Year Of Two Halves For South Island Companies

Wednesday 29 April 2009

Year Of Two Halves For South Island Companies

Deloitte South Island Index for year to 31 March 2009 released

The year to March 2009 was one of two halves for the South Island’s listed companies, according to the Deloitte South Island Index Year in Review released today. The strong gains enjoyed at the start of the year were eroded as the tentacles of the global recession wrapped around the Mainland and began to squeeze.

The report, released at a function in Christchurch tonight, showed the South Island Index started the year from 1 April 2008 to 31 March 2009 strongly with an overall gain of 12.2% across the first five months (April-August). However, in line with the global downturn, the Index declined from September 2008 through until February 2009.

But a glimmer of optimism flickered for the South Island in the final month of the year. For the first time in half a year, March 2009 saw an increase in the market capitalisation of South Island companies and the South Island Index outperformed the NZX 50 for the month.

Across the year, the South Island Index fell by 27.0% with $1,051 million value wiped off the initial total market capitalisation of $3.894 billion. The NZX 50 index was also down 25.4% in the year. Overseas it was worse, with Australia’s ASX All Ordinaries falling by 34.7% and the USA’s Dow Jones contracting by 38.0%.

Paul Munro, a corporate finance partner in Deloitte’s Christchurch office, said the last 12 months had seen unwanted records being broken across financial markets and the South Island had not been able to dodge the pain.

“The New Zealand economy, and the South Island, hasn’t escaped unscathed but along with other parts of Asia-Pacific, we have been holding up far better than many developed economies,” he said. “We need to be realistic of course, and acknowledge that we are still in a recession that is likely to continue for some time yet.”

Best and worst of company performance

In June 2008, there was speculation that PGG Wrightson was in contention to overtake Ryman Healthcare as the number one placed company on the South Island Index. But, despite Ryman’s market capitalisation dropping by $90 million in the nine months to 31 March 2009, it retains a firm grasp on the top slot and its market capitalisation is now double that of PGG Wrightson.

Just four of the 32 companies included in the South Island Index did not see declines in value. NZ Wool Services International was the strongest performing company in the South Island Index with its share price increasing by 17%, lifting its market capitalisation by $4.2 million in the year. As a result, it climbed four places from 18th to 14th on the Index at the end of March 2009.
At the opposite end of end of the spectrum, Plus SMS Holdings Limited lost more than 90% in market capitalisation ($35 million) in the year. Other companies hit hard were Widespread Portfolios and Wool Equities with both losing more than 80% of market capitalisation in the 12 month period.

No sector was immune

All eight industry sectors of the South Island Index lost ground in the year. The Port sector was the best of the bunch, declining by 2.2% in the year to March 2009. The biggest percentage decreases were in Technology and Financial Services, declining by 47% and 43% respectively.

Price-earnings ratios

Price-earnings multiples can be examined to assess the market view of relative risk and earnings growth expectations.

“Analysis of these P/E multiples gives an indication that the recovery may be led from the South Island’s Primary and Financial Services sectors,” Mr Munro said. “These sectors are trading at share prices that reflect significant future earnings growth. This suggests these sectors will lead a recovery by rebuilding earnings from abnormal lows much more quickly, in percentage terms, at least relative to the rest of the South Island Index.”

Other sectors in the South Island Index are reflecting more modest earnings growth, according to Mr Munro. “The P/E multiples indicate the earnings recovery may take a little longer in the Development, Port and Other sectors.”

The outlook is not catastrophic

Paul Munro said companies were taking a number of steps to buffer against risk, strengthen their balance sheets and adopt conservative capital structures. These included a trend toward the issuing of bonds as they faced declining access to capital over the past six to twelve months.

Mr Munro said Deloitte saw signs that companies wanted to be well-positioned to take advantage of growth opportunities as markets recover. “As the economy picks up we may see joint ventures playing a greater role in growth strategies, reflecting the lower cost and sharing characteristics of a JV.”

About the Deloitte South Island Index

The Deloitte South Island Index measures movements in market capitalisation, tracking the performance of more than 30 listed companies with a registered office and/or a substantial portion of their operations in the South Island.

For more, including the full list of companies in the Index, download “A tale of two halves: South Island Index Year in Review” from www.deloitte.co.nz.

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