INSIGHTS BLOG

CONTAGION & SPILT MILK – WHAT DID WE LEARN FROM THE LATEST ROUND OF COMPANY RESULTS?

Roy Davidson, 2 March 2020

Investors are currently catching their breath from the latest reporting season – where a large number of companies provided investors with an update on how they’re tracking.

The one thing on everyone’s minds was coronavirus (COVID-19). And after hearing from a raft of companies over the past month or so, it is clear that the outbreak of coronavirus, and the subsequent restriction of movement in the Chinese economy, is having a very real impact on some companies.

Most companies reported results for the six months to 31 December, meaning actual results were unaffected. However, we saw quite a few temper their earnings outlook due to heightened uncertainty.


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Of NZX 50 companies that provided an update over February, 60 per cent mentioned coronavirus in their releases, with this gathering momentum over the course of the month as the severity of the outbreak revealed itself. Crucially, one in five companies that reported expect coronavirus to have a material negative impact on their profits.

One in five companies expect coronavirus to materially impact earnings

corona virus chart

Should the economic fallout persist, and the domestic economy lose steam on an aggregate level for a sustained period, we will likely see the earnings of many more companies hurt in the future.

Who disappointed investors?

In this part of the world, those exposed to tourism have been the hardest hit, with Chinese travellers staying at home.

Air New Zealand sits right at the pointy end of this and has been among the most heavily impacted, reducing flights to and from Asia as a result. Due to softer demand conditions, Air New Zealand expects coronavirus to dent profits by up to $75 million, lopping almost 20% off expected profits.

Likewise, Auckland Airport, essentially the country’s gateway, expects a $10m hit due to coronavirus and lowered its profit guidance by around 2 per cent. Chinese passenger growth has been a key growth driver for the airport in recent years, and passengers from this part of the world also tend to spend more in the airport’s retail offering, meaning the impact is somewhat amplified.

Similarly, Serko, which provides the software used by travel agents, has also felt the brunt of reduced travel demand, with bookings dropping off recently. This saw Serko lower its earnings guidance to the bottom of its forecast range of 20 to 40 per cent revenue growth.

The challenges facing some of our exporters were highlighted by Port of Tauranga. New Zealand’s largest port lowered its full year profit expectations after seeing shipping cancellations and lower log volumes to China, trends it expects to persist into the near future.

In terms of non-virus-related disappointments, Synlait Milk provided arguably the biggest surprise of reporting season. Synlait has executed very well in recent years, manufacturing infant formula for a2 Milk. However, it was weakness in other parts of the business that surprised investors, namely a drop in volumes to some large bulk powder customers who have seen lower demand of late. In an update ahead of its result, Synlait lowered its profit expectations by around 15 per cent.

Did anyone provide good news?

It wasn’t all bad news, however. While coronavirus has had an overwhelmingly negative impact, some companies stand to benefit as countries prepare themselves. One of those is Fisher & Paykel Healthcare which provides respiratory equipment to hospitals. A boost in demand from Chinese hospitals, along with recent mask releases in the company’s sleep apnoea business, saw Fisher & Paykel nudge up its profit expectations.

Shares in a2 Milk rallied after its result. There had been some concern that the disruption in China would hurt sales of its infant formula. However, while exercising some caution over the outlook, the company said that demand over the first two months of the year had exceeded expectations.

Investors also liked the latest offering from wine producer Delegat Group, with the company improving its outlook for earnings. This came on the back of a strong uplift in sales volumes, with strong demand from the key North American and British markets for the company’s premium wines which fall primarily under the Oyster Bay and Barossa Valley Estate brands.

Another exporter to please investors was Scales, the country’s largest apple seller, which reported a strong result. The company was also confident of its ability to manage the disruption in its key Asian markets from coronavirus, stating it has flexibility to sell through different channels, such as e-commerce, should physical store sales drop sharply.

Finally, telecommunications infrastructure provider Chorus isn’t the most exciting business, but the company has made great progress in recent times. A sharp reduction in costs and increase in broadband connections was well received by the market, as was a more positive outlook for future dividends. The key issue for Chorus remains the transition to a new regulatory regime in the coming years, as well as the competitive threat from 5G.