Roy Davidson, 31 July 2020

We recently showed how the largest listed companies in New Zealand, measured by market capitalisation, have changed over time.

This was interesting to see. It showed the steady rise in the value of Fisher & Paykel Healthcare – now our largest listed company – and the more rapid rise of The a2 Milk Company. It also showed the decline of some companies that used to be heavyweights in the index but have had their fortunes change – including Sky TV and the Warehouse Group.

But what happens if we do the same thing, but look at revenue instead? This should tell us which companies have a greater economic impact, and which ones you’re more likely to interact with on a day to day basis.



Doing so also provides some key insights on why companies are valued the way they are by investors.

In first place on a revenue basis is Fletcher Building, reiterating what a behemoth the company really is. Fletcher building pulled in $8.3bn in revenue last year. However, margins in the building sector tend to be quite slim and the company has been through a tough patch with earnings being highly volatile. As a result, Fletcher Building currently sits outside the top ten in terms of total market value.

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Second place might surprise a few people, with EBOS Group claiming the spot. EBOS Group is the largest pharmacy wholesaler in Australia and New Zealand, and also owns or part owns Animates, Red Seal and Black Hawk. So, whether you know it or not, you’ve almost certainly interacted with the company. Again, small margins (which is normal for a wholesaler), and a sizeable minority shareholder, sees the company currently sit just outside the top ten in terms of value.

Also amongst the biggest revenue generators are Air New Zealand and Z Energy. Both are very large companies. However, Air New Zealand’s earnings tend to be quite volatile - demand is sensitive to economic conditions, as recent events have illustrated, while the company’s main cost, jet fuel, fluctuates significantly year to year. Z Energy, meanwhile, operates in a sunset industry and has faced margin pressures in recent times. These factors affect their value in the eyes of investors.

Our two most valuable companies, Fisher & Paykel Healthcare and The a2 Milk Company, don’t even feature in the top ten companies by revenue. Why is this?

Firstly, both companies have very high margins, meaning they are able to convert each dollar of revenue into earnings for shareholders much better than most.

To illustrate, at Fisher & Paykel’s last full year result, the company announced it had earned $287m in net profit from $1.2bn in revenue, a net profit margin of 23 per cent. In contrast, Fletcher Building earned a similar net profit of $246m, but from revenues of $8.3bn, a margin of just 3 per cent. In other words, Fisher & Paykel Healthcare was able to generate the same profits (in fact a bit more) from around one seventh the revenue, and at the end of the day, it’s profits that count.

Secondly, both companies have large growth opportunities ahead of them. The market for Fisher & Paykel’s key product, named Optiflow, is significantly under-penetrated. Meanwhile, a2 Milk, despite its impressive growth, still only has five per cent of the Chinese infant formula market and has only just begun its push into the US. Investors are willing to pay a higher price now in the expectation that profits will grow for many years into the future.