Market News 17 February 2025

Johnny Lee writes:

Reporting season is underway, with Vulcan Steel’s half-year result giving its shareholders a glimpse into the current environment for the metals sector.

The result was almost entirely negative. Revenue fell 13%, earnings fell 31%, profit fell 65% and the dividend was cut from 12 cents to 2.5 cents.

There were very few positive signs seen throughout the first half of the year. Customer numbers grew 0.1%.

The poor result was broadly expected, with the share price steady on the day. There was a bounce in the following days, but the share price remains well down from their highs.

Weakness for steel demand is expected to continue. The company highlights particular weakness from Victoria, as an area of concern. 

A number of data points now have been suggesting weakness across the construction sector, which is flowing through to this reduced demand for steel. Vulcan is anticipating a rebound longer-term, as the sector recovers.

Like many in the industry, Vulcan is focused on reducing debt and ‘’weathering the storm’’, in the hope for an improvement in market conditions in the years ahead. Lower interest rates - expected this week - may spur confidence, but increasing uncertainty from the US may yet upend these plans.  

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Skellerup continues to move from strength to strength, reaching a new record with profit up 12% from last year.

Net profit reached $24.2 million, on the back of strong earnings growth, particularly from the agri division.  

The increase in profit led to yet another increase in dividend, up from 8.5 cents to 9 cents. Skellerup has been consistent in lifting its dividend for many years now.

The company is also forecasting an increase in full year profits, providing guidance of $52 to $56 million, compared to last year’s figure of $46.9 million.

Skellerup continues to focus on debt reduction, with net debt now only $20 million. 

Skellerup also changed its shipping strategy, choosing to increase inventory to reduce its exposure to international shipping. A number of our companies have adopted this approach, fearing disruption and cost escalations from the transportation sector. While this helps to mitigate spikes in the cost of its supply chain, it does also impact the balance sheet, as inventory grows.

Overall, the result was well received and highlighted the company's intentions to innovate in a difficult market. 

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A2 Milk has also reported its half year results, including the declaration of its maiden dividend.

A dividend of 8.5 cents was declared. Dividends will be paid on a semi-annual basis and are expected to climb alongside increases in net profit.

A2’s result saw an increase in both revenue and profit, with revenue lifting 10%, earnings up 5% and net profit up 8%. Two large one-offs - an $8 million spend on air freight to address a short-term supply issue, and a $5 million depreciation acceleration on a coal-boiler - negatively impacted the result.

Net cash sat at $1.014 billion at the end of the period.

A2 remains a popular and trusted brand in China, with customers (parents – not the infants) happy to pay premium prices for New Zealand products.

The result saw a2 actually grow sales for its Chinese label product, despite the overall market shrinking 8%. 

China saw its first rebound in birth rate in over 8 years, with 9.5 million births in 2024, lifting demand for a2’s 0-6 month formula product. Unfortunately, declines continued across the older (1-3 years) products, as the previous falls in new births flowed through the company’s product chain.

The question now is whether this modest rebound is the start of a change in the trend, or a one off spike. Some demographers had anticipated 2024 - the year of the dragon - to lead to a one-off uplift in the birth rate. 

Outside of China, sales continue to improve across the board. Liquid milk sales grew over 10% across Australia, New Zealand and the US. 

The US division should reach positive earnings this year. Market share is slowly growing, and the company is hoping to gain long-term approval for its US infant formula product this year.

Mataura Valley Milk, a2’s milk producer in Gore, is on track to finally begin contributions to the company’s bottom line, with hopes that this year will see MVM become earnings positive. More favourable commodity pricing is driving earnings from the processor.

A2’s outlook remains upbeat, with the company expecting an even stronger result in August.

The share price soared following the announcement, rising 11% on market open. Shareholders will receive their dividend on 4 April. 

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Contact Energy published its results today, recording a net profit of $142 million, down 7%. Earnings rose 12% to $404 million.

The dividend was increased to 16 cents per share, up 2 cents per share from last year. Contact had also lifted its full year dividend 2 cents in 2024, marking an 11% increase in total dividend over the last year.

Progress continues across a number of its developments.

The Tauhara development is operational, and attention now turns to the solar development in Christchurch and the Glenbrook battery project in South Auckland.

The Manawa acquisition remains a focus. Contact is currently working with the Commerce Commission to address the concerns raised in its recent Statement of Issues, and hopes to achieve clearance by the end of March.

The company also provided some detail on its new agreement with Fonterra. Contact has signed an agreement to supply power to Fonterra’s site at Whareroa, as part of Fonterra’s electrification ambitions. 

This contracted demand acts to give greater certainty to Contact, when planning its supply response.

The company’s recent inclusion into the MSCI Index has seen some greater demand for the shares of late. This takes effect from 28 February.

In terms of balance sheet, debt is growing but remains within the thresholds needed to maintain the company’s credit rating. Contact flagged the possibility of further hybrid debt issues to maintain this, if necessary.

Contact Energy is expanding its renewable portfolio at the same time as increasing its returns to shareholders. The Manawa acquisition - if approved - will mark another major change for the company, as we near the 31 March deadline. 

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Readers in the Nelson region have been invited to a meeting with the New Zealand Shareholders Association this Thursday. 

The NZSA is a non-profit organisation which seeks to advocate for retail shareholders of listed companies. 

The NZSA also acts as a voting proxy for many retail shareholders across the country, Retail shareholders typically have very low participation in corporate voting, with some instead entrusting the NZSA to cast their votes for them.

The meeting will include a presentation from economist Shamubeel Eaqub.

Readers interested in attending this meeting are welcome to contact us and we will send through further details.

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Travel

Lower Hutt – 20 February – Fraser Hunter

Dargaville – 26 February – David Colman

Kerikeri – 27 February – David Colman

Whangarei – 28 February – David Colman

Wairarapa – 28 February – Fraser Hunter

Napier - Mission Estate - 6 March - Edward Lee

Napier - Havelock North - 7 March - Edward Lee

Christchurch – 12 March – Johnny Lee

Lower Hutt – 25 March – David Colman

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners Ltd