The June 2014 reporting season is over, the results have been counted and analysed.

The 28 companies in the NZX50 benchmark index with a June 30 final or interim balance date reported an aggregate 5.3 per cent increase in adjusted net earnings compared with a 15.1 per cent rise for the same period last year.

Diligent Board Member Services, Guinness Peat Group and OceanaGold are excluded from this analysis because they are not registered in New Zealand even though they are included in the NZX50 benchmark index.

The seven NZX10 Index companies – Auckland International Airport, Contact Energy, Fletcher Building, SkyCity, SkyTV, Spark (formerly Telecom) and Trade Me – included in the above figures had an aggregate underlying net profit increase of 4.9 per cent for the June 2014 year and 10.1 per cent for the June 2013 year.

In other words, these seven top 10 companies have underperformed the other 21 NZX50 Index companies over the past two years.

Herein lies one of the biggest problems facing New Zealand investors, namely that most of our largest listed companies are domestic oriented and have limited growth prospects. In addition, three of the seven NZX10 companies face varying forms of regulation.

This is why medium-sized companies often outperform our largest listed companies. For example, over the past 12 months the major indices have performed as follows:

• NZX10 Gross Index plus 13.9 per cent.

• NZX50 Gross Index plus 16.1 per cent.

• NZX MidCap Gross Index plus 18.7 per cent.

The MidCap Index comprises 36 companies. These are 36 of the NZX50 Index companies excluding the 10 NZX10 companies as well as ANZ Bank, Guinness Peat Group, OceanaGold and Westpac (the two Australian banks are in the NZX50 Index but were not included in the analysis above because they don’t have June 30 reporting dates).

This week’s column focuses on a number of NZX SmallCap Index companies that have reported for the June 2014 period. Some of these have dropped out of the NZX50 Index while others have strong growth aspirations and are hoping to be included in the benchmark index in the future.

BG Herald 30.08.2014

The first point to note about the accompanying table is that Cavalier, Hellaby, Michael Hill, NZ Refining, PGG Wrightson and Tourism Holdings are now classified as small companies by the NZX.

The second point is that these selective NZX SmallCap companies reported a combined net earnings increase of 15.4 per cent for the June 2014 ending period, a much better performance than the NZX10 or NZX MidCap companies.

Total dividends for the NZX SmallCap companies rose by 20.4 per cent even though Cavalier reduced its annual dividend and NZ Refining is not paying a dividend for the six months ended June 30.

The biggest improvements were made by Tourism Holdings, which reported a 191.9 per cent increase in net profit after tax for the June 2014 year, and PGG Wrightson, which announced a 187.8 per cent profit hike.

The worst performing small index companies were NZ Refining, which recorded a loss, and Turners & Growers, which reported a 38.7 per cent drop in earnings.

Tourism Holdings is a great example of a company where shareholder activism can result in a substantial improvement in earnings.

Twelve months ago, the company’s chairman was Keith Smith, who had been a director since March 1998. Tourism Holdings was directionless and struggling with its share price around 60c.

It badly needed a new chairman, and new directors, but Smith was in no rush to step down.

Following sustained pressure from a number of shareholders, Rob Campbell was invited to join the board in May 2013 and David Neidhart, a Swiss-based representative of major shareholder John Grace, joined one month later. Smith resigned in November and Campbell replaced him as chairman.

The frustrating aspect of this process is that most New Zealand boards insist that they should invite new members to join rather than accept shareholder nominations. The main argument in support of this selection process is that an invitation from existing directors helps protect the collegial characteristics of a board.

In other words, a friendly board environment seems to be more important than an energetic, challenging and effective board.

There has been a huge transformation at Tourism Holdings since Campbell became chairman. Changes have been made to the company’s vehicle purchase and sale strategy – an extremely important operation for any rental organisation – and Tourism Holdings is hoping to achieve net earnings of at least $15 million for the June 2015 year compared with $11.1 million last year.

PGG Wrightson, which was incorporated in 1900, reported a spectacular upturn in earnings and is paying its first full-year dividend since 2009.

Investor response to the result has been muted, mainly because the company’s accounting presentations are inconsistent and extremely difficult to decipher.

The company’s June 2014 net profit after tax has been reported as follows:

• PGG Wrightson’s media release states that net earnings increased from $14.7 million for the June 2013 year to $42.3 million for the latest period.

• The NZX one-page summary stated that net earnings increased from $19.8 million to $42.3 million.

• The NZ IFRS compliant financial statements shows that net earnings went from a loss of $303.7 million in the 2012/13 year to a net profit after tax of $38.7 million for the latest period.

• A broker report, using normalised net earnings, shows that net earnings rose from $24.6 million to $28.7 million over the same period.

These figures highlight the huge differences between adjusted, normalised, underlying and NZ IFRS-based earnings. These figures can be extremely confusing for investors because they allow companies to emphasise the highest profit figure for the latest reporting period and the lowest one from the previous corresponding period. As a consequence, the year on year percentage increase can be made to look extremely impressive.

NZ Refining continues to struggle as international refinery margins remain depressed.

The company is now classified as a small cap company by the NZX as its sharemarket value had plunged from $1.75 billion in 2005 to $500 million at present.

Chief executive Sjoerd Post has implemented a number of cost-saving initiatives but the outlook statement from chairman David Jackson was rather subdued. Jackson was quoted as saying “the directors have every confidence that the company will prove itself capable of weathering the business environment in the latter part of the [December 2014] year.”

Turners & Growers, which is 73.1 per cent owned by the German group BayWa, said that the interim profit was adversely affected by a number of one-off events and “trading for the remainder of the year is expected to be consistent with last year’s performance”.

Finally, Lyttelton Port deserves a major brickbat.

On August 1, Christchurch City Holdings, the investment arm of the council, announced its intention to make a takeover offer at $3.95 a share.

As a consequence the port company should have brought forward its profit announcement but, consistent with previous years, it waited until late on August 29 to release its June 2014 year result. This is the latest possible time under NZX rules.

The unwillingness of Lyttelton Port to break its traditional late reporting habit shows that the company’s board doesn’t put a great deal of emphasis on the early release of important information during a takeover offer.


Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management owns shares in the following companies mentioned in the body of the column: NZ Refining, Tourism Holdings and all seven NZX10 Index companies.