Chris Lee & Partners Ltd

Market News 26 August 2024

David Colman writes:

August is a month where many companies release results and provide guidance with the familiar companies below providing valuable updates.

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Fletcher Building (FBU) announced the appointment of group CEO & Managing Director Andrew Reding followed by its audited financial results for the year ended 30 June 2024 (FY24) and announced litigation updates.

Mr Reding’s role as CEO commenced on 22 August, after what was described by FBU acting Chair Barbara Chapman as an extensive global search.

Reding’s credentials are that of an industry veteran having previously worked at FBU as Managing Director of Fletcher Wood Panels from 1997 to 2001 and then Chief Executive of Building Products and Steel from 2001 to 2006.

He was President and CEO of Evergreen Packaging Inc for Graeme Hart’s Rank Group Ltd, and CEO of Carter Holt Harvey Pulp, Paper & Packaging.

He has also held several government industry advisory roles as part of MBIE’s Productivity Partnership initiative including Chair of the Construction Systems Workgroup which was formed to address poor productivity in the construction industry, Chair of the Building Information Modelling Acceleration Committee and as a member of the Building Advisory Panel, responsible for advising MBIE on setting building standards and other initiatives.

Of late, Mr Reding has been involved in seismic engineering, steel waste repurposing and clean tech start-ups.

He was also a director and Chair of the New Zealand Shareholders’ Association (NZSA) having to resign the roles prior to joining FBU.

Reding expressed excitement in returning to FBU in what will be a challenging task of optimising operational performance to position the company to benefit from market conditions when they improve. 

The new CEO will be working towards closing out the well-known issues the company faces and will undertake a strategic review.

Fletcher Building released its full year 2024 (FY24) results the day after the new CEO’s appointment.

Revenue from continuing operations of $7,683 million was flat year on year with higher revenues in Residential and Development and Construction offseting significantly lower revenues in materials and distribution.

EBIT (Earnings before Interest and Taxes) before significant items from continuing operations fell to $509 million from $785 million in FY23 within guidance range.

EBIT margin from continuing operations of 6.6% was also down compared to 10.2% in FY23.

Significant Items of $333 million from continuing operations (mainly FCC legacy provisions and Higgins impairment) and Tradelink net loss of $141 million (discontinued operations, including impairments) contributed to a Group Net Loss After Tax of $227 million, compared to NPAT (Net Profit After Tax) of $235 million in FY23.

Cash flows from operating activities of $398 million were up slightly by $10 million from $388 million in FY23.

Cash flows from continuing operations and excluding legacy projects and significant items of $784 million compared favourably to $537 million in FY23.

The group’s net debt is $1.8 billion

Acting CEO Nick Traber described a backdrop of slowing demand, and inflationary and competitive pressures with FBU’s businesses demonstrating resilience.

The long list of priorities for FBU had been on costs, cash, capital expenditure, extending the tenor of debt facilities and obtaining more favourable terms for covenant testing, selling Tradelink and resolving outstanding legacy issues.

Market volumes declined in FY24 by 25% in New Zealand and fell 15% in Australia resulting in substantial revenue declines in FBU’s materials and distribution businesses offset, despite a tough housing market this year, by the New Zealand residential business which sold 886 units, compared to 617 in FY23.

FY25 market volume expectations are that the materials and distribution businesses will be 10% to 15% lower year-on-year compared to FY24, which will require tightly managed costs and cash flows.

FBU’s last remaining Construction legacy projects are the New Zealand International Convention Centre (NZICC) and the Wellington International Airport carpark (WIAL) which are both expected to be completed through full year 2025.

The company has engaged Jarden to advise on options with both local and international investors to explore capital partnership options for Residential and Development.

Two days after the results were released FBU released two announcements that will likely test the new CEO.

The first announcement acknowledged that FBU is aware of media reports that BGC, a Western Australian home builder, intends to file legal proceedings against its subsidiary, Iplex Pipelines Australia over Iplex Pro-Fit Pipes issues.

No formal proceedings have been entered into yet and for now FBU will likely continue to focus on reaching a pragmatic industry response to the plumbing matters in Perth. 

