Company Interview / Two stocks that may benefit from rate cuts

Key points:

Reporting season mostly lowlights with economic challenges in New Zealand.Notable companies: Fletcher Building's macro issues and IBUs Group's growth prospects.Future benefits from interest rate cuts: Fletcher Building, retirement villages, and Briscoes Group.

Brad Gordon from Forsyth Barr observes that the recent New Zealand reporting season reveals more lowlights than highlights, influenced by economic challenges. The Reserve Bank of New Zealand's interest rate cuts indicate the tough economic conditions. Fletcher Building faces macroeconomic questions and legacy project issues like the SkyCity project and Perth Pipes, needing to move past these to improve investor confidence.

On a brighter note, Brad highlights the performance of IBUs Group, which revitalised after losing the Chemist Warehouse contract. The company projects a 15% annual growth in earnings over the next three years, making it a promising investment. Brad sees potential in IBUs Group's dependable cash flows and merger and acquisition upside.

Concerning interest rate cuts, Brad suggests that companies like Fletcher Building (ASX: FBU) and retirement villages could benefit as property markets improve. High-quality retailers like Briscoes Group (NZE: BGP) demonstrate resilience in tough macro environments. In contrast, the Warehouse Group faces continued downgrades due to underinvestment. The consumer-sensitive nature of these companies shapes their performance.

Full unedited transcript below:

0:12

Let's stick to reporting season, and particularly how some of those Kiwi companies have fared to take you through those hits and misses. Brad Gordon joining us from Forsyth Barr. Brad, welcome back to Aussie. It's good to catch up with you as the dust settles on reporting season. Well let's look on your side of the ditch then. And what are some of the highlights for you. How would you sum up reporting season?

0:34

Well, probably more lowlights than highlights, but um, but we've got what it was always expected to be a pretty tough, uh, reporting season given the state of the New Zealand economy, which, um, has, you know, resulted in the reserve Bank of New Zealand making a pretty significant about turn and cutting interest rates this month, which I guess got just goes to show how tough and how quickly the economy has turned.

0:59

So let's drill into some of those results you're seeing the first one being Fletcher Building and pressure there, particularly what we're seeing in property construction at the moment.

1:11

Yeah. Well look it's the question was Fletcher Building is um, well, there's more than one question with Fletcher Building, unfortunately. But the key question from a macro perspective is, um, when are we the darkest before dawn? And I think even with the reserve Bank starting to move interest rates a quarter of a basis, a quarter of a percentage point this month, we're still very tight in terms of, um, against what we perceive as a neutral rate sitting at 5.25% OCR. So it looks like there's a fair way to go for there macro to turn. But then Fletcher Building has also been very much about, uh, some of that tail risk stuff that, um, continues to linger. The um, International International Convention Centre for SkyCity project, the Western Australia Perth Pipes, and it just has to continue to tick those boxes and get those legacy projects, uh, out of out of investors sites.

2:07

All right. Yeah. Interesting to see what's going on on that front. Um, another one you're taking a look at is IBUs group. What are you seeing there? Yeah. Look on the on the brighter side of of reporting season, the boss has had a tough couple of years of losing the Chemist Warehouse contract. Um, but this business has now sort of rebased reset, and we forecast that buildings are going to grow at sort of 15% per annum over the next three years, which, yeah, in three years time, if earnings are roughly 50% higher, the commensurate sort of 20 times per share price should be 50% higher. It's a bit of a,

2:45

um, it's a high quality business. Um, dependable cash flows and there's some M&A upside to it. So on the positive end, like the share price hasn't reacted significantly to the result, but it is one stock that I can see sort of being significantly higher in 12, 18 months and in three years time.

3:04

So, Brett, given the RBNZ has now begun that rate cutting process, when you take a look, um, equity wise at least, who do you see or which companies do you see as being the beneficiaries. Which ones could come under further pressure at this point? I guess, bearing in mind to the state of the Kiwi consumer, who obviously they're obviously struggling still

3:30

the Kiwi consumer is absolutely on on their knees. We're seeing, um, unemployment tick up quite quickly, which is why the reserve Bank has moved, uh, significantly. Before they thought they would, they were talking holding the OCR until the middle of next year. Now that's now they've already moved. So, um,

3:50

interest rates will come down and will come down quickly. We expect that the next eight, uh, reserve Bank meetings there will be interest rate cuts down to a terminal rate of 3%. So

4:03

um, or thereabouts. So that's going to make a difference by, by this time next year we should we we should have an OCR of roughly 3.5%. Then you should see the economic sensitive companies like Fletcher Building being well positioned to capitalise. The retirement villages should be well positioned to capitalize because the property market should have improved. People can sell their houses to actually move into retirement villages. Um

4:30

Briscoes Group's high quality retailer of the highest quality, has managed to grow earnings despite the really tough macro environment. You know that that should be seen to perform well. Um, but you know, there's a big chunk of New Zealand's, uh, in the, uh, market that isn't as, um, well, the interest rate sensitive, but not as economically sensitive, such as utilities and generators and things which have got their own other drivers against what's happening in the macro. Interesting to see what's going on for retailers. This is the issue we're seeing here in Australia too. Those those quality retailers have actually done very well despite obviously the pressure the consumer is under. So is that that's the same what you're seeing on your side too. Oh very much so. You've seen warehouse Group continually downgrade. They haven't really invested in their business enough. Um, over the last few years have rejected this takeover offer. Well, one of the cornerstone shareholders has rejected this takeover offer that was in the pipeline. Um, but, yeah, just in

5:30

continued downgrades from the warehouse group. Briscoe. Look, they haven't been chucking from the rooftops that we're doing well, but, um, they're able to get record results through very, very difficult trading. So. Yeah, you can just see the, uh, the difference. Catman do, um, you know, that's a really bumpy road. Um, but it's actually a reasonable quality business with its Ripcurl stores as well. And, um, and that should start performing well as the consumer sort of, um, unfreeze.