NZ Budget A Winner

This story features FLETCHER BUILDING LIMITED. For more info SHARE ANALYSIS: FBU

By Chris Shaw

The New Zealand Government has released its Budget, with the most significant of the changes related to tax reform. The moves include cuts to personal income tax, the company tax rate to 28% from 30%, Portfolio Investment Entity (PIE) tax and the tax rate for savings vehicles, offset by an increase in the GST rate to 15% from 12.5%.

As Credit Suisse notes, the reforms are aimed at encouraging savings and investment at the expense of borrowing and consumption. Macquarie views the reforms are fiscally neutral in coming years, though there will be the effect of increasing the FY11 deficit thanks to an increase in welfare payments.

The fact new spending measures are limited and economic forecasts have been lifted slightly means the deficit is likely to narrow on a three year view, with the Budget now projected to move back into a surplus in FY15. Macquarie notes this one year earlier than had previously been expected.

Macquarie also points out while the reforms are an attempt to better balance the domestic economy there is likely to be a boost in household consumption, as the tax rate changes mean an increase to average net take-home pay of about NZ$15 per week.

UBS suggests overall the moves should be applauded as they were both long overdue and assist in re-balancing the economy. From a longer-term view the broker suggests the combination of the 2009 and 2010 Budgets has supported the economy through and out of recession while still improving the fiscal position. This should result in an improvement in both economic growth and living standards.

Growth forecasts have been lifted to reflect this, with the New Zealand economy now expected to expand by 3.2% in March 2011 year, then by 3.1%, 2.9% and 3.0% in the three subsequent years. For the 2011 year UBS notes this forecast is up from 2.4% at the time of the Half Year Economic and Fiscal Update.

In terms of how the Budget changes are likely to impact on equity valuations, GSJB Were makes some initial conclusions. The broker sees the cut in the corporate tax rate as having a minor impact, one it estimates to be less than 2% across the broader market.

Most impacted from the changes according to GSJB Were are the listed property trusts given the removal of building depreciation and of depreciation loading on new assets. With the PIE rate being reduced as well the broker estimates a 5-7% reduction in distributable earnings across the sector. It notes this is slightly better than its previous worst-case scenario estimate of a 9% impact.

A higher GST will directly impact on Sky City's gaming revenues by around NZ$8 million in the view of GSJB Were, though this will be partially offset by a NZ$3 million increase in revenues from higher household consumption.

The removal of tax depreciation shields should also have a minor impact on earnings on the broker's estimates, the overall impact being a cut of around NZ$4 million. This equates to a valuation impact of around 2%.

GSJB Were also expects the removal of the tax depreciation shield on buildings will affect Auckland Airport as it should mean an increase in cash tax expense. But higher passenger service charges should offset much of this, while the cut in corporate tax rate should also provide a modest lift.

Overall there is expected to be a 4% improvement in net profit after tax and a positive valuation impact of around 2%.

As noted, the tax changes are seen as being modestly positive for household disposable income growth, So GSJB Were sees scope for the moves to create some additional spending. This should offer a modest boost to the retail sector and stocks such as Fisher & Paykel Appliances, while the broker also suggests Fletcher Building ((FBU)) could receive a boost as the Budget changes mean the New Zealand residential outlook may prove more benign than has been implied by recent activity in the sector. 

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