FBU’s results announcement included that Iplex was intent on trying to reach an agreement in principle with the Government and key parties in the near term.

The second announcement advised that the Commerce Commission intends to file legal proceedings against Winstone Wallboards (FBU owned GIB manufacturer) over the use of volume rebates (which were discontinued in 2022) which the Commission considers contravened the Commerce Act.

FBU has been a perplexing disappointment that has failed to capitalise in good times and has been woeful in bad times despite having a well-established and dominant position in the construction sector.

The new CEO’s salary was set at $1,450,000, plus benefits, for what will be a very demanding role.

Former CEO Ross Taylor was paid over $2,223,600 in his final year but in 2022 received a staggering $6.5 million per annum, unfortunately (not for Ross) reflecting the short term (18 month) performance of FBU’s stock price from mid-2020 to the end of 2021 and cannot possibly be seen as a reward for establishing long term sustainability (sadly a goal that is unachievable when putting out fires).

The new CEO has a hefty task ahead of him with lawsuits being unwelcome and costly distractions to a strategic review scheduled to be complete in the first half of 2025 on top of the day to day running of a large, complex company.

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Ebos (EBO) is Australasia’s largest, diversified wholesaler, marketer and distributor of healthcare, medical and pharmaceutical products. It also distributes animal care brands, and recorded another year of strong growth.

EBO released its full year 2025 results including highlights:

Revenue of $13.2 billion (up 7.8%)

Underlying EBITDA of $624.3 million (up 7.3%)

Underlying NPAT of $303.4 million (up 7.7%)

Underlying EPS of 157.9 cents (up 6.8%)

Final dividend declared of NZ 61.5 cents per share, bringing total dividends declared for the year to NZ 118.5 cents per share (up 7.7%)

EBO experienced strong earnings growth in its Healthcare and Animal Care segments with Healthcare Underlying EBITDA up 6.0% and Animal Care Underlying EBITDA up 13.2%.

Significant growth investments included:

- an increased shareholding in Transmedic

- acquisition of Superior Pet Food Co.

- four small bolt-on acquisitions in the Medical Technology and Medical Consumables businesses across ANZ and Southeast Asia

Return on Capital Employed (ROCE) increased by 20 bp to 15.3%, in line with target.

Net Debt:  EBITDA reduced to 1.89x compared to 2.06x in December 2023.

EBO’s Healthcare segment revenue grew by 8.0% to $12.6 billion with an underlying EBITDA margin of 4.35% (down from 4.43%) and the Animal Care segment revenue grew 3.2% to $579 million with an underlying EBITDA margin of 19.4% (up from 17.7%)

EBOS has provided guidance for FY25 that the Group expects to generate Underlying EBITDA of between $575 million to $600 million.

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Fonterra (FSF), the global dairy nutrition co-operative, provided FY24 earnings guidance updated with the following key points:

2024/25 season forecast Farmgate Milk Price range is $7.75 to $9.25 per kgMS, up from $7.25 to $8.75 per kgMS – a midpoint increase of 50c to $8.50 per kgMS.

A wide forecast range was provided as the company has a relatively small proportion of its sales book contracted.

An uplift to the 2024/25 season Advance Rate Schedule was announced with farmers due to be paid 10% more of the FY25 forecast Farmgate Milk Price from December (paid January) compared to other seasons, intended to assist farmers with on-farm cash flow.

FY24 earnings from continuing operations (excludes discontinued operations such as DPA Brazil in FY24 and DPA Brazil, Soprole and China Farms in FY23) are expected to be at the top end of the forecast range of 60 to 70 cents per share.

CEO Miles Hurrell noted that the recent rise in Global Dairy Trade prices as well as the strength of the Co-op’s balance sheet as reasons to expect earnings to be at the top end of its forecast range.

The Co-op will confirm its final FY24 earnings and full year dividend when it reports its financial results on 25 September.

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Fisher & Paykel Healthcare Corporation Limited (FBU) announced guidance for the first half of the 2025 financial year, which ends 30 September 2024, and in a sign of confidence, updated its guidance for the full 2025 financial year.

FPH is a leading designer, manufacturer and marketer of products and systems for use in acute and chronic respiratory care, surgery and the treatment of obstructive sleep apnea. Its products are sold in over 120 countries worldwide.

