The New Zealand reporting season finished up more or less in line with our expectations. In aggregate around 60- 70% of the companies reported results that were in line with expectations, 20% reported results ahead of expectations and the rest reported below par profitability and earnings resulted in a commensurate increase in dividend payments. We believe that a strong economy and supportive exchange and interest rates should assist corporate profits in general over the next 6-12 months. This along with healthy dividend yields (which in many instances are higher than bank deposits) should be supportive for stocks.
Auckland Airport (AIA) was one of the standout performers in this reporting season with the company delivering stronger-than-expected results and lifting guidance for the full year. Half year net profit after tax soared 18.6% on 11.6% revenue growth. We believe AIA will continue to deliver strong results in the future on the back of continued growth in tourism, new air services particularly from Asia and lower interest rates (which is beneficial for its property business).
Tourism Holdings (THL) is another company that did well, reporting underlying growth in net profit after tax of 45% on 20% revenue growth. This was underpinned by strong growth in rental sales in NZ & the US and good growth in the tourism services division. The company lifted guidance, signalling positive outlook for tourism in all of its markets of NZ, Australia and the US. On the other hand the agricultural sector, especially dairy, is facing headwinds from lower international dairy prices and the related effects on farmers. PGG Wrightson’s (PGW) underlying net profit after tax and revenue decreased 18.7% and 5% respectively due to conservative spending from PGW’s farming customers.
Skellerup (SKL) similarly saw its net profit after tax decrease 1% due to reduced demand for dairy rubberware and footwear. This was offset by increased earnings from the industrial division. The outlook for the dairy sector remains subdued for some time yet and therefore revenues and earnings are likely to be pressured for PGW and SKL.
Among the NZ stocks that look interesting are Heartland Bank (HBL), NZX, Summerset (SUM) Genesis Energy (GNE) and Contact Energy (CEN). We believe that valuations of all these companies are compelling and each of them possess a strong dividend yield. HBL has executed well in segments that are underserviced by traditional banks. The company is showing good growth as evidenced by its first half results where it reported a 9% growth in net profit after tax together with an uptick in ROE. The stock is trading at 10.7 times forward earnings with a gross dividend yield of 9.9%.
NZX’s gross dividend yield is also compelling at approximately 8.2%. While there are no near term catalysts for NZX given the soft listing environment, medium to long term growth appears promising propelled by a build- up in Kiwisaver funds under management, which will ultimately result in growth in its capital markets and funds management businesses.
SUM also seems attractive given the favourable growth outlook for the aged care sector and rising development margins on new sales of units and apartments. We feel that management is executing well and is adroitly following Ryman’s footsteps of developing an integrated village with a continuum of care facilities. GNE and CEN are compelling from a dividend yield perspective given the lack of capital expenditure resulting in high free cash flow generation. CEN’s dividend yield will be lower in FY16 due to the announced buyback program, but in the following year its dividend yield will increase to approximately 12.8% at the current share price.