. While the news has been good for a few, there is no doubt the slowing economy is taking its toll on most. We’ll look at what light the results can shed on our fortunes for the year ahead with our feature in interview in just a second.
But first…
(TOP 5)
- AI chip-making superhero Nvidia reported profit gains… but shares sank… with most investors already on board and expectations at elevated levels.
- Aussie’s still too hot to cool down… and I don’t mean the temperature. Inflation slowed to 3.5% year-on-year but still too hot for the RBA – no rate cuts in the foreseeable.
- In the US… the data is fighting fears of a slowdown. Second quarter GDP, solid consumer spending and benign jobs data there … the high frequency kind. The Fed meets this month and this Friday’s unemployment data release will help guide any decisions there.
- NZ business is feeling itself. Confidence surging to 10-year highs in August fuelled by feel-good rate cuts.
- BUT… confidence ain’t cash. The survey pointed to weak current trading conditions, something backed up by the Kiwi reporting season here.
Joining me today is Michael Luke, a Milford Co-Portfolio Manager. Michael – thanks for being on the show.
Michael Luke
Hi Ryan. Great to be here.
Ryan Bridge
Good to have you here. Just a note for those who are watching or who are listening at home. This segment is informational only and should not be considered financial advice. Michael, reporting season. Are you just loving this?
Michael Luke
It’s certainly a busy time for us. Lots of company meetings out on the road, getting the real pulse of what’s going on in our stock market and the local economy.
Ryan Bridge
So, we’ll talk about the results in a second and what they have told us about the past and crucially about the future. But how are the markets reacting to reporting season?
Michael Luke
So, overall the New Zealand share market was pretty flat. Now that’s after being up nearly 6% in July. So, July was all about the reserve bank cutting rates. August was all about company results. And if I think about some of the performers, while the share market was pretty flat, within that we saw some pretty big moves. So, top performers being Katmandu up over 20%, Vista Group up over 20%. And we also saw a number of income shares kind of perform strongly as well. While on the other hand, some of the maybe more disappointments were companies like a2 Milk, Spark, which were down about 20%.
Ryan Bridge
Yeah, so a2 Milk, a lot to do with China?
Michael Luke
Yeah, so a2 Milk, they’re primarily exporting infant formula to China and that market’s really tough. So that weighed on their outlook a little bit.
Ryan Bridge
And Spark has been hit by – because I guess you look at countries like Australia and America in terms of government spending – they are sort of not pulling back quite as much as our government is here. Is that what is affecting Spark’s result?
Michael Luke
Yeah, it’s quite an interesting one because other countries like Australia and the US, their governments are still kind of spending. While in New Zealand, our government is really cutting back. So, we’ve seen companies like Spark, which is traditionally pretty resilient. People don’t really cut phone lines, but Spark also has quite a large IT services business doing a lot of work with government. And governments really cut back on IT spending. All of those technology projects have been put on hold and that really impacted Spark’s result.
Ryan Bridge
Interesting that similar story for Air New Zealand, right? Because they are quite reliant on government spending when it comes to business travel.
Michael Luke
A similar thing with Air New Zealand. They’re doing it quite tough and they kind of called out that government spend on travels down about 50%, compared to corporates down 9%. So, government and businesses cutting back on travel is impacting companies like Air New Zealand as well.
Ryan Bridge
OK, so how would you describe the market reaction to reporting season pretty stable or volatile? Depending on where you look.
Michael Luke
I’d call it volatile – over and unders. There’s always over and unders. I think particularly the outlooks from some of our more domestic companies – they were probably a bit softer, as you’d expect, with what’s going on in the economy.
Ryan Bridge
Yeah, let’s talk about that because obviously the Reserve Bank was aware that things were bad, and so they cut rates. When we look at these reports, how bad did it get, you know, in actuality for these companies? And when did it get really bad?
Michael Luke
I think from company results, it’s really clear that the decline in the economy started maybe slowly and then really accelerated throughout the year, particularly in May and June. And if you think about some of the results, you had Fletcher Building. Now, they kind of said that construction volumes activity was down about 25% and that flowed through to the earnings being down 60%.
And Fletcher Building is expecting building activity to drop another 10 to 15% over the next 12 months. So, that’s one example. Two other examples are Spark – like I said, it’s really only in the last couple of months that they have seen that big slowdown in IT spending. And then we’ve also seen other companies like Heartland Bank kind of call out. Just in the last few months, they’ve been seeing businesses struggling to pay their debts a bit. So, it really accelerated into May and June.
