Market Morsels: IAG, FBU, AZJ

Company News

by Glenn Dyer

The continued wild weather in New Zealand is playing havoc with companies on both sides of the Tasman, with updates from IAG (ASX:IAG) and Fletcher Building ((ASX:FBU) released Monday, as well as one from Aurizon (ASX:AZJ).


The terrible rain and flood events in the NZ North Island in late January have seen Insurance Australia Group (ASX:IAG) keep its interim dividend at 6 cents per share despite an improvement in results in the six months to December 31.

And the insurer told the market on Monday – the day when a major rain and flood event hit the North Island for a second time in 16 days, courtesy of Cyclone Gabrielle – that it is confident of improving results in the final six months of this year.

Somehow you would have thought IAG might have held off a bit on making that suggestion until it saw the damage and claim numbers from the latest weather event. The first one saw over 15,000 claims and a cost to the insurer of more than $350 million.

Claims from the latest rain and flooding should start flowing in from today (Tuesday).

IAG did remind investors that in its February 3 update it said it expected its reported insurance margin to be around 10% compared to the previous estimated range of 14% to 16%.

“This is largely due to the expected higher natural perils costs from the Auckland flood event,” it said in that statement. A second round of claims from the latest event could put further downward pressure on that margin.

IAG said statutory net profit after tax was up on the corresponding half year at $468 million (1H22: $173 million) and included a post-tax Covid business interruption provision benefit (write-back) of $252 million. Suncorp also wrote back a provision not used for some Covid insurance cases.

Ignore than and earnings were lower – around $216 million and much closer to the weak 2021-22 interim figure.

IAG said its reported insurance margin for the half was 8.5% (December, 2021 half: 7.1%) which “reflected growth across the business but was offset by the ongoing impacts of higher inflation on claims costs in home and motor.”

“A $70m unfavourable net natural perils experience and a $48m prior year reserve strengthening also impacted the margin.

“Our expense ratio improved by 110 basis points to 22.9%. We remain on track to maintain the Group’s full year cost base of approximately $2.5bn,” the insurer said yesterday.

The hit from higher costs in its car and home insurance businesses came as inflation drove up the cost of labour and replacement products and services.

IAG (whose brands include NRMA and CGU) said in Monday’s release that premiums were rising by double-digits in those markets to fend off inflation, higher damage bills and the costs of its own protection (reinsurance).

“We are forecasting FY23 GWP growth to be around 10%, an increase from the previous guidance of mid to high-single digit growth,” CEO Nick Hawkins said in the release.

“Despite the challenges from the high inflation and perils experience impacting our business in the half, I believe we have a sound basis for confidence as we move into the second half.

“We are well positioned on a number of fronts – the quality of our brands and customers, our strong capital position where we have a third of our business on multi-year quota share arrangements, and our focused strategy is delivering results.

“It’s this strong position which gives us confidence in our FY23 outlook, the financial return we can deliver to our shareholders, and the opportunities ahead,” he said in Monday’s release.

IAG shares ended up 4.4% at $4.92 while the storm was lashing the NZ North Island.


Trans-Tasman building products giant Fletcher Building (ASX:FBU) just couldn’t wait two days to release the bad news on the impact of wet weather on its guidance for the year to June 30, even though it had a solid six months for the December first half.

The company could have been expected to drop the news in the interim results due tomorrow (Wednesday) but, as the North Island and Auckland in particular prepared for the impact of Cyclone Gabrielle and the second major rain and flood event in 16 days, Fletcher slipped out the early trading update on Monday instead.

Fletcher told investors on both sides of the Tasman its profitability has been dented by the extreme weather over summer after solid trading in the early parts of the six months to December – and that will be felt in the June half’s financial performance.

And besides this warning, the company’s release yesterday also contained a further warning to shareholders about a weaker level of trading expected in 2023-24 with falls of 15% forecast in volumes in its materials and distribution businesses in both NZ and Australia.

That will mean lower revenues and no doubt, more price cuts to hold on business and in turn, lower profit margins.

