Global markets sold off overnight as the US markets headed for their worst loss in 7 weeks with downbeat corporate earnings and contradicting signals on Republican plans for a popular retirement scheme weighing on investor sentiment.
Once again, earnings will be closely watched this week with a number of heavyweight US companies reporting quarterly profits. Given the high level of the market the current US earnings season is as important as ever in terms of supporting company share price valuations.
Stock in Focus: Fletcher Building (FBU:NZ / FBU:AX)
The big news in the local market was another earnings downgrade from Fletcher Building stemming from its troubled construction division.
It felt like déjà vu, as FBU said it has taken a further $125 million provision against problematic construction contracts including the Convention Centre and the Justice Precinct in Christchurch, and said its B&I unit would report a full-year loss of $160 million, including $35 million of overhead costs. The announcement follows a review by KPMG of FBU’s key construction project. The company also announced its new chief executive, Ross Taylor, who replaces former chief Mark Adamson who was sacked this year amid cost overruns at major building projects.
This was very disappointing announcement given it was another in a string of downgrades, and sounded to us like more of the same – with FBU stating on the analyst conference call that the NZ Convention centre project and Justice Precinct project in Christchurch accounted for 80% of the additional downgrade. The silver lining on the call was that FBU’s other large project, commercial bay in Auckland, appears to be on track. FBU also stated that they remain well within their financial covenants.
We are currently BUY rated on FBU and reviewing our recommendation. Members should look out for our full update on FBU to be released in our weekly report.
Australia & New Zealand Market Movers
The Australian share market added to gains on Wednesday (ASX 200 index +0.14%) as the ASX 200 inched back above 5,900 points as mining and energy stocks gained ground, and weaker than expected inflation sent the Australian dollar to a three month low. Interest rates are expected to remain at their record lows until well into 2018 after a collapse in fruit and vegetable prices offset soaring electricity bills and kept inflation below the central bank's target range.
The New Zealand market dipped on Wednesday (NZX 50 index -0.09%) breaking a 15-day streak of gains as Fletcher Building faltered on another earnings downgrade, while Comvita, A2 and retirement village stocks gained. In other stock news, Infratil, the publicly listed infrastructure investor has concluded its NZ Bus negotiations with Auckland Transport while negotiations in Wellington are ongoing, and still expects the business will shrink by a third.
3 Things Markets Will be Watching this Week
1. Quarterly US corporate profit announcements, with the level of the market making the current earnings season as important as ever.
2. Australian inflation data is published on Wednesday.
3. The European Central Bank makes an interest rate decision on Friday.
Have a Great Day,
Team