Ryan Bridge
Interesting how, well, sad but also interesting, how depending on what line of work you’re in, what type of business you are, how the timeline of that slowdown affects you, right?
Michael Luke
It’s really dependent where you are in the economy. And we’ve kind of seen how the economic cycle plays out. If you think about it, consumer spending, house prices were hit pretty early. While more recently, we’ve seen things like IT spending getting cut. And with the example of Fletcher Building, the building sector hanged in there for a while, you know, while they completed existing work. The issue was new projects aren’t getting started. So now that they’ve finished all those old projects, there’s been a big drop off. And finally, we’re starting to see it start to impact companies like Heartland Bank, where now you’re having some companies enter insolvency and struggling to pay their debts.
Ryan Bridge
Let’s talk about some good news, because we’ve covered a lot of bad. Fisher and Paykel. So they’re obviously one of our premium exporters. They’re not as exposed to the Kiwi market. How have they done?
Michael Luke
It’s been the exporters which have performed a little bit better. Fisher and Paykel Healthcare, now they are a world leader in medical devices for respiratory care. And so, their growth is really about clinical adoption rather than the economy. And they increased their profit guidance during the month, which was well received by investors. So, some of those exporters are performing a lot better, you know, exposed to economies, not like New Zealand.
Ryan Bridge
How would you define performing well in the current environment? Is it, you know, I mean, obviously it’s not going to be super profits or anything like that. Is it sort of just basically being in line with what you told the market you would be?
Michael Luke
Well, expectations going into results were quite negative. Investors were quite concerned. So, companies that just delivered in line with guidance, it was kind of a welcome relief for investors. Or companies where maybe the results were bad, but less bad than feared, did well. It was really the kind of companies that you knew were going to be bad, but were probably a bit worse than what you expected, which were under pressure.
Ryan Bridge
Right. Let’s talk about travel, because obviously it’s a big market for New Zealand, big export dollar for us. Tourism. Auckland Airport – how are they fairing? And what are they saying about those visitor numbers? Because we’re not back to pre-Covid levels, are we?
Michael Luke
Auckland Airport, they had pretty strong earnings growth as travel rebounds, you know, post-border reopening. However, their outlook, they’re expecting a bit lower growth in the year ahead. And that’s because the kind of travel recovery is stalling a little bit or slowing down. And they kind of also pushed out when they expect travel to return to 2019 levels to about 2027.
And if we think about what’s driving that, it’s two things. It’s weaker demand and some supply constraints. So, starting with demand, it is very expensive to travel to New Zealand. We’re a long haul destination. And it’s also quite expensive once you get here. So, I think we are seeing some travelers choose to go to cheaper travel destinations. I think one example is Australia. Australia makes up about 40 percent of tourists to New Zealand. And they’re only back at 86 percent of 2019 levels because Australians, they’re travelling to markets like Japan and Bali instead of New Zealand. We need the Australians to come back, really.
Ryan Bridge
Yeah, but the problem is the beer is so cheap in Bali.
Michael Luke
I know.
Ryan Bridge
Right. So that’s the demand side of it. What about the supply? Because most airlines have been affected right? Including New Zealand.
Michael Luke
I guess on the supply side, you know, when Covid happened, airlines really cut back on new aircraft orders, right? And in response, the manufacturers – Boeing, Airbus – they really downsize because people didn’t want to buy airplanes.
Now that borders have reopened, however, there’s a shortage of aircraft where Boeing and Airbus are kind of scaling up to try and build more aircraft. But there’s a global shortage of planes. So, what that means is there’s still some airlines that haven’t returned to New Zealand, and on existing routes, there’s less planes flying than we’re back in 2019. We also need some of those kind of supply or airlines to return.
Ryan Bridge
Does that actually in a funny way almost create more of a monopoly for the likes of Air New Zealand – potentially more earning potential?
Michael Luke
In some areas. But actually for Air New Zealand, like one of their main routes is to America. Now, that route has become extremely competitive because of relations between China and the US, you’ve seen the US redeploy aircraft that were going to China. So actually, there’s a lot of planes coming from North America. And actually, I think US arrivals are back above 2019 levels. So, you’d think so. But competition is actually really, really tough on some of the New Zealand’s routes like them, like North America.
Ryan Bridge
This is fascinating information. Where do you get all this information? Are you just sitting there scrolling constantly and getting these updates? Because obviously, you’ve got to be across a whole bunch of stuff, right?
