13 Feb 2012

Strong earnings growth predicted for few companies

7:38 am on 13 February 2012

A handful of listed companies are expected to show strong performance in their earnings during the first half of the 2012 financial year.

But for most, the tight economic environment will continue to slow profits and squeeze margins.

The half-year earnings reporting season for listed companies gets under way in earnest from this week.

Steel & Tube's result to the end of December came out last week, and despite sales rising 6.5% compared with the same period a year earlier, there were tight margins and profit fell 24%.

Forsyth Barr's head of research Rob Mercer says expected revenue and profit growth will come from businesses restructuring.

He says it is expected that interim results will show revenue growth averaging about 6.5% and will be matched with a similar level of profit growth.

Mr Mercer says that is the first time that revenue and profit growth will have been at a similar level.

He says it signals that companies have already adjusted their cost base, and since 2008 or 2009 have downsized and are now at a level where both revenue and profit are growing at the same pace.

Mr Mercer says there are only a few companies which are expanding aggressively in their business models.

He says most of the gains are companies that have reduced their business to meet the current conditions and are now starting to see modest sales growth.

Meanwhile, Tower Investments chief executive Sam Stubbs says there will be less impressive results from companies that are struggling in a fairly quiet economy and which have industry structures that make it difficult for them to put up their prices.

Mr Stubbs says examples are Fletcher Building, Steel & Tube, Nuplex and New Zealand Refining. However, he says a select handful of companies will perform well.

Mr Stubbs says that is likely to be companies such as Freightways which has had good package volumes and made some very smart acquisitions in information management.

He believes TradeMe will do well with improving yields in their classifieds and earnings momentum.

Mr Stubbs says Port of Tauranga should also do well because it has a unique asset which has had increased hubbing by the shipping lines after problems with Ports of Auckland.