Exporter earnings ripe for upgrades after kiwi dollar slump

Monday 20th July 2015

Sharemarket analysts are expecting a slew of profit upgrades and new commentary from stock exchange listed exporters in the upcoming earnings season following the recent slump in the value of the New Zealand dollar, says Andrew Bascand, the managing director of Wellington based funds manager Harbour Asset Management.

Among likely beneficiaries are businesses such as Fisher & Paykel Healthcare, Nuplex Industries, Xero and Diligent.

"The kiwi dollar is 15 percent lower than its average year to date," he told BusinessDesk. The local currency appeared to have reached a sustainably lower level against the Australian dollar, where it threatened to reach parity earlier in the year creating major headaches for exporters to New Zealand's largest market for high value added goods and services.

"This is a fundamental change in the kiwi dollar," said Bascand. "This has major implications for revenue expressed in New Zealand dollars, for margins, profit and for valuations."

While the lower kiwi would have little or no impact on profits for the six months to June 30, companies would be expected to give new profit outlook statements and analysts would produce new profit forecasts, using exchange rates prevailing today.

"You’re going to get a very big twist that’s going to occur," he said. "Take a tech company like Diligent. It earns US$98 million, that used to be worth NZ$120 million, now it’s worth NZ$140 million, NZ$150 million."

Harbour Asset has built a 9.63 percent stake in Diligent, which sells and develops software for use in corporate governance from operations headquartered in New York, but is NZX listed.

"No one has changed their Diligent forecasts for a month and a half," he said. "It’s happened so quickly."

There would be "a few" companies, such as Sky Network Television, that relied heavily on imported material to resell in the New Zealand market, although most would have forward cover, so the impact on profits might be up to a year away, Bascand said. "Eventually it comes home to roost."

The local sharemarket had yet to react fully to the changed exchange rate outlook, in part because "it doesn’t know whether to believe this yet."

"It’s like a slow option contract beginning to pay out."

Looking out two to three years, Bascand said it was logical to expect global dairy prices to bounce back to commercially sustainable levels, "not just in New Zealand but around the world."

"At US$3.19 (per kilogram of milksolids), which I think is the estimate using spot prices, in a cashflow sense, I don’t think there are any farmers that are making money. They stop making milk eventually, the stockpiles run down and the prices goes up again."

"Expect dairy prices to rise again and maybe the New Zealand dollar goes down more first and then comes back up."

In the meantime, the New Zealand economy would be hit.

"It may not be a recession but growth falls and it induces the Reserve Bank to ease. So this plays out like a very slow tanker that’s had to turn."

BusinessDesk.co.nz

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