The latest company earnings season reporting shows overwhelmingly negative comments, consistent with economic recessionary conditions. Companies exposed to the domestic consumer, construction sector and primary sectors the worst hit

The latest corporate earnings season for NZX-listed companies has drawn to a close.  The publicly available releases contain a rich source of information.  We parsed the public releases and investor presentations of 39 company earnings releases through a macro lens to gather as much information as possible on the economic backdrop in NZ. This information can be timelier than official economic releases and thereby provides an added source of data to assess economic conditions.

Overwhelmingly, the vibe gathered from the commentary was ostensibly negative, with companies upfront in describing the challenging recent economic conditions.  Indeed, the word “challenging” was used by 12 of the 39 companies analysed and we might have even missed a few instances of this word.

Construction, retail, and primary sectors appeared to be the worst hit.  Looking at share price performance over the reporting season, three retailers made the list of the five worst performing stocks.  As well as the obvious hit to demand, many companies noted the high inflation backdrop, rising cost pressures and higher interest rates eating into profitability.

Pockets of positivity were few and far between, with the recovery in tourism a rare highlight. It was pleasing to hear some comments on easing inflationary pressure on costs and looser labour markets. There were some green shoots in activity noted, although it is difficult to judge whether a genuine recovery in activity has begun or it was simply a case of the worst being over.

The findings come as no surprise, given the backdrop of the NZ economic recession.  While NZ equities have underperformed global equities over recent years, the shortfall over the past year has been particularly brutal.  We put this down to a combination of the domestic macro backdrop and the sectoral make-up of the market, with little weighting to the in-favour technology sector and the over-weighting towards companies that perform worse in a higher interest rate environment.

In an Appendix we have cut-and-pasted comments taken from the releases with a focus on the macro environment, and with only some light editing.

Here’s a summary of some of the themes from a sector perspective:

Building/Construction: Clear signs of very weak trading conditions, with higher interest rates driving a significant downturn in the property market.  Widespread de-stocking in construction materials. Short-term, companies are prepared for trading conditions to remain challenging.  Some noted improving conditions in the NZ housing market and lower cost inflation.

Media/Retail: Most retailers are particularly under pressure, with weaker demand on low levels of consumer confidence. Rise in minimum wages noted as a factor in rising labour costs. One company, NZME, noted positive signs for 2024, with better advertising revenues, the recovering real estate market and business and consumer confidence heading in an improved direction.

Airlines/Tourism: Positive comments on the lift in tourism that has helped support demand, but weaker domestic conditions an offsetting factor. Air NZ noted softness in corporate and government demand since September. Significant cost inflation noted with a view to lifting domestic airfares to compensate.

Primary sector: Some pretty woeful conditions have been experienced in the rural sector, including horticulture. Plenty of commentary in the PGG Wrightson release that spelled out the litany of headwinds facing the sector (worth a read).  Difficult harvest for 2023 in the horticulture sector due to Cyclone Gabrielle, but 2024 looking much better.

Electricity generators: Higher wholesale electricity prices (reflecting the cost of building new generation rising significantly) lifting revenue and costs through the sector, with price increases passed onto consumers, albeit at less than the rate of CPI inflation. Rising cost pressures from increased lines and transmission investment. Significant pipeline of investment plans, albeit reliant on Tiwai aluminium smelter remaining open, with that decision still pending.

This article is here with permission. The full version with the Appendix is available from BNZ.