Confessions from the NZX-listed corporates last month confirmed what is already plain to see – the economy is under the cosh.

Those stocks with high exposure to discretionary spending suffered, along with those in the
building sector.

There were some bright spots, a2 Milk being a case in point. And then there were those stocks that keep on keeping on – utilities such as Mercury and Spark.

BNZ economists turned their attention away from the usual statistics to look at the releases and investor presentations of 39 company earnings releases “through a macro lens” to gather information on the economic backdrop for New Zealand.

They said the information can be timelier than official economic releases and thereby provided 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,” the bank said.

Construction, retail, and primary sectors appeared to be the worst hit, BNZ said.

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 New Zealand economic recession,” the bank said.

The bank noted that while New Zealand equities have underperformed global equities over recent years, the shortfall over the past year had 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,” it said.

Winners and losers

As a guide, Craigs Investment Partners compiled a graph of the five best and the five worst NZX top 50 stocks, based on the reaction of their share prices on the day their company results or earnings updates.

A2 Milk fared the best with a 13.7 per cent gain while Fletcher Building was the worst, its share price dropping by 13.2 per cent.

Mohandeep Singh, senior research analyst at Craigs Investment Partners, noted some share prices went up, despite reporting only mediocre results.

“Freightways was as expected, but some of the commentary was a bit more positive, even though it was not a super outstanding first-half result,” he told Stock Takes.

The bottom five share price performances were either on the back of bad results or on expectations of bad results to come, such as retirement village company Ryman.

Problems in construction were also in plain sight with sharp earnings declines in Fletcher Building’s first half profit, along with declines in Steel and Tube and Vulcan Steel.

“Then we saw the same across the retail sector with KMD Brands, Michael Hill and Restaurant Brands – anything that’s got some leverage to the consumer.”

On the upside, a2 Milk was the one in terms of share price performance, he said, noting the company is also sitting on a cash mountain of $792m.

Power company Mercury NZ was among the standouts.

“Those that have been less exposed – the electricity companies and telcos – have produced good stable results, with earnings in line with expectations.

“And the utilities have tended to raise their dividends.

“There are those stocks that have crashed and burned but underneath all that, there are good defensive stocks in New Zealand, which carry on business on business as usual,” he said.

Singh said that results would continue to reflect the economy “at the coal face”.

Looking ahead to the next reporting season, the annual results for those stocks with June 30 balance dates – which will fall due around August – “does not look overly impressive”.

“By then, investors will be wanting to hear from those companies that are starting to show some green shoots,” he said.

Xero’s upgrade

Xero’s share price has shot up more than 17 per cent this year and analysts have upgraded the stock of late in the wake of its inaugural investor day held on February 29.

Fisher Funds Australian equities manager Robbie Urqhart said both he and the market had been impressed by the calibre of leadership at Xero under its new CEO Sukhinder Singh Cassidy.

Singh Cassidy has been in charge for nearly a year during which she has restructured the company and brought on board a new leadership team.

Urquhart said Singh Cassidy had now reoriented the structure of the firm from being based around regional heads in charge of different countries to functional heads.

”It’s a natural evolution of a firm that is just continuing to grow and has structured itself for the next 10 years of global expansion.

Over the last 10 years Xero has grown revenue on average 43 per cent per year – the share price is up 270 per cent over the last decade against the ASX200 which is up 145 per cent.

“So they have done really well, they have scaled and grown the business well but Sukinder has bought this global perspective and global management team that she has now put in place.”

Xero laid out a new three-by-three strategy for the next three years. It will focus on three geographic markets – Australia, the UK and the US and three key products within those markets – core accounting, book-keeping, payments and payroll with a focus on SMEs of one to 20 employees.

Urqhart said for him it was a surprise that the US has been elevated into the top three markets.

”It’s not a market or a country that Xero has won in historically.

“They’ve been on the back foot and have tried a number of different ways to approach that market.

“It hasn’t been a disaster but it hasn’t been a successful market for them.”

But he said Xero appeared to have increased the productivity of its development capability which had resulted in some significant wins in the US in the last 10 months such as taking the number of bank feeds from about 20 to over 600 in the course of 10 months.

”It’s this kind of stepped up productivity that underpins their confidence they can now go after the US market – they have got the right people in place and the right development road map to achieve that.”

In addition to that Xero unveiled its AI tool to help customers navigate their book-keeping requirements – JAX or Just Ask Xero.

Urqhart said the chatbot system was well suited to a business that helped companies with their accounting and book-keeping requirements because it was very rule-based.

”It’s a very rich market for them to go after.”

The chatbot is due to be rolled out globally this year.

They are playing catch-up to US competitor Intuit which came out with its own version of an AI tool last year.

What also would have been music to the ears of analysts was a promise by Xero to double its revenue and achieve the rule of 40 which is free cashflow margin over your revenue growth rate being 40 per cent.

Xero didn’t give a timeframe on when they would achieve this.

But Urqhart said: “You need revenue to grow at a decent clip and have margin expand to achieve that over next three, four years.”

”That has given the market more confidence they are going to continue to see – over next three to five years – a revenue growth rate that is going to be in the double digits coupled with profit margins that are going to go up through time.”

Maui cools EL&F talk

Maui Capital chairman Paul Chrystall moved to cool a report in the Australian Financial Review that suggested Australia’s Anchorage Partners was set to buy its equipment leasing firm EL&F.

“It’s no secret that the business is in the process of sell-down so at some point in time, if something happens then an announcement will be made, but there are no announcements at this stage,” Chrystall told Stock Takes.

“We have nothing whatsoever to say on a deal with that company,” he said.

Since establishing Maui in 2008, Chrystall has managed Maui’s Aqua Fund (2012) and Indigo Fund (2008), according to the company’s website.

EL&F is an integrated equipment, asset management and finance group with a diversified exposure to the New Zealand materials handling, construction, forestry and logistics sectors.

It trades under the brands AB Equipment (equipment sales and servicing), Speirs Finance (asset financing) and Yoogo (vehicle and equipment leasing).

(Additional reporting Tamsyn Parker)

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.