Gauging the increasing number of write downs

As well as frequency of abnormal items, another important feature is the size of the write-down. My hunch was that the quantum of write-down in this reporting season was also high. As the above table shows that was indeed the case with a total of $1.6 billion of negative abnormals. This is only surpassed by the $1.8 billion that vanished in Financial Year 2019. Out of interest, over 80% of that total was down to just two companies, Fonterra and Sky TV who wrote down the book value of their businesses by $801 million and $705 million respectively. For Fonterra that was principally a reassessment of the value their operations in China and Brazil[3], while for Sky TV it was essentially an acknowledgment of the impact of Netflix and other streaming services coming to New Zealand[4]. This years negative abnormal are much more broadly spread with Precinct Properties, Vital Healthcare, Meridian Energy, Fletcher Building, Mercury, SkyCity and Auckland Airport, all reporting negative abnormals ranging from between $260 million and $100 million.

So, in broad terms we are seeing an increase in the number and level of negative abnormals over the past eight years. What is driving that and what does it mean for investors. My overriding observation is that it is getting harder to ignore abnormals as they become more prevalent in annual results, which I believe supports what was the main thrust of my previous article on this topic.

However, this study has raised some additional observations. Some business models are more susceptible to write-downs as well as write ups, a prime example of this being listed REITS as the value of their properties gets pushed around by interest rates. For most of the last 8 years they benefited from falling interest rates but this year the opposite was the case. For example, the two largest negative abnormals were by Precinct Properties ($260 million) and Vital Healthcare ($222 million) while Auckland Airport chipped in $105 million due to its property division. The current downward trajectory of listed REITS share prices suggests that investors see more negative write-downs still to come from that part of the market.

Another observation of this August reporting sample of companies is that it is very slim pickings for investors that want to own companies whose reported earnings consistently match their normalised earnings. Only three of the 37 companies reported no abnormal items over the past 8 years: Chorus, Hallenstein, Glasson and Skellerup. This again underlines the reality that investors have to deal with abnormals but shouldn’t necessarily ignore them.

[1] 401350.pdf (nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com)