Warning: Tread carefully

Virus outbreak could leave legacy of hidden dangers, investors warned

With New Zealand’s sharemarket heading into results season, investors are being warned to read through the financials carefully and weigh up the potential for dividend cuts.

Shane Solly, portfolio manager at Harbour Asset Management, predicts the results will be a “field day” for accountants and auditors.

“How companies treat things like debtors, inventory and the value of projects that were started pre-Covid but are likely to be unprofitable in a Covid world are some of the things investors will need to watch for.”

Solly said that after entering the investment world in the early 90s following the 1987 crash, he was still dealing with accounting landmines years later.

“Things are a lot better now but accounting rules have a degree of flex that mean companies are able to soften the blow to a degree.”

But, Solly said, investment markets preferred certainty. “Resetting expectations is often better than lingering ambiguity.”

He said earnings forecasts may now be out of date.

“Companies may meet guidance or come in within a range that is close to previous results that does not require pre-disclosure — but may be very different from what the market is expecting.”

And he expects outlook statements to be more cautious than ever. “It is going to be quite challenging for businesses to make forward-looking statements for the next quarter, the next half.”

While everyone was hoping New Zealand was through the worst, there was no certainty that the country would not go back to a higher alert level, he added.

Solly said he expected the words “cautiously optimistic” to feature heavily. He urged investors to be careful when making assumptions around dividends and whether they were sustainable.

New Zealand’s NZX 50 is seen as a largely dividend play stock market, with utility companies such as power generators and telcos dominating the index.

Solly said those defensive stocks may not stop paying a dividend, but could decide to keep it on hold.

“People have come to expect an increase and companies may push that out.” Even utility businesses are likely to feel the economic downturn in coming months as people lose jobs and can’t pay their bills.

Solly said investors needed to take extra time to read the accounts. “Look at what is being baked in here. Maybe that dividend is virus-proof but maybe it isn’t.”

Sky high

Sky Network Television grabbed the attention of the NZX’s regulatory arm this week after its share price shot up 45 per cent in just over a day’s trading.

The pay-TV operator received a “please explain” letter after its share price rose from 32c at the close of trade on Friday to 46.5c by 10.30am on Tuesday.

But the company had little to say about the price rise and confirmed that it remained in compliance with disclosure requirements.

Fat Prophets’ Greg Smith believes the rise was down to investors looking at some of the beaten up stocks which haven’t recovered as much as others in the past few months.

“Sky TV is clearly in this camp but is also interesting in that while it has been heavily impacted by the global shutdown of sports, its business has continued to operate through the lockdown, and overall audience will likely be well up.”

Smith said that with the return of sports competitions now on the horizon, there will be a lot of interest in what the subscriber churn has been like during the lockdown in terms of Sky Sports.

“Some people may have actually been happy to keep their subscriptions going given the hassle of cancelling and all the glory days archive footage that has been on.”

Smith said Sky TV may also be in a really good position in contract negotiations over shortened competitions, particularly with the NRL.

“Having a less diverse spread of national sporting events will have implications but also cost savings.

“Meanwhile, if you consider what has happened with Netflix and other streaming services globally, Neon will likely have been doing well, and the Lightbox acquisition could not have been better timed.”

Maybe that dividend is virus-proof but maybe it isn’t. Shane Solly, Harbour Asset Management

Smith said there was a lot of bad news priced into Sky but the company was already in a major turnaround programme pre-Covid.

“This arguably has been accelerated. The fact the company hasn’t raised capital during the ‘virus crisis’ will also be a big plus.”

Anxious wait Clothing retailer

Hallenstein Glasson Holdings is estimating it will make a loss of $2.8 million in its April 30 quarter after sales fell 32 per cent compared to the same period last year, thanks to the lockdown.

It has begun a phased reopening of its stores under alert level 2 and chief executive Mary Devine told the market it expected to trade profitably from this month onwards but at a lower level than last year due to “a likely decrease in foot traffic, increased levels of unemployment and related economic impacts”.

Castle Point fund manager Stephen Bennie said it was going to be very interesting to observe retail activity this coming Saturday and Sunday, the first weekend of trading under the new reduced alert level.

“Retailers and mall owners will be anxiously waiting to see how many shoppers return.”

Bennie said distancing measures would restrict numbers, but retailers would get a feel for Kiwis’ appetite for in-store shopping.

“The good news is that supermarkets, which have stayed open throughout, have not proven to be vectors of spread. This should bolster people’s confidence that they can safely enter stores and malls.”

But on the flip side, Bennie said, during levels 3 and 4 even more shopping moved online and that is unlikely to fully unwind.

“Hence the anxious wait.”

Under pressure

Fletcher Building shares are expected to come under pressure after the company was removed from the MSCI World Index on Wednesday.

The index change is likely to see index-tracking funds exit the stock, meaning its share price could fall further. Some of the world’s biggest index-tracking fund managers are also big Fletcher shareholders.

American asset management behemoth BlackRock owns just under 5 per cent, having recently reduced its shareholding below the substantial holding threshold.

Rival fund manager Perpetual has also cut its stake in recent months, from 9.99 per cent to 8.89 per cent.

Fletcher Building shares are down more than 35 per cent in the last year.