The RBNZ raised the OCR by +50bps to 4.75% which was widely anticipated – with the peak still assumed to be 5.5% but taking slightly longer to get there. The RBNZ will rightly try to look-through the near-term inflationary impact of Cyclone Gabrielle and suggested that it didn’t materially alter the outlook for monetary policy – but will look to targeted response methods to help with the recovery, to avoid wide-based inflation to commence. We expect a peak rate of 5.25-5.50% with rates held for all of 2023, with a first minor cut in 2024 “data dependent”, a major slowdown in economic activity which is why we maintain a cautious outlook over the near-term.
WiseTech Global (WTC.ASX)
A tough stock to gauged to its expensive valuation even amongst tech peers, it keeps delivering on strong growth. We feel tailwinds for the logistics sector are easing and growth could slow down so we see an opportune time for investors to trim some profit, and we downgrade WiseTech down to a HOLD.
Spark New Zealand (SPK.NZX)
Spark shares were down -5.1%, reported numbers were strong largely due to the TowerCo sale. The company using the proceeds to pay down debt and buy back $350m of shares.
The underlying result which excludes the above one-off was weaker than expected and disappointed markets. While mobile continues to perform well, benefiting from roaming and reopening, broadband and cloud were weaker, while operating expenses rose +10.4% eating away at operating earnings (EBITDAI) which came in at $510m, down –5.2% from last year.
While an unfortunate result we remain BUY rated on Spark, it is still a key part of our NZ portfolio, even as we trimmed down from 12% down to 11% in January.
Spark still pays an attractive dividend yield, being well-funded by its free cash flows. Prospective dividend growth (which we believe is still on the cards) should offset weakness given the current higher interest rate environment. It is possible Spark will be able to pay a gross dividend yield of ~7.6% (after accounting for imputation tax credits) looking forward, in our view.
Looking near-term Spark’s defensive nature as a utility company also makes it more immune to a softening in the economy/recession, reflected by the fact the stock has not sold off this year.
EBOS Group Limited (EBO.NZ)
Ebos shares rose +3.2% after delivering another strong result for the first half of 2023, as net profit after tax rose +30% from last year to $141.6m, on the back of the strong growth from animal care and its LifeHealthcare Acquistion.
We see the stock as a fairly priced at current levels (trading at near record high p/e multiple of 27x for the company and maintain our HOLD rating on a the view with limited upside over the near to medium term (limited acquistion opportunity over the near to medium-term), however due to its defensive nature and stable growth profile we would continue to hold most of our holdings still in the NZ portfolio with an 8% weight, down from 10% last year.
We still like the growth outlook for the company and view the healthcare sector as more immune to economic slowdown, so downside risk should be limited. We are buyers again at more attractive valuation closer to EBOS historical average forward PE multiple of ~22x.
Rio Tinto (RIO.ASX)
Rio Tinto shares slipped -0.5%, following BHP’s, after reporting a similar result as commodity prices slipped and the impact of higher energy and raw materials prices weighed upon its operations, and higher rates of inflation on operating costs and closure liabilities.
For the 12 months ended 31 December, the mining giant reported a -13% decline in revenue to US$55,554m and a 41% reduction in net profit after tax to US$12,420m. In response to its softer earnings, the Rio Tinto board elected to cut its fully franked final dividend by 46% to US$2.25 per share.
We remain HOLD rated on Rio Tinto. The stock appears fairly priced in light of China’s reopening. With the global economic slowdown taking longer than expected we anticipate demand to ease and commodity prices to come under further pressure, and could see further dividend cuts over the near to medium-term.
What Markets will be watching this week
Monday
A2 Milk Earnings
Freightways Earnings
oOh! Media Earnings
Tuesday
BHP Earnings
Coles Earnings
Costa Group Earnings
Mercury Energy Earnings
PGG Wrightson Earnings
Wednesday
RBNZ OCR decision
Rio Tinto Earnings
WiseTech Global Earnings
EBOS Group Earnings
Spark Earnings
Thursday
Next DC Earnings
Qantas Earnings
TPG Telecom Earnings
Auckland International Airport Earnings
Air NZ Earnings
Heartland Group Earnings
Precinct Properties Earnings
Scales Earnings
Sky TV Earnings
Tourism Holdings Earnings
Friday
Lynas Rare Earths Earnings
Harvey Norman Earnings
Channel Infrastructure Earnings
Delegat Group Earnings
Summerset Group Earnings