Michael Luke
It’s always speaking to lots of companies, reading lots of results. You know, you find companies like New Zealand, they do provide a lot of information during their reporting, and they called that out specifically.
Ryan Bridge
And as part of your job, do you actually go and visit some of these companies and meet them and ask them questions?
Michael Luke
A big part of our job is going out there and meeting companies. So, during reporting season, we’re out there on the road trying to meet the majority of the New Zealand companies that reported. And that goes into our investment process in terms of trying to find great investment opportunities for our clients.
Ryan Bridge
Let’s talk about the future, because obviously everybody wants to know what’s going to happen, what’s going to happen. When is it going to happen and when is it going to get better? There’s sort of a game of two halves here, according to these results. Tell us about the next six months.
Michael Luke
I think the reality is its really tough right now. We’ve got high interest rates, high cost of living, and we’ve got government and businesses cutting costs. So, speaking to companies, a lot of companies are still expecting earnings to fall over the next six months and they’re taking out costs as a result. I think the reality is the next six months are going to be tough, but there is some optimism returning that with interest rate cuts, this time next year could hopefully be a lot better.
Ryan Bridge
How confident are they that it will get better after this short term rough patch, the continuation of this rough patch? How confident are these results or are these reports saying that they are?
Michael Luke
Well, I think it depends where you are in the economy. Currently, it’s optimism because if you look out there right now, trading is still tough. It’s optimism that things will improve next year.
Ryan Bridge
We saw that with the swing, the uptick in the confidence survey. Suddenly, everybody was excited, not necessarily because things are better, but they’re just hoping they will be.
Michael Luke
I think conditions were just so tough. So, when the Reserve Bank did cut interest rates and signaled that they’re going to continue to cut interest rates potentially, it was a kind of welcome sigh of relief and a big boost to optimism. The question, I guess, is how long that takes to flow through to activity. And we’ve spoken about it before, but there’s quite a lag between interest rates in the economy.
It took quite a while for the full impact of those interest rate rises in 22 and 23 to be felt. And it’s also going to take a bit of time for those interest rate cuts to trickle down to the economy. But I think it could happen quicker this time, however, because households have kind of moved to shorter data mortgage rates. So, you know, they should feel that benefit sooner, hopefully.
Ryan Bridge
All right, Michael, tell us you’ve been reading the reports. Who’s performed well?
Michael Luke
Some of the more kind of defensive companies performed well during reporting, delivering pretty resilient results. One example that comes to mind is Chorus. Now, they recently finished building a large proportion of New Zealand’s fiber network. Now, they reported a result that was in line with budgets. However, they increased their outlook for dividends. Now that the investment in fiber rollout has rolled off, they’re now starting to pay high dividends to shareholders. And that was well rewarded by the market. And I think Chorus finished up about eight percent.
Ryan Bridge
Why are you calling it a defensive company? What does that mean?
Michael Luke
Companies like Chorus – Chorus provides fiber and things have to get pretty bad before you start cutting your internet connection. So we saw Chorus perform pretty resiliently compared to the likes of Spark, which came under pressure of some of the pullback and IT services spend.
Ryan Bridge
Defensive companies, you’re meaning by defensive. I’m an idiot, basically, but I’m trying to understand defensive means like a safe company, typically.
Michael Luke
Typically companies that are more immune to the economic cycle. So, if you think about what companies are still doing well right now, it’s companies like Chorus, which provides fiber, as well as the kind of electricity companies – very steady, stable companies.
Ryan Bridge
What about the other big thing we talk about in the media is the electricity prices and the spot market. Is that affecting results of particular companies?
Michael Luke
The electricity companies, they reported pretty resilient results. I think management teams were pretty mindful of the impact of higher electricity prices. So, a lot of focus on their results was on their large renewable energy development pipelines and bringing a new supply on to help the electricity market.
Ryan Bridge
Michael, thank you so much for coming on the show. Great to have you.
Michael Luke
Thanks Ryan, it’s great to be here.
Ryan Bridge
That was Michael Luke, one of Milford’s Co-Portfolio Managers. Before I leave you for this episode, let’s take a look ahead. The big event this week globally is the US employment data. It’s out Friday night New Zealand time. Important for a couple of reasons. Last month saw a weaker US employment report which was one of reasons we saw market volatility in early August. People worried about a slowdown there. Furthermore, last month the Federal Reserve was very clear it has no appetite for a rise in unemployment and that means this data is crucial. It will be a key driver of US monetary policy going forward. That decision, as do most in the world’s largest economy, will undoubtedly affect us here in the Shakey Isles too.
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