NZ stocks well ahead of 5year average

AUCKLAND: The price of New Zealand stocks relative to their earnings prospects is running well ahead of past levels, Forsyth Barr says.

The broker estimates the 12month, forwardweighted price earnings (PE) for the entire market is running at 31.7 times — 45% above its fiveyear average.

Analysts were quick to point out PE ratios were not a onesizefitsall measure, but that they did provide a firstglance view of a stock’s worth.

The professionals were more likely to use discounted cashflow valuations (DCF) to estimate the value of an investment based on a company’s expected future cashflows.

Arguably one of the stocks hit hardest by the Covid19 pandemic, Auckland International Airport, is the most expensive, judging from its 12month forward PE of 100 times.

Salt Funds managing director Matt Goodson said there were a few ‘‘issues’’ surrounding PEs and analysts were more likely to use DCF.

Auckland Airport’s PE was high because of the Covid19driven collapse in its earnings.

‘‘The question now is the recovery path and increasingly, the June 2021 year is looking like a tough year, and June 2022 will at least be partially affected,’’ Mr Goodson said.

‘‘On Auckland Airport, you really have to look at the long term discounted cashflow valuation path rather than the oneyear forward PE, when it has been heavily affected by oneoff factors.

‘‘You really have to form a view as to what the free cashflows of the business are going to look like in four or five years’ time to form a view as to its valuation.’’

Then there were companies which had benefited from Covid19, such as Fisher & Paykel Healthcare, thanks to strong demand for its respiratory products.

‘‘In normal times, company comparisons using PE one year forward would be fine, but it’s particularly challenging at the moment because of these massive oneoff factors,’’ Mr Goodson said.

In the big picture, the driving force behind sharemarkets and those high PEs were abnormally low bond yields, which were making equities look more attractive.

Forsyth Barr head of wealth management research Matt Henry said the broker’s 31.7 times forwardweighted PE for the market was high, but was a result of interest rates being abnormally low.

‘‘Most assets are at elevated prices relative to history, whether that’s bonds, equities or property.

‘‘There is no such thing as an inherently cheap or an inherently expensive asset — it’s always relative,’’ Mr Henry said.

‘‘There are no cheap assets in the world and New Zealand equities are certainly in that camp.’’

He noted that the local market was dominated by a handful of stocks at the top.

‘‘Those companies change over time. Telecom [now Spark] was once the biggest, and at one point Fletcher Building was the biggest.’’

Now the market was dominated by Meridian, Fisher & Paykel Healthcare and a2 Milk.

‘‘Those companies typically have high multiples because of the growth that they have delivered recently.’’

In Meridian’s case, the stock had been singled out for buying by exchangetraded funds seeking defensive, green energy companies.

‘‘Price/earnings is a reflection of a point in time, not long term earnings, so in the case of Auckland Airport people are factoring in an earnings recovery over the longer term and people are willing to pay for a high quality asset,’’ Mr Henry said.

‘‘Given where interest rates are, there are very few cheap assets anywhere, as all the commentary out of the housing market will attest, and the New Zealand equity market has been a strong performer since the global financial crisis.

‘‘We are definitely seeing full valuations and in some cases high valuations, but it’s important to recognise that there is that compositional element to New Zealand, which means that when you look at the weighted average, we have got 15 stocks that represent 75% of the index and three that represent a quarter of the index.

‘‘If one of those stocks is F&P Healthcare, at 45 times, that clearly moves the average up.’’ — The New Zealand Herald