Managing Director and CEO Lewis Gradon described the year to date as beginning strongly across all products and regions.

The company is having to adapt to ongoing change in clinical practice and has received a good response to new product introductions.

Early indications are that the year to date includes relatively high hospital admissions in both the Northern and Southern Hemispheres as Northern Hemisphere seasonal hospitalisations persisted into the beginning of this current financial year and hospitals have returned to more normalised staffing and capacity.

Gross margin improvement initiatives were mentioned in line with a return to the company’s usual practice of working on efficiency and continuous improvement.

FPH’s guidance assumptions (at 31 July exchange rates) for the first half of the 2025 financial year included a continuation of the current trading environment with expectations (compared to the first half of the 2024 financial year) as follows:

- Revenue to be in the range of $940 million to $950 million (18% growth in reported operating revenue

- NPAT (net profit after tax) to be in the range of approximately $150 million to $160 million (44% growth in reported net profit after tax).

For the full year FPH continues to expect operating revenue to be in the range of approximately $1.9 billion to $2.0 billion and now expects full year NPAT (net profit after tax) to be in the range of approximately $320 million to $370 million - an improvement from previous guidance released in May of NPAT being in the range of $310 million to $360 million.

FPH’s 2024 Annual Shareholders’ Meeting is scheduled for 2:00pm, Wednesday, 28 August.

FPH shares closed at $35.40 (up $3.30 or 10.3%) following the announcement.

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Spark’s (SPK) full year 2024 operating performance provided data on an adjusted and reported basis to factor in the significant revenue and net profit declared in the year prior associated with the TowerCo and Spark Sport transactions.

The results included an admission that SPK could not adapt its cost base quickly enough as the market turned.

Revenue was $3,861million (down 1.2% on an adjusted basis and 14% on a reported basis).

EBITDAI (earnings before interest, taxes, depreciation, and amortization) was $1,163 million (down 2.5% on an adjusted basis and 32.5% on a reported basis).

NPAT (net profit after tax) declined 72.2% to $316 million with the below factors noted:

- TowerCo and Spark Sport transactions

- lower EBITDAI

- higher finance expenses and depreciation

- a one-off $26 million non-cash tax adjustment relating to recent Government policy changes.

Adjusted NPAT, excluding one-off items in both years, declined 21% to $342 million.

Free cash flow, was down 32.5% to $330 million in line with lower earnings, higher interest costs and lease costs.

SPK remains in a leading position in the mobile market by service revenue and total connections, with service revenues surpassing $1 billion for the first time – increasing 3.1% to $1,010 million driven by connection growth, price increases, and the stabilisation of roaming revenues in the consumer market which was partially offset by declines in the intensely competitive business market. 

Broadband revenue declined 2.1% to $613 million, as lower consumer spending increased price driven competition, particularly amongst non-telco competitors.

In the digital services market, total IT revenue declined 1.6% to $692 million, including a 14.9% decline in IT services. There was 3.5% growth in IT products revenues as businesses migrate to the cloud.

Data centres revenue grew 54.2% to $37 million, with Spark’s Takanini campus expansion completed on time and on budget.

High-tech revenue grew 21.5% to $79 million, with IoT revenues up 53.3%.

More than 2 million devices are now connected to SPK’s IoT networks.

SPK is positioning itself to capture a significant share of data centre growth with the New Zealand data centre market predicted to grow from approximately 90MW today to 500MW by 2030.

SPK’s data centre development pipeline sits at 118MW with three strategic Auckland locations earmarked for investment.

In FY24 SPK invested over $350 million into its network and digital infrastructure, delivering a 28% increase in mobile network capacity and underpinning growth in data centres, IoT, and high-tech.

Spark provided the following guidance for FY25, subject to no adverse change in operating outlook:

- EBITDAI: $1,165 - $1,220 million

- Capital expenditure: $460 - $480 million

- Total dividend per share: 27.5 cents per share, 75% imputed

SPK shares closed at $3.99 (down $0.30 or 7.0%) following the announcement.

New Issues

Westpac (WBC) has announced it is considering an offer of perpetual preference shares (PPS).

