Cover Story Top 200: Good Climate, Better Management, Great Results

In year that saw the United States turning in record multi-billion-dollar deficit, New Zealand’s economy remained surprisingly robust in 2003. Given our exposure to depressed world markets, expectations for the year were not high – which made it even more pleasing that the country’s Top 200 companies managed to chalk up total profitability increases of more than 120 percent on last year.
Not that it was an easy year. There was the war in Iraq, the impact of the SARS virus on international trade and tourism in particular, power shortage – and the climbing exchange rate. Exporters cringed as the Kiwi dollar crept up against the greenback – up to the high 50c mark, then on into the 60s. Pundits predict it could yet reach 65c.
Sectors such as primary production were noticeably exposed and that helped knock the overall revenue from this year’s top 200 companies down by around seven percent. The largest and by far the highest-earning company, Fonterra, experienced revenue drop of 10 percent – from close to $14 billion down to $12.474 billion. However, its profitability looked whole lot better as last year’s $50 million loss turned into $257 million gain. Co-operatives “real” profits are though, notoriously difficult to gauge.
Other primary producers also suffered: AFFCO Holdings revenue fell 17 percent to $991.9 million and it reported $12.3 million loss. The Alliance Group profits dropped 70 percent, and South Island’s PPCS meat company dipped little more, down 77 percent.
It wasn’t just trees that fell in the forestry sector. The ever-climbing exchange rate cut ring-barked export receipts which then withered and died. $271 million loss helped Fletcher Challenge Forests harvest the dubious honour of being ranked first on our list of biggest loss-makers for the year – from third last year. Forestry investor Evergreen (though not amongst the top 200 revenue earners) also chalked up significant losses blaming rising shipping costs and the high Kiwi dollar.
On the positive side of the ledger, New Zealand’s domestic economy hummed along, fuelled in part by booming housing sector. That meant companies servicing local market demand fared lot better than export price takers.
The construction, banking, food, retail, manufacturing and the media sectors all fared well. The energy sector experienced significant profit surge, tourist activity started trending up again and, even though the value of export receipts suffered, large volume cargo handlers had good year.
The generally strong profit performances across reasonably wide range of sectors ignited the local share market. In addition to new governance rules and guidelines, the exchange generated record number of new listings and increased investment activity. There’s also general sense that New Zealand listed companies are turning in performances that are more reliably consistent.
Market watchers believe better standards of governance and improving management practices are factors in many of the improved company performances.

Taking stock
Listed companies generally had good earnings season and generated plenty of cash, says Stock Exchange (NZX) chief executive Mark Weldon. “There are few reasons for that. The macro-economic settings have been reasonably good and people have just been getting on with it. Australia was bit of battlefield for many New Zealand companies but recently we’ve started to see some of them turn in few very good results from there – Fletcher Building is an example.
“I also think we’ve generally got good governance standards here – things are run pretty well.”
Governance standards and performance moved even more squarely into the spotlight this year and, according to Weldon, it has helped encourage tighter focus.
Weldon thinks more companies are showing greater clarity of purpose. “If you look at companies like Sky City or Fletcher Building, they’re pretty well crafted. You have very clear idea of what that company does, what it’s going to do, what you can expect. There’s not lot of whacky stuff out there. Companies have seemingly defined their core business very well and are executing well against core business which is what investors like to see.”
That has also been characteristic of new sharemarket listings, says Weldon. “If you look at Promina – you know what it does in terms of insurance and financial products. Freightways clearly has well-defined business model. And our company is reasonably well understood in terms of what we do – so I see it as fairly consistent trait.”
In terms of new listings, 2003 was the “strongest year in recent memory”, says Weldon.
“It’s also been the strongest year in terms of trading and investor participation. We’ve had lot of both retail and offshore institutional investors voting with their feet and participating in the market. Trading values are substantially up on year ago and the number of trades are also up. That’s positive for liquidity which is good for companies’ cost of capital and for their ability to raise funds.”

Steady as she goes
One characteristic of this year’s top 200 is stability. Apart from few shifts in rankings and the disappearance of Woolworths (taken over by Foodland), this year’s top 25 corporate performers look much the same as last year’s. As group, they represent more than half the total Top 200 revenue, have improved their profitability by massive 5698 percent and their overall return on equity by close to 25 percent.
In some respects, the “steady-as-she-goes’ performance of New Zealand’s major companies was response to the rather negative omens that persisted at the beginning of the year. Deloitte chief executive Nick Main describes it as an “aura of infectious gloom” that hasn’t quite lifted.
“There’s sense that things couldn’t possibly be this good. We went into the year thinking the economy would be turning down, that we couldn’t keep up the rate of economic growth we’d been having,” he explains.
“Then there were all sorts of problems around like SARS, the recessed US market, the war in Iraq. So I think people have been reasonably cautious, running their businesses tightly with big focus on cost management. As it turned out, revenue is running at similar levels or better for many companies and because costs were kept under control, it’s proved pretty good year.”
Companies have done better than expected because, at least in part, the economy has generally grown quite strongly, says economist and investment columnist Brian Gaynor. “Growth in the year to March was 4.3 percent and it has continued on quite strongly. The figures your Top 200 list contains are reflective of the year from last July to June this year and most of that period was pretty good in New Zealand. Housing in particular has been strong and that makes up bigger percentage of New Zealand’s economy than in other countries.”
The flow-on effect of buoyant housing market has an impact right down through the economy, adds Gaynor – from builders’ suppliers and carpet manufacturers to appliance retailers and even car sales.
“A strong housing market not only encourages people to build more houses but also to borrow against the increased value of their homes and to spend that money. So while this year was not as strong as last, it’s been good on an historical basis.”

Who’s doing well
Sectors that have generally shown an upward trend in fortunes include food and food retailing, utilities, banks and financial institutions, manufacturing, construction and to some extent the media which has picked up on the back of an advertising boom, particularly real estate advertising.
Fletcher Building’s revenue rose 8.6 percent to $3.2 billion and it notched up an 80 percent profit improvement over last year to $168 million. Recent acquisitions boosted assets by more than 50 percent to $2.38 billion. It’s strategically planned and so far well-executed leap into the Australian market has been generally very good for the business.
The financial sector

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