AMP Says NZ Companies Must Grow Earnings to Justify Share Prices
New Zealand’s listed companies need to improve their earnings to justify current share prices, according to the country’s biggest non-government fund manager.
AMP Capital Investors is “conservatively concerned” about current valuations, Guy Elliffe, head of New Zealand equities at AMP, said at a press briefing in Wellington today. “We need to see earnings growth now to justify the valuations of companies in the market,” he said.
The recent reporting season provided evidence that earnings are coming through to support the run-up in share prices, AMP said in its quarterly strategic outlook. Earnings-per-share growth for the full year was around 10 percent for the companies reporting, excluding the listed property sector, it said.
The NZX 50 Gross Index hit its most expensive valuation in six years in May and approached those levels again this month amid a 17 percent rise in the benchmark year to date, according to data compiled by Bloomberg.
“It’s not that we think the market is terribly overvalued and we think investors should get out of equities, we’re not really saying that,” Elliffe said. “We’re just saying we don’t expect the sort of returns we’ve seen in the last three years to continue into the near future.”
The enterprise value of stocks in the benchmark rose to 9.38 times analysts’ estimates of earnings before interest, tax, depreciation and amortization on Oct. 3, according to data compiled by Bloomberg. It has only been more expensive on 11 trading days over the past 10 years, the data show, once on May 13 this year and 10 other times during May and June of 2007, the data show.
New Zealand shares returned 23.5 percent in the year through September, according to AMP. Elliffe said another reason to be cautious about returns going forward is the swelling supply of equities in New Zealand.
The government has embarked on an assets-sale program and is currently seeking to raise about NZ$2 billion ($1.7 billion) from the sale of as much as 49 percent of Meridian Energy Ltd., the nation’s largest power generator.
“We’re obviously looking at a very large offering with Meridian, and there’s another 10 or so capital raising opportunities that I’m aware of,” he said. “So in addition to the pressures on earnings growth, we have got a supply of equities to absorb in the market.”
Elliffe said demand for Meridian shares, which are due to list on Oct. 29, appears to be better than he’d expected.
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