A WBC PPS would constitute additional tier 1 capital to meet the bank’s regulatory capital requirements and would be expected to obtain a credit rating of BBB+.

The initial 5 year distribution rate has not been established but a rate in the vicinity of 7.0%p.a. would be in line with recent comparable issues adjusted for underlying interest rate fluctuations.

Clients will not be charged brokerage if they obtain an allocation of the WBC PPS.

Full details will be released when the proposed offer is expected to open on 2 September, subject to market conditions.

Please let us know if you would like to be added to our list of investors interested in the Westpac Perpetual Preference Shares.

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Spark (SPK) noted in its results summary that there is potential for a hybrid capital notes issue.

Please let us know if you would like to be added to our list of investors interested in the potential new capital note issue from Spark NZ.

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Travel

4 September – Palmerston North – David Colman

12 September – Auckland (Albany) – Edward Lee

13 September – Auckland (Ellerslie) – Edward Lee

18 September – Lower Hutt – David Colman

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

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

Chris Lee and Partners Limited

Market News 19 August 2024

Johnny Lee writes:

The Reserve Bank cut interest rates on Wednesday, with the Monetary Policy Committee agreeing to move the Official Cash Rate from 5.50% to 5.25%. 

Term deposit rates, mortgage rates and call account rates around the country immediately followed suit.

The RBNZ stated it was confident that “inflation will return sustainably to target within a reasonable time frame”, but that “monetary policy will need to remain restrictive for some time”. 

The longer-term projections have not materially changed. The RBNZ maintains the view that the OCR will trend back towards a long-term rate of 3% over the next few years. What did change was the short-term projection, which now shows the RBNZ anticipates cutting rates much sooner than previously thought.

Put another way, instead of a plateau followed by a steep decline, the decline would begin earlier and be more gradual.

The share market responded quickly to the news, with the NZ50 index jumping more than 100 points within an hour. The yield stocks – property trusts and electricity stocks in particular – saw a sudden rush of buying interest following the cut. Investors suddenly seem convinced that the interest rate cut cycle has begun and have wasted no time in chasing yields.

Another sector that saw a sudden change in fortunes was the aged care sector. Ryman and Summerset jumped around 6% within the hour. 

The burst of enthusiasm for shares highlights the sheer amount of money waiting on the sidelines. Clearly, there was a large cohort of investors waiting for this news. 

The bond market saw an immediate impact too. Bond liquidity has fallen, as traders swooped in to acquire any and all available bonds. Even bonds issued as recently as a month ago – like the Mercury 6.42% bond (MCY070) – are now trading at significant premiums. BNZ’s recent Perpetual Preference Share issue, priced at 7.28%, lists this Thursday.

Swap rates also plunged to fresh lows, with the five-year swap rate now at its lowest point in two years. This has resulted in many long-term senior bonds now being priced below a 5.00% yield. Investors will need to set their expectations accordingly.

In the US, consumer price data showed prices rose 2.9% for the year end July, raising the likelihood of the US Federal Reserve beginning its own interest rate cut cycle.

For New Zealand, the Reserve Bank’s next Monetary Policy Review is scheduled for October 9, with economists now debating whether we see a 25 or 50 point reduction. Unless the data surprises, last week’s interest rate cut may be the first of many.

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Small telecommunications solutions provider Vital Limited has received a proposal to buy a majority of its company, in yet another display of external interest in our listed companies.

Vital Limited is an entirely separate entity from Vital Healthcare Property Trust. Vital Limited ranks among the smallest of our listed companies, comparable in size to perhaps Chatham Rock Phosphate or Burger Fuel Group.

Vital Limited was previously known as TeamTalk, and once traded at around $3 a share before beginning a downward descent to a low of around 20 cents per share prior to the takeover news.

The indicative offer is partial, with Empire Capital Trust bidding for only 50.01% of Vital’s shares. Empire stated it wanted Vital to remain listed long term, in order to continue to access additional capital as needed. The price offered by Empire was 37.5 cents per share.

This structure would be similar to Restaurant Brands, which has a large majority owner controlling the company’s strategy while maintaining a sharemarket listing.

The board of Vital responded to the approach two days later, stating that it believed the offer materially undervalued the company. Indeed, the offer was so far below the board’s view of Vital’s value that it would not allow Empire the opportunity to conduct due diligence on the company.

Shareholders may have read the announcement with a sense of déjà vu. TeamTalk rejected an offer from Spark in 2017 to purchase the company, stating that the offer of 80 cents per share was hostile, opportunistic and did not value the company appropriately. The board had procured an independent report at the time from Grant Samuel, valuing the company then at around $1.52 to $2.11 per share. Spark’s response at the time, predictably, stated that the valuation was absurd and shareholders should consider whether a change in ownership was necessary to change the company’s trajectory.

Obviously, the offer never proceeded. TeamTalk eventually thwarted the bid by selling its Farmside rural broadband business to Vodafone (now One NZ) for $10 million, leading to Spark pulling its bid.

Of course, this summary of events carries the benefit of hindsight and, ultimately, the world has experienced significant change over the past seven years. Even for Vital, much has changed over that period. The year-end result in 2017 showed a profit of $5.1 million. The 2023 result showed a loss of $183,000.

One complicating factor to the offer is the fact that it is only for 50.01% of the company. If the offer proceeds, control will be lost and remaining shareholders will need to accept the role of minority ownership. Shareholders would need to ensure that their goals align with that of the new majority owners. Again, the example of Restaurant Brands highlights the importance of this alignment – Restaurant Brands saw its strategy change significantly after the buyout from Finaccess Capital. 

These partial takeovers can be difficult for directors to endorse. If acceptance rates are broadly consistent, the offers inevitably end in investors having acceptances scaled, leading to an awkward middle ground where investors are effectively forced to sell the unpurchased balance on the sharemarket if they wish to exit the company.

Vital is a small company and prides itself on being a niche provider. Shareholders, for now, will need to wait and see if the Empire offer progresses to a formal approach, which it has indicated may be imminent.

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Synlait and a2 Milk have officially settled their dispute and agreed to new terms moving forward.

The dispute resolution arbitration process followed a2 Milk’s decision to end its exclusivity agreement with Synlait, first announced to market in September 2023.

Both a2 Milk and Synlait’s share price rallied following the announcement, a2 up 5% while Synlait rose 18%. The bonds also shot up in price to 85 cents in the dollar – although the utter lack of liquidity in the bonds makes it difficult to infer too much from this. Regardless, it was good news for share and bond holders alike.

Several key points were outlined in the announcement.

Firstly, Synlait has agreed that the exclusivity under the Supply Agreement will end at the conclusion of this calendar year. A2 Milk is expected to continue sourcing from Synlait in the short term, however, as new arrangements are put in place.

A2 Milk has agreed to pay $24.75m to Synlait as a one-off settlement, which includes the withheld amount that was pending the resolution of this dispute.

Perhaps more importantly, a2 Milk has agreed to subscribe to the upcoming Synlait capital raising, although it did not mention the extent at which it would support the raise. Curiously, a2 also wrote an explanation for this decision, citing the “strategic importance of the continued stability of production at Dunsandel”.

If a2 Milk and Bright Dairy each intend to fully subscribe to the equity raising, this will make up (collectively) around 59% of the issue. Bondholders of SML010 will be keenly following these updates, ahead of December’s stated maturity date.

Synlait also confirmed it would be working with a2 to develop a new China Label registered product and is seeking Chinese regulatory registration from 2029 for this new product. No specific details were provided.

Synlait and a2 Milk shareholders will no doubt be pleased that this arbitration phase has concluded and each company has a clearer path going forward. 

Synlait share and bondholders now await formal details of the equity raising. With both a2 Milk and Bright Dairy agreeing to participate, the final chess piece left is the institutional and retail investors, and whether they are willing to inject capital to rebuild the company.

These details are expected by month end. A2 Milk’s full year result is due later today.

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Travel

21 August – Christchurch – Johnny Lee

4 September – Palmerston North – David Colman

12 September – Auckland (Albany) – Edward Lee

13 September – Auckland (Ellerslie) – Edward Lee

18 September – Lower Hutt – David Colman

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

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

Chris Lee and Partners Limited

Market News 12 August 2024

Johnny Lee writes:

Manawa shareholders - and Infratil shareholders by proxy - had bad news last week, as the electricity generator confirmed a significant earnings downgrade. The company lowered its estimates from a mid-point of $140 million, down to $105 million.

The share price of Manawa Energy, 51% owned by Infratil, declined 7% after exiting its self-imposed trading halt. 

Previously known as Trustpower, Manawa made a strategic pivot in June 2021 when it decided to sell its retail operations to competitor Mercury (previously known as Mighty River Power) and decided to focus exclusively on wholesale generation. 

Last week’s downgrade was due to two distinct problems identified by the company.

Firstly, Manawa had become aware that an electricity retailer, using Manawa as an intermediary, was in default of its payment terms. Manawa immediately terminated its supply agreement with the unnamed retailer and began to take steps to recover the outstanding debt. Manawa made the point that this is the only such arrangement it has of this nature, but the default would require a bad debt provision of nearly $20 million.

The second problem was the unseasonal weather. The relatively dry, calm weather had led to Manawa’s total generation falling, forcing the company to buy electricity from the wholesale market to meet its contractual supply commitments. Those same weather conditions had caused a spike in market pricing, meaning Manawa would need to spend millions to meet its obligations.

Manawa’s place as our fifth largest listed power company has been consistent and its relatively small size means that these downgrades have a significant impact on shareholder returns. The exact impact may not be known until the company reports in November.

With consumers feeling heightened stress from elevated power prices, these debt defaults may continue to crop up, particularly amongst the smaller utility providers. In Manawa’s case, it has acted quickly to terminate the contract and staunch the wound, as it looks to focus on its generation strategy.

Shareholders will be hoping this is a one off, as they await November’s result and the full impact of these two events. 

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The decline in interest rates over the previous month has led to something of a rethink among conservative investors, particularly those exposed to the term deposit market. It also shines a spotlight on the Reserve Bank’s meeting this week, with some bank economists calling for the central bank to begin the interest rate reduction cycle.

Long-dated term deposit rates are now comfortably below 5%, with some banks now paying only 4.50% for 5-year deposits. 

Short-dated deposits are considerably higher, with most marginally below 6%. Banks seem eager to reward the 6-12 month deposits, perhaps with an eye towards where interest rates may sit next year. 

The popularity of the recent BNZ 7.28% Perpetual Preference Share offer – which closed raising $450 million from investors – suggests there is still significant demand for longer-dated issues from trusted issuers.

The BNZ’s decision to increase its margin from 3.00% (the margin applied to its earlier issue, BNZHA) to 3.50% certainly aided its cause. ANZ Bank’s issue, the ANBHD issued in March, was priced with a margin of 3.25%.

Another reason for the strong demand for BNZ’s preference shares is the developing view that interest rates have peaked and could decline as early as this year. Indeed, a significant gap has emerged between market pricing and the RBNZ’s previously stated expectations, making this week's meeting even more relevant for investors.

As always, the statement will be dissected head to toe, with economists and traders alike searching for clues to help predict where rates are heading next. If the RBNZ does not reduce rates on Wednesday, the focus will turn to what data the committee is waiting to see, before making the decision to cut. 

Last week‘s unemployment data was one piece of this puzzle. The unemployment rate of 4.6%, up 0.2%, was slightly better than market expectations. While unemployment was higher, the rise was explained by a growing workforce, which outpaced the growth in employment. 

Our term deposit market remains heavily inverted (short term deposits rewarding more than long term deposits) as banks look to reward investors choosing 6-12 month terms. Investors should ensure they have a balance across short and long term investments, as the bond market continues to focus on longer dated opportunities.

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The other major news last week was the ructions seen on the Tokyo Stock Exchange, where the main index (the Nikkei 225) fell 20% over a three-day period. It rebounded 12% shortly after.

The sharp decline followed the Bank of Japan’s decision to raise interest rates for the second time this year. The increase earlier this year had marked the first increase in Japanese central bank interest rates in over 17 years. 

The Bank of Japan’s announcement also included the news that it would be winding down its bond buying programme.

The Yen quickly responded and is now up nearly 10% for the month against the US dollar. This raised alarm bells with investors, particularly shareholders of large scale exporters. Mitsubishi, for example, has fallen nearly 20% over the last month. Another major stock, Softbank, was down 35% at one point.

The rising Yen also jeopardised what is known as the carry trade. This is where investors borrow money from a country with very low interest rates – like Japan – and invest in countries with higher returns – like New Zealand. 

The risk with these trades has always been a rapidly appreciating Yen, especially for those carrying leverage. There is no free lunch.

The volatility seen in the world's fourth largest stock exchange has flow on effects for other markets, particularly those leveraging their position to invest. With two interest rate increases in six months, the Japanese central bank has begun the process of winding back decades of stimulus.

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Vital Healthcare was amongst the first companies to announce results this reporting season, and provided no real surprises for shareholders.

The dividend has been maintained, as expected, and guidance was provided for the year ahead. 

Vital’s asset divestment programme is nearing its end, as the company looks to manage its debt levels. Previously, the Listed Property Trust sector issued new shares as a means of controlling debt, with both rights issues and share purchase plans being a popular choice.

With share prices in sector trading at such steep discounts to Net Tangible Asset values, most of these companies have been quitting assets instead. 

Vital is also looking to slow its development programme, as another means of keeping debt in check. 

Overall, the result held few surprises and saw no impact on the share price. Interest rate movements and property prices will continue to drive this sector for now.

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Travel

14 August – Auckland (Ellerslie) – Edward Lee

21 August – Christchurch – Johnny Lee

12 September – Auckland (Albany) – Edward Lee

13 September – Auckland (Ellerslie) – Edward Lee

20 September – Christchurch – Fraser Hunter

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

Chris Lee and Partners Limited

Market News 5 August 2024

Johnny Lee writes:

This week marks the beginning of reporting season, giving shareholders the opportunity to ‘’check in’’ with their companies.

This reporting season is shaping up to be a very interesting one. Shareholders across a number of companies on our exchange will be watching closely – some optimistic, some not – as we digest economic data suggesting a slowdown across the economy.

Swap rates have declined over the last few weeks. Speculation is no longer whether a cut will occur - instead economists are now pondering how many cuts will be needed this year to ensure the Reserve Bank‘s inflation targets are met. These same conversations are occurring across most major economies, with the US Federal Reserve suggesting cuts could begin next month.

This backdrop will lead to our major companies evaluating forward guidance, and their strategies for the year ahead. 

With rumours swirling around Fletcher Building’s plans this year, shareholders will be keenly awaiting an update from what was once our largest listed company.

Recent surveys of businesses around the country have highlighted the struggles facing the construction sector, with many expecting weaker conditions ahead as building consents, particularly in the apartment space, decline.

Fletcher Building’s most recent guidance, from May, included a significant downgrade to its outlook, with much of the weakness being observed in the Distribution and Building Products divisions.

While navigating difficult conditions, the company is also dealing with multiple issues, including the now long-running Perth plumbing dispute, as well as the MVAC issue from July. These distractions continue to plague Fletcher Building, rightly or wrongly.

This will be the first result under CEO Nick Traber. Following the net loss of $120 million in February, the company declined to pay a dividend. Shareholders will no doubt be very pleased to receive some clarity on how the company intends to position itself for sustainable, long-term returns in the future.

FBU announces its result on the 21st.

One sector entering reporting season with more optimistic shareholders will be the electricity sector, with a number of companies expected to announce a more positive outlook for shareholders.

Both Contact Energy and Meridian Energy – reporting on the 19th and 28th respectively – are likely to lift dividends, following positive comments from each on the matter.

For Genesis Energy, it’s result on the 22nd will be its second since announcing the strategic pivot in November 2023. Dividend expectations will be more muted, as the company has made no secret of the fact that shareholder returns will need to be reduced as the company looks to expand its solar capacity. 

The transition from New Zealand’s ‘’dirty’’ generator to a leader in solar development will be expensive - at least initially - and may require shareholder patience. With its peers instead lifting shareholder returns, the investment proposition for Genesis Energy may differ from the rest of the sector.

Heartland Bank’s update will be keenly anticipated, perhaps acting as an early progress report following its renewed push into the Australian market.

The dividend could see a decline, in line with prior guidance. Heartland has already indicated that the dividend payout ratio would decline as it looks to bulk up its Australian offering, and this result could give shareholders an insight as to what this may look like going forward.

The share price has been somewhat stagnant since the capital raising earlier this year, with some signs of life emerging in the last few weeks. 

Heartland’s result is scheduled to be announced on the 29th.

a2 Milk’s result will likely be market moving, one way or the other.

a2 Milk has quietly enjoyed one of the best share price performances of the year, despite a dearth of news from the company. 

This lack of communication from the company has not deterred investors, who have sent the share price up 75% higher on strong volume and persistent interest from both sides of the Tasman.

The ongoing affairs with Synlait Milk have instead managed to steal the spotlight. August should see this situation, if not resolved, at least on the path to a long term resolution. Whether a2 has a role to play in that resolution remains to be seen.

a2 Milk’s cash balance will remain a focus, as the company vault nears the billion-dollar mark. Predictions of dividends, takeovers and share buybacks will no doubt continue until the company formulates a long-term strategy for shareholder return. 

One aspect of a2 Milk’s result that is always interesting is its analysis of the Chinese market. Its place in the market affords the company a valuable perspective, as the demand for its key product - premium infant formula - can provide insight as to the financial strength of young, affluent consumers.

Sky Network Television will also be in the spotlight, when it reports on the 21st.

Rising inflation, both general and specific to the entertainment industry, is putting increased pressure on discretionary spending. Sky TV will be more aware of this than most, as competition from the likes of Amazon, Netflix and Disney continues.

Sky TV’s most recent guidance update was during its half year report - issued back in February – and the absence of any further update should give shareholders confidence that it remains current.

This guidance included a dividend uplift to at least 10.5 cents per share, 

The other point of interest will be whether the deteriorating economic conditions is having an adverse effect on retention rates, particularly with churn rates from the newer customer cohort.

The sharp increase seen in sports revenue in the February result – a period that included the Rugby World Cup – could also see moderation. 

Its other revenue streams, like advertising and broadband, will also give clues as to where consumers and businesses are tightening their wallets.

The first companies to report will be Vista Group Limited and Vital Healthcare Property Trust, both expected in the coming days.

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A brief comment regarding trading in Santana Minerals.

Santana Minerals is now dual-listed, providing potential buyers the option of buying either the Australian and New Zealand listed variant of the company.

To be clear, it is the same company – shareholders in New Zealand and Australia are both entitled to a single vote per share. There is no reason why the shares should be priced differently, beyond the impact of the exchange rate.

Share prices and exchange rates are both open information, available on the internet at any time. 

A trend has begun to emerge where retail investors are acquiring stock early in the day – before the Australian market opens around midday – at prices that well exceed the Australian equivalent. Once the Australian market opens, the price in New Zealand falls to bring the two prices back towards equilibrium.

Liquidity is quickly improving for Santana, which may eventually resolve this problem. In the meantime, those buying shares in Santana - or indeed, any dual listed stock - should check both prices to ensure the best outcome.

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New Investment Opportunity

BNZ has today confirmed that the rate will be set around 7.00% per annum, fixed for a six-year term, with distributions paid quarterly.

This investment is perpetual, with a likely redemption date in six years. It is worth noting that our expectation is that it will be repaid at that time.

BNZ will cover the transaction costs for this offer, so clients will not have to pay brokerage.

The investment will be listed on the stock exchange under the code BNZHB and should be relatively liquid, allowing investors to sell at any stage.

The PPS will constitute additional Tier 1 capital for BNZ’s regulatory capital requirements and will have an investment-grade credit rating of BBB. BNZ Bank itself has a strong credit rating of AA-.

Payment would be due no later than Monday, 19 August 2024.

As interest rates are falling quickly, this could be one of the last opportunities to invest in a security with a rate of around 7.00% per annum.

If you would like a firm allocation, please contact us no later than 9am, Friday 9 August.

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Travel

14 August – Auckland (Ellerslie) – Edward Lee

21 August – Christchurch – Johnny Lee

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

Chris Lee and Partners Limited