INSIGHTS

MARKET SUMMARY: 14 TO 18 AUGUST

Research Team, 18 August 2017

The key focus for investors this week has been the Australasian reporting season, with a large number of corporates both here and in Australia reporting full and half year results. Expectations heading into the reporting season were fairly high given current lofty valuations. So far, the market has not been disappointed with the majority of companies finding favour with the market and pushing the NZX50 to fresh record highs.

One of the companies in focus for investors both here and across the Tasman was Fletcher Building. The embattled construction company has had numerous profit downgrades this year, with the last of these happening late in July that coincided with the departure of CEO, Mark Adamson. The market was therefore well prepared for the significant decline in profit for the year and were far more focussed on the outlook for the coming year. Although no quantitative figures were given for guidance, the outlook was reasonably upbeat, although more colour will be given at the AGM to be held in October. The market reacted favourably to the result, and the share price rose 1.8%, taking it back above $8.

Freightways reported its full year result and showed solid top line growth with revenue beating expectations. Revenue was driven by strong volume growth, however, this came at the expense of margins. The company expects this trend to continue, with volume growth expected to continue at narrow margins. The market was disappointed with the outlook and Freightways’ share price weakened over the following days. Some of these losses were reversed later in the week when the company announced a new acquisition. Freightways has diversified its presence in the Australian market through the purchase of State Waste Services, a medical waste company based in Sydney.

Telstra reported its full year earnings later in the week and the result was largely in line with expectations. However, the market was focussed on the company’s new dividend and capital policy which will see its dividend slashed from 31 cents per share this year to 22 cents per share in the 2018 financial year. The new dividend policy is to pay out 70-90% of underlying earnings and 75% of one-off National Broadband Network payments as special dividends. This is much lower than the previous policy, which was around 95% of earnings. The market was thoroughly disappointed with the announcement, which led to a 12% decline in the share price when the market opened.

Reporting season continues next week with yet another busy week. We will be watching for earnings from Amcor, BHP Billiton, Sydney Airport, Auckland Airport, Port of Tauranga and Fisher & Paykel Healthcare to name just a few.

Reporting season wasn’t the only thing investors were watching this week. The political front at home was a lot less dramatic, with no leadership changes from any of the major political parties. However, geo-political tensions continued to capture the attention of global markets. The war of words between US President Donald Trump and North Korean Leader Kim Jong Un simmered down significantly, and markets rallied as investors became less risk averse.

The latest Global Dairy Trade auction saw a decline of 0.4% in the headline index. However, this was the sixth auction in a row that has seen a price movement of less than 2% from the headline index, showing that prices have stabilised. This was a welcome development given the significant volatility in dairy prices over the past few years. The whole milk powder price was the biggest contributor to the loss, falling 0.6%, but taking up the lion’s share of the 32,000 tonnes of product sold at the auction.

China was in focus earlier in the week with a large number of data points released Monday. Expectations were for these to show a slowdown in economic activity and this came to fruition, although it was a bigger slowdown than the market was expecting. Industrial production was the biggest disappointment for the market, coming in at 6.4% versus expectations for 7.1% growth.