NZ stock valuations look 'full' after earnings season as NZX 50 cracks 5000

Tuesday 4th March 2014

Investors are cautious about the extent of any further rally in the NZX 50 Index, which has topped 5000 for the first time, after an earnings season that gave analysts little reason to change their forecasts.

The NZX 50 rose 0.6 percent to 5039.871 around 3pm and has advanced 17 percent in the past 12 months, a rally it may struggle to repeat in the year ahead. The NZX Capital Index, which excludes dividends, is up 14 percent in the past year, lagging behind the Standard & Poor's 500 Index's 20 percent gain.

Stocks in the NZX 50 are trading at an average 16.6 times forecast earnings, based on rolling 12-month-ahead forecasts, according to First NZ Capital. That compares to an average PE in the past decade of about 15 times. For the half-year results to June 30, the brokerage has the PE at 18.2.

"Valuations, to be frank, look full on average," said Paul Richardson, chief investment officer at Mint Asset Management. "The market has raced ahead and taken up much of the valuation gap that existed two years ago."

Investors have driven up stock prices on optimism a strengthening economy will allow companies to lift earnings and deliver fatter dividends. Of the companies that First NZ follows, 53 percent reported per-share earnings growth in the latest results season that met estimates, 30 percent beat expectations and 17 percent disappointed. Some 64 percent of the 28 companies increased their dividends.

Of the brokerage's forward estimates, 62 percent of EPS forecasts were left unchanged, 17 percent were upgraded and 21 percent downgraded. Some 79 percent of dividend estimates were left unchanged, 11 percent upgraded and 10 percent cut.

"This earnings round was on balance a bit better than expected if you look at the average or median company, although for the market as a whole earnings were revised down a bit - the large cap stocks like Telecom were mildly disappointing," said Andrew Bascand, managing director at Harbour Asset Management

"Valuations for New Zealand equities are above long term averages, but not by so much that you can say the market is expensive," he said. "Much depends on economic growth flowing through to sales, margin expansion and profit growth."

The NZX 50's gains in the past 12 months were driven by growth stocks such as Xero and A2 Corp, along with companies that deliver consistent earnings growth such as Ryman Healthcare and Auckland International Airport. Yet it has been the return of formerly 'beat-up' stocks such as Chorus, Diligent Board Member Services and OceanaGold that has helped push the benchmark index to new highs in the past month.

Of those Chorus was cheered for its ambitious cost cutting targets, Diligent cleared some of its baggage by providing long-awaited restated revenue figures and OceanaGold benefited from a recovery in the price of gold so far this year.

Fletcher Building, whose shares managed only a third of the gains of the NZX 50 in the past 12 months, has risen 3.8 percent in the past month. The biggest company on the benchmark index affirmed its full-year earnings guidance last month, after weak results across the Tasman crimped first-half profit.

"The main message from reporting season is that our main listed companies will have to generate far higher earnings growth if our share market is to sustain its momentum," Milford Asset Management executive director Brian Gaynor wrote in his NZ Herald column this week.

"The NZX will run out of steam unless companies, particularly larger ones, can take advantage of the stronger economy by reporting much larger earning increases," he said.

BusinessDesk.co.nz

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