New Zealand Market Outlook - Core Stocks

Pockets of value emerge in an otherwise fairly valued market.

In aggregate, stocks in New Zealand were trading in line with our fair value estimates with the price-to-fair-value ratio of 0.96 at September quarter's end. The economic outlook remains mixed, though higher inflation in the near term is likely. Construction activity is strong and manufacturing is holding its own. The dairy industry remains under pressure, though the worst could be over. Auckland housing prices are plateauing with investor interest being attracted to better value regional markets. Another cut in the official cash rate is possible in December.

There is some value on offer in the electricity generation sector with Contact Energy and Genesis Energy trading below fair value. Mighty River Power and TrustPower appear cheap. All four companies have a high uncertainty ratings so care is needed when seeking additional exposure in this sector.

In the health care sector the retirement village operator Ryman Healthcare is selling at a 10% discount to fair value. Growth prospects for this company are strong, and favourable demographics in both New Zealand and Australia provide a meaningful tailwind. A 10% discount to fair value is rare and provides an opportunity for investors to increase their holdings. Fisher & Paykel Healthcare Corporation may be attractive and is a quality company, but is relatively expensive at price-to-fair-value ratio of 1.08. Currently Ebos Group also looks expensive, selling at a 24% premium to fair value.

Precinct Properties New Zealand is worth a look as it offers some value with earnings and distributions forecast to rebound strongly from 2018.

There is growing  value in the telecommunications sector, with both Chorus and Spark New Zealand recovering from weakness during the quarter.

On the retail front the discount department store operator, Warehouse Group is now selling at an attractive 15% discount to fair value and could be worthy of investors consideration depending on the success of the Christmas sales period.