Shrinking profitability in business surveys sounds warning on corporate earnings

Wednesday 4th July 2018

Storm clouds may be gathering for the upcoming corporate earnings season as business confidence hits a seven-year low and almost a third of companies said profits shrank in the June quarter.

The latest quarterly survey of business opinion - released yesterday - showed a net 16 percent of respondents reported lower earnings in the three months ended June 30, down from a net 7 percent in the prior quarter. Importantly, a net 12 percent expect to report lower earnings in the September quarter, signalling a shift in perceived earnings momentum.

"The net measure does suggest some weakness in corporate earnings for the upcoming reporting season," said New Zealand Institute of Economic Research principal economist Christina Leung.

The survey's sector break-down showed around 30 percent of firms across the board said their profitability was "down" on the three months to the end of June.

James Lindsay, senior portfolio manager at Nikko Asset Management New Zealand, said "looking at these numbers it would be hard to see it not showing some effect on company earnings over the next few reporting seasons". He said of particular concern was the shrinking investment intentions.

Rising costs have crimped earnings with building sector firms reporting intense margin pressures and retail firms struggling to pass on higher wage bills to consumers. The QSBO was in line with the latest ANZ Business Outlook survey for June with expected profitability deteriorating to a net 17 percent, suggesting firms have little ability to pass on higher costs in the face of strong competition.

Not only is profitability getting squeezed but firms expect to hire fewer people and invest less money than three months ago, adding to the view underlying economic growth is slowing, which will only fuel greater losses for corporates.

ANZ Bank New Zealand senior economist Liz Kendall noted today that ANZ job ads fell a seasonally adjusted 1.6 percent in June and the data "show that business caution is affecting decision making, with flow-on effects for the labour market. And with businesses caution persisting, it is fair to say that downside risks have increased.”

Bank of New Zealand head of research Stephen Toplis said the QSBO survey was more evidence "the economy is entering a pseudo-stagflation phase. Growth indicators continue to come under downward pressure while inflation pressures build further."

Matt Goodson, managing director at Salt Funds Management, said "it is surprising that the listed market continues to reach new highs when forward indicators of profitability are flashing some warnings signs."

The latest shareholder metrics from the stock exchanged showed the S&P/NZX 50 Index ended June at 8,943, up 18 percent on the year while the market capitalisation of NZX's equities rose 10 percent to $133 billion, or 46 percent of gross domestic product. Since then, the benchmark index has gained 0.9 percent, recently trading at 9,021.28.

Goodson did note, however, the softer kiwi dollar - which has fallen more than 2 percent on a trade-weighted index basis this year - will help offset some of the weaker profitability, in particular for exporters.

"The (weaker) kiwi dollar is certainly a real pressure release valve," he said.

The June balance date reporting season gets underway in August with companies like Chorus, Contact Energy and Air New Zealand due to report.

(BusinessDesk)

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