The building supplies and construction company lowered its expectation for full-year operating profit to between $NZ800 million and $NZ855 million, from its previous forecast for at least $NZ855 million.

While the forecast excludes significant one-time items, it is still ahead of the $NZ756 million it reported for the December 2021 period.

“While the underlying performance of the business is strong, trading in New Zealand in January-February has been heavily impacted by the adverse weather events,” CEO Ross Taylor said in a statement to the NZX.

Immediately following the January 27 rain and flooding event, Fletcher said that a few of its manufacturing plants had been closed temporarily to ensure safety and some clean-up was required on site, but all major sites were still OK to keep running.

Looking at the December half, the company said revenue of $NZ4.284 billion was up 5% from $NZ4.064 billion in the first half of 2021-22.

Earnings Before Interest and Tax and before significant items of $NZ360 million was up 8% from $NZ332 million in HY22 and net profit after tax was $NZ92 million (which includes $NZ150 million of previously revealed of construction provisions),

Fletcher says its board “expects to declare an interim dividend, which will be announced on 15 February” (tomorrow).

CEO Taylor said that, “Sales volumes on both sides of the Tasman were generally in line with, or slightly below, the second half of FY22, and there was an easing of previous supply chain and COVID-19 related challenges. Input cost inflation remained elevated, however strong pricing disciplines led to good recovery of these cost increases.

“Combined with efficiency initiatives and a focus on margin accretive market segments, this resulted in the materials and distribution divisions improving EBIT by $83 million to $339 million while the EBIT margin improved 150 basis points.

“We expect the softening of residential markets to continue into FY24 in both New Zealand and Australia. This lower activity is likely to reduce volumes in our materials and distribution businesses by circa 10% to 15% compared to what we have seen in the first half of the current year.

“And it is likely to mean that house sales in our NZ Residential development business are at similar levels in FY24 to what we expect to deliver this year. Commercial and infrastructure markets are expected to be more robust. As we look ahead to FY24, we are actively managing variable costs, overheads and capital to ensure we hold margins close to the current FY23 levels and keep our balance sheet and cashflows healthy.”

Fletcher shares fell 6.2% on the ASX to $4.63.


Finally, rail operator Aurizon (ASX:AZJ) has sliced its interim dividend by more than 30% after a weakish first half performance where the company again had to battle wet weather and flooding across parts of the Eastern Australian coast.

On top of that there was a two-week derailment and repairs at Blackwater in the central Queensland coal fields which also clipped volumes and revenues.

The lost tonnages from the wet weather and rail derailment can’t be recovered and has forced the company to cut annual earnings guidance by 4% to a range of $1.420 billion and $1.470 billion on an EBITDA basis.

The interim was cut to 7 cents per share, fully franked, from 10.5 cents per share for the December, 2021 half year. That was after coal and rail network volumes fell 8% and 2% respectively in the six months.

Despite that weakness, group revenue rose 12% (higher prices) but this was not enough to halt a sharp slide in earnings – on both a statutory and underling basis.

Statutory after-tax profit fell 49% to $130 million for the six months, while on an underlying basis (with all the odds and sods stripped out, earnings were down 34% to $169 million.

Rather than talk about these results, the company, like so many others preferred to discuss its EBITDA, which fell 7% to $673 million from $727 million a year earlier.

CEO Andrew Harding said in the earnings release that Aurizon faced “a challenging period operationally, with prolonged flooding on the East Coast together with a number of significant third-party derailments and incidents that resulted in reduced volumes and revenue.

“For example, compared to the 10-year average, double the amount of rainfall was recorded during the period in the key coal producing regions of Central Queensland and the Hunter Valley. “

The company’s coal EBITDA was down 20% or $56 million to $230 million “primarily due to lower above rail volumes from the impact of prolonged wet weather. In addition to the 8% reduction in volumes there was also a decrease in above rail revenue yield (excluding fuel) and moderately higher operating costs.

The Network EBITDA was down 4%, or $17 million to $363 million and “also due to 2% lower volumes from the impact of prolonged wet weather.”

The shares lost 6.5% to close at $3.45 yesterday.

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