Market News 18 November 2024

Johnny Lee writes:

TWO of New Zealand’s largest companies - Infratil and Mainfreight - released their financial results last week.

Infratil reported a 25% increase in earnings and a modest increase in dividend to 7.25 cents per share.

This will prove a very busy period for Infratil, with considerable activity expected across the portfolio.

Most obvious is Manawa Energy, which is currently under takeover from Contact Energy, pending regulatory approvals.

Infratil has already indicated its support for the takeover. If the takeover is successful, Infratil stands to gain gross proceeds of around $185 million, as well as a 9.5% shareholding in Contact Energy. The company has not yet revealed its long-term intent for this equity stake, no doubt waiting for greater certainty from the regulator.

Longroad continues its renewable energy development in the United States, although earnings fell from last year's high, down 36% to $21 million.

The change of political leadership poses a risk, but Infratil has been assured its short-term projects - which currently benefit from various tax incentive programmes - will remain unaffected from any change in regulation. The exact shape of any changes remains to be seen, with some expecting a greater focus on nuclear energy in the years ahead.

Meanwhile, growth in AI and data centres is fuelling renewable energy demand, and moves towards greater onshoring of manufacturing could benefit the industry further.

One NZ (formerly Vodafone) saw a modest increase in earnings, albeit driven by a continued push to control costs. Wellington Airport and Retire Australia both saw modest lifts in earnings.

The main story remains the data centre business, CDC.

CDC saw earnings growth of about 30%, but Infratil clearly has greater ambitions for the industry. It has plans to nearly septuple its current capacity, with CDC allocating more than $2 billion of spending over the next financial year. Infratil, as a 48% owner, plans to allocate nearly $700 million for capital expenditure.

While this increase in capacity may sound almost absurd, margins have remained very high - 75% - and the average lease period remains around 31 years. This is a highly profitable business with predictable long-term cash flows. Indeed, the challenge may be securing sites and funding. Demand is clearly not the challenge, at this point.

The next 12 months will see a period of change across Infratil’s portfolio, with Manawa, CDC and Longroad all in the spotlight as economic conditions and corporate activity continue to evolve.

Mainfreight’s annual result was also released to market last week, showing an 8% increase in revenue but an 8% decline in profit. 

The share price saw a modest gain on the day and was broadly in line with expectations following the company’s Investor Day update last month.

Last year's dividend of 85 cents per share was maintained. It is payable on 20 December.

The return of revenue growth will be a relief to shareholders, with increased revenue observed in the Australian, European, American and Asian markets. New Zealand remains the laggard, seeing both a revenue and profit decline.

Continued pressure on margins is proving problematic. There has been some improvement late in the reporting period, but it is clear that competition remains fierce and focusing on cross-selling - between transport, warehousing and air and ocean - will be key to improving margins.

The elevated level of capital expenditure, particularly in warehousing, is being maintained. About half a billion will be spent over the next few years, largely on property, to improve capacity.

Conditions remain challenging and management is focused on positioning the company to take advantage of improving economic conditions. More plainly, the company is trying to match its capital expenditure with anticipated customer demand growth.

The extraordinary conditions observed during Covid were always going to lead to a period of revenue and profit decline. Now, revenue is improving and investments are being made into greater capacity. Once this is done, greater levels of profitability will need to follow. 

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SANTANA Minerals released its pre-feasibility study to market on Friday, following two days of trading halt in the shares.

This document is mandatory reading for all new shareholders. It includes a concise breakdown of the economics of the project, its potential value to shareholders and the country, and some of the key assumptions of the project.

The summary also outlines the projected cash flows from the initial construction period, through to the ninth year of initial, expected production. 

The study estimates that the project will produce around $5 billion (NZD) of revenue, and around $2 billion of total free cash flow. The Government will likely pocket over a billion itself, between royalties and taxes.

The study includes a ‘’base case’’ gold price scenario, and the ‘’spot’’, or current, gold price scenario. Ultimately, the gold price at the time of production cannot be predicted and is part of the risk of investment. It has risen 30% over the last 12 months.

The Bendigo-Ophir project continues to take steps towards a working mine, and the pre-feasibility study released last week neatly outlines the vision. While much of the document is technical in nature, it does provide interested parties details of the risks and opportunities ahead, as the company gears up for its next phase. 

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STEEL and Tube has issued a trading update, confirming the difficult conditions being experienced across the broader construction sector.

Sales volumes are down about 20% compared to last year, with a similar decline seen in revenue.

The decline was led by both a significant decline in the demand for steel and an oversupply forcing margins lower. 

The weakening conditions for the construction sector had already been well flagged by Steel and Tube’s peers, and will no doubt force some consolidation in the sector. Steel and Tube itself highlighted that it is currently engaging with several potential acquisition opportunities.

The company’s debt-free stance - with around $15 million in the bank - may give it an advantage in this regard. 

Like many companies across the country, Steel and Tube remains hopeful of further interest rate relief to spur better economic conditions. Interest rates were in a well-established decline for many months, but have reversed course since the US election.

The update from Steel and Tube gave shareholders much to stew over. While the immediate reaction was a 4% share price fall, shareholders will be aware construction is typically a cyclical sector. The question for investors is whether construction is heading towards a recovery - as Steel and Tube believes - or whether conditions will worsen further.

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INFRATIL’S perpetual infrastructure bond - IFTHA - completed its annual rate reset last week.

The rate has been set to 5.51% for the next 12 months. This rate marked the margin (1.50%) above the one-year swap rate (4.01%).

Historically, these annually resetting securities have been advantageous for investors during periods of rising interest rates, offering an alternative to long-term fixed-rate bonds. However, the relatively low margin has resulted in the bonds trading below their par value for a long time, last trading at approximately 63 cents per dollar of face value, equating to a yield of around 8.75%.

The interest rate for IFTHA will be subject to another reset in November 2025, reflecting the prevailing interest rates at that time.

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Travel

Our advisers will be in the following locations on the dates below:

15 November – Cromwell (morning only) – Chris Lee

25 November – Christchurch – Fraser Hunter (FULL)28 November – Napier – Edward Lee29 November – Napier – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited