Chris Lee & Partners Ltd

Market News

Johnny Lee writes:

Summer is well and truly underway now, as equity and bond markets continue to wind down for the year.

The last Market News for the year is reserved for a review of the 2024 New Zealand stock market, highlighting the winners and losers of the year.

As at the time of writing, the New Zealand 50 Gross Index is up 8.7% for the year. Remarkably, few stocks matched this performance, as 2024 was instead a year marked by greater extremes in both directions.

One stock stood head and shoulders above the rest: the best performer among the majors was utility services company Gentrack. Its share price rose over 100% this year, and it now carries a market value of $1.4 billion, similar to Kiwi Property Group or Briscoes.

The company had a truly transformational year. It reported a 25% increase in revenue this year and has now become a major component of the NZ50 Index. While the stock is not widely held by income investors yet – as it does not pay dividends – it is growing in multiple markets and sectors. The company is now actively seeking acquisition targets to sustain its growth.

Across the main sectors, there was a mix of successes and failures.

The Listed Property Trust sector, after years of battling higher interest rates, continued to struggle in 2024. Property stocks have been vocal about their expectations for a lower interest rate environment, anticipated in 2025.

Kiwi Property Group was the only major property stock to outperform the index, closing the year with a 12% gain.

Resido – Kiwi’s residential offering at Sylvia Park – is now live, and investors will be looking forward to its first full-year result in May. Kiwi Property Group is hoping Resido will add long-term value to the adjacent Sylvia Park offering, effectively creating a virtuous cycle as residents shop and work within the Sylvia Park complex. Kiwi Property Group has ambitions to replicate the model, if successful.

The retail sector saw two very big winners, and two very big losers.

Hallenstein closed out the year up 56%, paying strong dividends out of increasing cash flows despite a difficult environment for both its customers and suppliers.

Across the sector, Briscoes was up 19%, The Warehouse was down 33%, and Kathmandu was off nearly 47%. Hallenstein was clearly the star.

A key takeaway has been the value of maintaining a strong balance sheet. Hallenstein controlled its use of debt during the better years and is now flourishing during the tougher, higher-interest-rate environment. Dividends have been consistently strong, while its indebted peers have sold assets (including land in leaseback agreements) in a bid to manage their debt loads.

The banking sector also had a mix of winners and losers. Westpac Bank was the leader, up nearly 50% for the year. Throughout the financial year, the company announced a dividend increase, a special dividend, and a large increase to its share buyback programme.

ANZ also had a good year, up around 22%. Like many listed companies, ANZ announced the departure of its CEO, and new CEO Nuno Matos will be entering during a period of transformation as ANZ continues its integration of the recent Suncorp acquisition.

Heartland Bank, in contrast, faced a far more challenging year, falling 32%.

Its August result fell short of market expectations and saw its price decline from $1.15 to 96 cents.

The next two years will be important for Heartland, having placed its stake in the ground with regards to its growth ambitions in Australia. Dividends have been reduced to fund this growth, and shareholders will be hoping that this short-term pain is rewarded with improved, sustainable returns.

The electricity sector had a major development, with Contact Energy announcing its intention to acquire Manawa Energy (formerly Trustpower). Manawa’s share price rose 35% over the year, and the share price remains modestly below the takeover price – partly representing the risk of the deal failing – but perhaps offering a short-term profit opportunity for those confident in the takeover offer proceeding.

Genesis was the main underperformer in the sector, down a modest 7% for the year. Genesis made some progress towards its 2030 strategy and remains on track to deliver its ambitions to become New Zealand’s solar leader. The company hopes to have generation from its new investments online within the next year or two and is working hard to redesign its image after years of disdain from the “green” investment community. At the same time, it hopes to use Huntly’s base-load generation to provide stability as the sector invests further into renewables.

There were a number of other strong performers in 2024, outside of these sectors.

Fisher & Paykel had another good year, up 56% on the back of strong sales growth – particularly in consumable products. The company has a pipeline of new products coming to market and has developed relationships across the industry following the unprecedented growth seen during COVID.

One of the best performers – perhaps surprisingly – was a2 Milk, which rose 40% this year.

The company shocked the market by declaring its era of cash hoarding was over, and dividends would be forthcoming as early as next year. While global birth rates continue to weaken, Infant Milk Formula producers are battling for a greater share of a diminishing market.

It was a good year for the NZX as a company, with the exchange operator’s share price up over 40% in one of its best years. 2024 marked yet another year of listed company departures – New Zealand Oil & Gas, Geneva Finance, Arvida, Marlborough Wine Estates, Cannasouth – but a number of large-scale capital raisings, including Fletcher’s $700 million raised in September, illustrated the value of a public listing.

The NZX’s Smart Invest platform also found a winner with its new Bitcoin fund. Literally thousands of New Zealanders have begun using this product, with many up well over 50% already. Millions have now been invested into the fund, ranging from $50 investments to a recent trade of over $500,000.

Channel Infrastructure had a great year, up 38%. Much of this gain came late in the year, as the company announced a capital raising to begin work on a new bitumen storage facility for corporate client Higgins. Shareholders also enjoyed three dividends throughout the year, an early reward after the company’s transformation from refinery operator to importer and storage owner.

Infratil was another enjoying a strong year, with its data centre business moving from strength to strength. Infratil will no doubt be exploring opportunities to capitalise on these remarkable revaluations. The developments in the United States over the last few months will also offer risk and reward for its Longroad investment, as Infratil carefully weighs the opportunities ahead of it.

Two other notable outperformers were Turners Automotive and Freightways, both of which enjoyed near 30% gains for the year.

There were plenty on the other side of the ledger, unfortunately.

One of the worst performers this year was Synlait Milk, which finally succumbed to its debt burden and surrendered control to major shareholders Bright Dairy and a2 Milk. The stock was down 55% for the year.

The company is now almost entirely controlled by these two shareholders, with a few – mostly retail – shareholders hanging on for now. Next year will be a litmus test for the company, as it looks to win back those farmers who abandoned it following the struggles of 2024.

The good news was the repayment of Synlait bonds, alleviating a major source of market stress in the first half of the year. Pricing on the bonds fluctuated wildly as investors weighed the risk of default. Although the outcome was ultimately positive for bondholders, it is unlikely Synlait will offer further bonds in the future.

Fletcher Building had a year to forget, down 40% and suspending all dividends as it battled court cases and faced a very challenging trading environment for the construction sector.

It is difficult to see an immediate solution to the quagmire Fletcher Building finds itself in. Construction is cyclical, and the company will no doubt enjoy easier conditions once interest rates fall and consumer confidence is restored.

However, the theme of inconsistency seems never-ending. Dividends are inconsistent, leadership has been inconsistent, and strategic direction has changed multiple times over the last decade. Hopefully, new CEO Andrew Reding – if he is to remain in the role long-term – can provide a period of stability and consistent leadership.

Spark also had a poor year, down 39%. The company took the rare step of cutting its dividend, announcing that the March dividend would be marginally lower.

Further dividend cuts appear to be priced into the market, with the company now trading at an improbable dividend yield of nearly 12%. Concerns are mounting over its debt burden, particularly given its ambitions in the lucrative but expensive data centre industry. The recent sale of its remaining Connexa holding (its mobile tower business) demonstrates the company’s awareness of the costs involved in further expanding its data storage capabilities.

Ryman was another major drag on the index, ending the year down 29%. Its recent result forecast yet another poor year ahead, although the company hopes to reconsider dividends in the latter half of the decade.

Ryman’s issues with debt management are leading some investors to abandon the company, instead shifting focus to its listed peer, Summerset, which rose 26% this year. Summerset recently saw its total market value climb above Ryman’s and announced the acquisition of more land – including one near Paraparaumu College in Kapiti – to fuel further growth.

Outside of these companies, the wine industry was another sector clearly struggling. Many listed wine producers had poor years and are forecasting further challenges in 2025.

While 2024 saw a modest gain across the New Zealand share market, it was a year of big winners and big losers, particularly among the heavyweights.

Next year will be pivotal for many corporates. Contact Energy has a major development expected, a2 Milk plans to pay its first-ever dividend, and Santana Minerals is hoping 2025 will mark progress from gold explorer to gold producer.

We wish readers an enjoyable holiday period. Our office closes at 12pm on 20 December and reopens on 8 January. We will monitor emails over the break for anything urgent but will be unavailable via phone.

Chris Lee and Partners Limited

Johnny Lee writes:

As we near the end of the year, market activity is beginning to decline as investors and the companies they hold wind down ahead of the holiday break.

All of our major companies have now reported their 2024 results. By the end of next week, almost all of their dividend payments will have been made and, barring a surprise, all major bond issues will have been completed.

One event that is expected to occur during this holiday period is the Commerce Commission’s decision on the Manawa takeover, which Contact Energy announced back in September.

The decision has already been delayed once – it was expected late November – and may be pushed out further. One imagines that productivity at the Commerce Commission does not peak on December 24, the expected date.

This decision has major implications for both Manawa and Contact shareholders, and the electricity sector at large. Both companies hope that by combining the assets of each company, Contact will be better placed to accelerate new generation across the country.

For Manawa shareholders, it will mean a payout at around $6 a share – the exact price dependent on Contact Energy’s share price – and the end of a fairly long journey on our exchange. After splitting off the Tilt Renewable business and its retail business (both eventually sold to Mercury), the final acquisition by Contact Energy will see Manawa depart our exchange for good.

For Contact, it is investing in a small addition to its generation portfolio, a pipeline for new assets, and a raft of new shareholders joining the table, including Manawa’s major shareholder, Infratil.

With submissions being made on both sides of the debate—mostly on the subject of whether the merger will see higher prices or lower prices for consumers—the Commerce Commission has plenty of expert opinion to consider ahead of what will be an important moment for New Zealand equity markets.

Chorus has presented its Investor Day to shareholders, declaring its “Road to 2030” strategy as the company continues its journey from Network Builder to Network Operator.

Chorus has had a strong year, with its share price up 15% and lifting its dividends from 42.50 cents to 47.50 cents. Revenue and earnings both saw modest increases over the year.

Chorus has grown its revenue in four of the last five years, encompassing a period of both (relatively) high interest rates and low interest rates. While part of this growth has been due to population growth, the company is also changing the way it spends its revenue, focusing more on shareholder returns and less on capital expenditure.

The battle between Chorus and FWA—Fixed Wireless Access—continues, with Chorus firmly (and predictably) of the view that wired broadband remains the only option for the country for users prioritising reliability and speed.

Evolution of wireless technology remains a key threat for investors, although churn rates suggest many people switching to wireless broadband are returning to fibre shortly afterwards. The company hopes that being both price competitive and ahead of the technology curve will help keep its competition at bay.

Chorus is also exploring its options with regard to its stockpile of copper cabling. With over 4,000 kilometres of copper cables, Chorus believes the wires could have a value in the tens of millions of dollars.

The macro trends remain positive. Data consumption continues to grow, with Chorus noting that there has been notable growth among the older cohort of New Zealanders using streaming services.

On this theme, Chorus has highlighted the opportunity provided by retirement villages, listing them in the “Priority Segments” for future growth. Chorus is also looking at opportunities in both the holiday home market and low-income households through Kāinga Ora.

Longer term, among Chorus’s goals is to ensure its dividend is both sustainable and growing in line with inflation, with next year’s forecast affirmed by the company to grow from 47.50 cents to 57.50 cents.

The next decade will see the rest of the Crown Equity and Crown Debt securities reach maturity. This may mean replacing non-interest-bearing debt with new debt, and may mean either repayment of equity or the issuance of new shares in their place.

Until then, the company is focused on retaining customers on the fibre network, while focusing on becoming an efficient and simple business. The regulatory regime now looks stable, and investors can look forward to modestly improving dividends in the years ahead.

Scales also had a brief update last week, announcing a lift to its January dividend and hiking its previous guidance following strong sales from Mr Apple and continued growth in the Global Proteins market.

The company is forecasting a good year ahead for Mr Apple, with larger, better apples, and a greater proportion of premium brands, like Dazzle. Export numbers are also expected to rebound following last year’s cyclone-impacted result, with volume in line with 2022’s result of 3.3 million trays.

Global Proteins’ contribution continues to grow. Esro Petfood, the company’s new European pet food processor, is expected to be profitable as early as next year.

This move into proteins and pet food has provided some useful diversification for the company, and Scales remains on the hunt for opportunities to grow both organically and inorganically through acquisition.

The dividend was lifted from 4.25 cents per share back to 7.25 cents per share. Assuming a similar dividend in July—which the company has suggested is likely—it will move the annual dividend to 14.50 cents, nearer to pre-cyclone levels.

Scales did advise that, over time, the imputation attached to the dividend may diminish, as more earnings are derived offshore.

Many of our horticulture companies have struggled over the last few years, with cyclones, logistical logjams, and high interest rates all presenting challenges for small exporters in this corner of the world.

But for two of our largest—Scales and Seeka—the year has seen a recovery, with both now up around 15% for the year. Their peers in the viticulture sector will no doubt be hoping for a similar recovery next year.

Chris Lee & Partners Limited

Market News - Monday 2 December 2024

Johnny Lee writes:

The Reserve Bank has cut interest rates again and has already begun hinting at a further cut in February.

The Official Cash Rate was reduced from 4.75% to 4.25% last week. The rate was 5.50% at the beginning of August.

While unemployment is forecast to continue climbing in the short-term, falling immigration and rising emigration are each expected to lead to renewed tightening in the labour market.

The Reserve Bank expects economic growth to rebound, partially stimulated by the lower interest rates. This sentiment is shared by most of our publicly-listed companies

The Reserve Bank was definitive in its expectations for February’s meeting, stating: “If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”

In a press conference following the announcement, Governor Orr reiterated that a further 50 point cut (moving from 4.25% to 3.75%) in February was the base assumption. 

The market reacted predictably, with mortgage rates and term deposits rates both declining. Term deposit rates are now almost all below 5% across all terms.

The rapid decline in interest rates has implications for both sides of the coin.

For borrowers, those who have been utilising short-term rates and are refinancing next year will see a significant reduction in the cost of their debt.

For lenders and investors, it increases the appeal of longer-dated securities. Banks have been heavily rewarding short-dated term deposits this year, leading some to use 6-, 9- and 12-month term deposits to increase income. When these mature, the rates on offer may be substantially lower.

One of the bigger risks at the moment is the policy direction of the next US administration. Discussions around tariffs have raised fears of higher inflation, which could lead to a higher trajectory for US interest rates and the US dollar. 

Conversely, by making Canadian, Mexican and Chinese goods more expensive, opportunities may arise for other exporting nations to gain a pricing advantage. It may also incentivise these countries to focus on their exports to other markets.

For now, the Reserve Bank has made it clear that interest rates need to decline further before reaching a neutral rate. Investors should enter 2025 with the expectation that rates on offer - in the short term - will be lower and adjust their strategy accordingly.

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Channel Infrastructure, formerly called New Zealand Refining, has announced a capital raising for its shareholders.

The company is raising $50 million dollars from existing shareholders to invest into new infrastructure at Marsden Point. At the same time, the company announced it would build a bitumen import terminal, contracted to Fletcher Building subsidiary Higgins Contractors.

The raise is being completed at $1.60 per share, at a ratio of 1 new share offered for every 12.12 shares held. A shareholder of 10,000 shares would be entitled to buy 825 new shares at a total cost of $1,320.

The share price is currently around $1.80 per share, providing some incentive for shareholders to act. Those who do not will be included in a retail bookbuild – effectively an auction of their rights – and the difference between the bookbuild price and the $1.60 will be paid back to those non-participating shareholders. The rights themselves will not be tradeable.

Channel has undergone something of a transformation over the past decade. The company identified early that its refinery assets would struggle to be competitive in the long term, and pivoted to become an importer and handler of our most commonly used petrochemical products. 

Now, Channel is further diversifying its revenue streams to include bitumen storage, signing a 15-year contract to secure long-term revenue. 

Shareholders should note the narrow timeframe available for participating in the offer. The offer opened on 28 November – last Thursday – and closes on 9 December – next Monday.

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Fisher and Paykel Healthcare’s result has been released to market, and shows the company is continuing to move from strength to strength.

Among the majors, Fisher and Paykel has been one of our strongest performers this year alongside Westpac, Gentrack and Hallenstein Glasson. Fisher and Paykel is now up nearly 60%, including dividends, this calendar year.

Revenue was up nearly 20%, while profit increased by over 40% compared to last year's result. The dividend increase was more modest, lifting from 18 to 18.5 cents per share.

Hospital and homecare sales both continue to grow nearly 20% year on year, mostly through consumable sales.

The company reaffirmed its guidance for around $2 billion in revenue and $320 million to $370 million in profit. Last year saw the company reported $265 million profit on revenue of $1.7 billion.

Fisher and Paykel is not yet formally commenting on the possible financial impact of US tariffs. The CEO did point out that the company had manufacturing capacity in both New Zealand and Mexico and could adjust distribution as needed. Ultimately, the company’s strategy extends well beyond a four-year presidential term.

The company’s balance sheet has improved and has returned to a net cash position. Two years after the announcement of the purchase of land in Karaka, the company now sits with a net $50 million in the bank.

Shareholders will be pleased with this result. Fisher and Paykel continues to grow, and has several new products in development to drive this further. The company’s stated goal is to continue doubling revenue every five to six years, and so far, it looks to be on track to do so.

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A more negative response was seen following Ryman’s half year result, which saw the share price decline 7%. 

Ryman reported a 10% lift in revenue, but a 50% decline in profit, as the company continues to make moves to lower costs.

Debt climbed further and now sits at $2.56 billion. Reducing this burden remains the primary focus and has led to Ryman declaring that no new villages - other than those previously announced - will begin development until at least March 2026.

Dividends are still suspended. Ryman has already made it clear that dividends are likely to be at least two years away.

Indeed, the outlook for next year is weak. Ryman now expects another period of negative cash flow and is reducing capital expenditure further to help compensate.

Falling interest rates will help, as well as a smaller, leaner executive team. However, a two-year wait for the prospect of a small shareholder return will not align with some investor timeframes, and has led to some selling pressure.

The result caps a poor 2024 for Ryman. Its share price is down around 20% this year, while its competitor Summerset is up nearly the same amount - while paying growing dividends. 

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New Bond Offers

Infratil has announced a new 6-year bond, with a maturity date of 13 December 2030. This would replace the IFT260 bond, which matures on 15 December 2024.

The offer will comprise both a Firm Offer and an Exchange Offer, intended for holders of the IFT260 series. The Exchange Offer is not mandatory.

Based on current market pricing, we are expecting a coupon rate around 6.00%. 

More details, including a presentation and investment statement, have been uploaded to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/IFT360.pdf

If you wish to make a firm allocation, please contact us by tomorrow morning with the amount and the CSN number.

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Kiwi Property Group (KPG) has announced its new 5.5-year senior, secured green bond.

KPG owns and manages a property portfolio valued at $3.3 billion, with a high occupancy rate of 98.4% and a weighted average lease term of 3.8 years.

The interest rate has been set with a minimum of 5.35% p.a and have an investment-grade credit rating of BBB+.

KPG will not be paying the transaction costs for this offer. Accordingly, clients will be charged brokerage.

More details, including a presentation and investment statement, have been uploaded to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/KPG070.pdf

If you wish to make a firm allocation, please contact us no later than 10am, 5 December with the amount and your CSN number.

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Kiwibank (KWB) has announced that it plans to issue a new 5-year senior fixed rate note.

The interest rate has not been set but will be in the vicinity of 4.65%.

KWB has a strong credit rating of AA.

KWB will not be paying the transaction costs for this offer. Accordingly, clients will be charged brokerage.

More details regarding the notes, including a presentation and investment statement, have been uploaded to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/KWB1229.pdf

If you wish to make a firm allocation, please contact us promptly with the amount and the CSN number.

Please note that this investment offer closes this Wednesday at 10am, with payment due no later than Tuesday, 10 December.

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Office Closure

Our offices will close on Friday 20 December and re-open on Wednesday 8 January. 

During this time, if your enquiry is urgent, we can be contacted by email.

Chris Lee & Partners Ltd