Thursday turned out to be a busy day for trans-Tasman stocks on the ASX, with Downer EDI, Fonterra and Air NZ each making headlines.
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It was a very bad news day indeed for services group Downer EDI (ASX: DOW) – so bad in fact that the shares hit two-and-a-half-year lows after two shocking updates were rolled into one
The company told the ASX in an update that not only had some of its past profits have been overstated by up to $40 million, but that the wet weather, supply chain delays and other problems had forced it to slash its full year earnings guidance.
That downgrade was before any losses or write-downs from the accounting problems in some of its service contracts in the four financial years from 2020 to 2023.
Naturally that hit the share price hard – in fact it fell out of bed, plunging 31% to a day’s low of $3.31 and ended at $3.82, still down 20%.
Yesterday’s lows and close took the share price back to the dark days of early 2020 and the depths of the first pandemic and lockdowns.
On top of that, the news broke eight days after long time CEO Grant Fenn announced his retirement. He is due to leave in February when the company releases its 2022-23 interim results.
That will now be a very sombre note on which to end his career.
The trading downgrade had been hinted at in comments made to the company’s AGM in October so it was the news of the “accounting irregularities’ that provided the biggest shock for investors yesterday.
Downer said the accounting irregularities result in a historical overstatement of pre-tax earnings between $30 million to $40 million, accumulated across FY20-23.
“A detailed investigation has been initiated and is being treated with the highest priority,” the company said in a statement to the ASX.The company said it had identified historical misreporting of its Australia utilities business’ revenue and work in progress in one of its maintenance contracts.
The company has begun a detailed investigation into the issues that appear to relate to the period between September 2019 and November 2022. The overstatement appears to have accumulated over financial years 2020, 2021, 2022, and 2023.
Any potential ongoing impact is yet to be determined.
Then the company told the ASX that its 2022-23 guidance was being downgraded due to “difficult weather conditions and elevated cost to serve issues … particularly in Australia’s Eastern States and New Zealand.”
The company expects FY23 net profits to be between $210 million and $230 million compared to $225.3 million in FY22.
The guidance provided in August when the annual results were released forecast a 10% to 20% growth in underlying net profit.
“Although the business has a general skew to the second-half, we think that the challenge for the last seven months of FY23 has become too large,” according to CEO Grant Fenn yesterday.
“Our Road Services and Utilities businesses have been heavily impacted by weather and all businesses have been battling with staff shortages and supply chain issues. These issues are dissipating but not in time for 2023 earnings,” he added.
The company said it will provide another update when it releases its half-year earnings in February.
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A very different story for Kiwi dairy giant Fonterra (ASX: FSF), which revealed a sharp rise in quarterly results.
Fonterra said its first-quarter profit jumped 84% as it benefits from strong margins in its protein and cheese products.
Normalised after-tax profit increased to $NZ214 million in the three months to October 31, from $NZ116 million last year.
That was on a 32% jump in sales to $5.79 billion.
Fonterra has spent the best part of two years cutting back on investments offshore – in China and Chile – and deciding to keep its huge Australian dairy, cheese and protein operation.
CEO Miles Hurrell said in Thursday’s statement that Fonterra was making good progress and the long-term outlook for dairy remained strong.
“Globally, milk supply from key exporting regions is down over the last 12 months. Production in Europe and Australia continues to be down, with US milk supply showing a slight improvement in recent months. Here in New Zealand, our milk production is down 2.9% on the same point last season,” he said.
“Global market volatility has prompted some softening of demand for whole milk powder, particularly in Greater China … We’ve seen increased participation from other regions which has offset in part the drop in demand from Greater China. While it’s still early in the financial year, we are happy with our sales contract rate.”
Fonterra’s ingredients business benefited from favourable margins in its protein portfolio, particularly for casein and caseinate products used in medical nutrition, and whey protein concentrate used in products such as high protein beverages.
“The sustained strong margins in our protein portfolio give us the confidence to upgrade our earnings guidance, although the wider range reflects the volatility in the market which we expect to continue in the short to medium term,” Hurrell said in Thursday’s announcement.
“If these conditions continue for a further extended period, it could have an additional positive impact on forecast earnings.”
The co-operative’s foodservice business also improved relative to the same period last year, but high milk prices put significant pressure on margins in both its foodservice and consumer divisions, Hurrell said.
While higher milk prices are beneficial for farmers, they can squeeze profit margins for milk processors like Fonterra unless they can sell their products at higher prices as well. Higher milk prices also squeeze end-users of Fonterra’s milk and other products.
The group’s profit margin lifted to 16.3% from 15.1% due to strong product prices, partially offset by higher milk prices to farmers.
Fonterra Shareholder Fund securities rose 2.7% on the ASX to close at $2.99.
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Finally, Air New Zealand (ASX: AIZ) joined Qantas yesterday in revealing a strong upgrade to its interim earnings forecast and trading performance.
The quantum of the dollars involved might not be the same, but Air New Zealand’s earnings upgrade was very solid 40%.
The airline told stock exchanges on both sides of the Tasman the upgrade was due to “continued strong travel demand across the domestic and international networks, as well as a recent decline in jet fuel prices has accelerated the airline’s financial recovery. “
The airline said it now expects earnings before other significant items and taxation for the first half of the financial year to be in the range of $NZ295 million to $NZ325 million, up from the previous guidance range provided on September 21 of $NZ200 million to $NZ275 million for the half year.
(Qantas said late last month it now expects to earn $A1.45 billion for the six months to December 31.)
“The updated range is based on current forward sales expectations and assumes an average jet fuel price of around US $127/bbl for the six months to 31 December 2022.
“It also assumes we will fly approximately 75 percent of pre-Covid capacity levels across the entire network in December, with Domestic running at just under 100 percent, short-haul at about 85 percent and international at around 70 percent.
“Ticket sales over the past two months have remained strong as New Zealanders continue to book travel overseas and at home, and as the majority of our remaining international destinations re-open for passenger travel.
“Fuel prices have also moderated in recent weeks, with current jet fuel prices of approximately US$102/bbl. While fuel prices are around 20 percent higher than pre- Covid levels at present, the six-month average has declined since the airline’s last market update in September, adding almost $20 million upside to the guidance range. Whilst fuel is a contributor to this earnings update, it is not the only factor.”
As well, the airline pointed to capacity constraints “which will continue to impact pricing.” (Constrained capacity is helping Qantas boost revenue from a fewer number of flights and seats on offer).
“Air New Zealand is focussed on ensuring operational reliability while also adding capacity to alleviate this pressure. Since February 2022 the airline has hired over 2,200 employees into the organisation and welcomed two new A321 neo aircraft into the fleet. These new aircraft add an additional 200,000 seats per year into the domestic network and alongside the additional employees, will help ease capacity restraints.”
Air NZ said that even though conditions had improved, continuing volatility in “fuel, global recessionary risks, continued inflationary pressures and increased costs” meant “the airline is not providing full year guidance at this time.”
On the ASX, Air NZ shares rose 1.3% to 73 cents.
