Chris Lee & Partners Ltd

Market News 27 February 2023

Johnny Lee writes:

Volatility is back, as we near the conclusion of reporting season and investors and traders alike mull the news about their investments.

Virtually every major stock has moved markedly from the start of the month. Portfolio values have shifted considerably on the back of this.

Such reactions - perhaps overreactions – are to be expected, as investors find information they like and dislike from the semi-annual results.

Both Chorus and Spark were sold down following their respective results.

Both companies lifted their dividends as expected, although the lack of imputation on Chorus's dividend may mean a net reduction in the short-term. Its forecasts of further dividend uplift were maintained.

Both telecommunication companies are in the process of buying back their own shares, a consequence of what both companies feel is an excessive cash balance and a dearth of investment opportunities worth considering in this environment.

Meanwhile, the result from healthcare and animalcare company EBOS continues its trend of record results, with revenue, profit and dividends all rising. Net debt was slightly lower than the previous half. The share price rose strongly following the announcement.

Pleasingly, the growth in earnings was seen across virtually every division.

The pet food industry, it seems, is attracting the attention of a number of major corporates. Woolworths Group, the Australian supermarket giant, recently bought a stake in specialty pet food retailer Petspiration, valuing the company at over a billion dollars.

Woolworth's CEO believes that the pet industry in Australia is due for considerable growth, following a large increase in pet ownership during the pandemic. The amount we spend on our pets is also increasing. EBOS is making its own moves in this space, with a new pet food manufacturing facility contributing positively to the animalcare division's result.

The healthcare division also grew sharply, as trading from its pharmacies were strong and its new acquisitions began contributing to its underlying results.

EBOS's overall outlook remains positive, as it looks to leverage its balance sheet to continue expanding over the six months ahead and continue its upwards trajectory.

Summerset's result was met with cheer, as the company reported a record underlying profit, although net profit after tax fell – although still a healthy profit - from last year's 136% net profit growth.

While competitor Ryman Healthcare remains in the news for far more negative reasons, Summerset has moved from strength to strength, having avoided the debt pitfalls Ryman stumbled into over the last few years.

The development pipeline remains strong for Summerset, while the resale portfolio reaches new heights and introduces a steady flow of recurring revenue. The landbank is substantial and will be the source of much of its revenue growth going forward.

Although the dividend yield remains relatively insignificant, it is moving in the right direction and rewarding long-term shareholders. In 2015, the dividend was 5.3 cents. This year, it is 22.3 cents.

While Ryman has its hat out for shareholder funds, Summerset is filling its investors pockets with growing dividends. The share price moves have reflected this difference, with Summerset's share price rising and Ryman's diving following the respective announcements.

Advised clients can find a result and outlook summary of the Summerset result on the Private Client page on our website.

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Air New Zealand's result confirms that the rebound is underway and well ahead of its previous expectations. The company reported positive earnings of $299 million before tax, a huge improvement on last years $376 million half year loss.

The company has added 2,000 staff in the last six months – 11 a day – as it begins a massive recruitment drive. One imagines that Air New Zealand will be doing its utmost to ensure that the new staff – or at least those that are not former employees - integrate into the company's culture and standards.

Reading the result, it is difficult to come to a conclusion other than the fact that ticket prices need to rise. Air New Zealand is lifting staff wages, paying more for fuel, and adding additional capacity on new lines, all while trying to invest further into sustainability around its aircraft and airfuel.

Increasing the cost of travel is always tricky, as demand for air travel can be very ''elastic''for certain types of travel. Essential travel will simply be paid. Non-essential travel, however, will be towards the bottom of household lists if inflation continues to erode disposable income.

Importantly, the company stated its intentions to consider a dividend payment as early as August this year. Its previous guidance was that dividends would not be considered before the 2026 financial year.

The company was paying two 11 cent dividends a year prior to COVID and the resulting downturn in global travel. Of course, Air New Zealand has 3.3 billion shares on issue today, triple the number of shares on issue compared to 2020. Initial dividends will no doubt be very small, unless the company decides to conduct a share consolidation in the interim period.

Air New Zealand's share register has changed dramatically over the last few years, as income investors abandoned the shares while those hoping for a recovery took their place. For now, it seems the recovery is proceeding faster than expected, and although the share price has some ground to recover yet, shareholders will be pleased that the initial forecasts have proven to be overly pessimistic so far.

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The Reserve Bank lifted the Official Cash Rate by 0.50% last week, as economists and investors alike analyse the economic impact of the disastrous weather events unfolding around the country.

There are several issues weighing on the minds at the Reserve Bank.

Inflation is too high and has been outside the ''target band'' for too long. While the Reserve Bank does not particularly concern itself with short-term inflation shocks, these shocks will have longer-term flow on effects concerning both inflation and economic activity.

In terms of the cyclone's impact, there are four sectors that the Reserve Bank is monitoring closely for an immediate inflationary impact.

The first is food prices. This is logical, as the cyclone has destroyed crops and farmland alike in an area responsible for much of our national production. Assuming consumer demand does not change, this lack of supply will need to be substituted from abroad, meaning elevated freight costs will increase the cost.

The second major concern is around the cost of construction. Infrastructure – such as roading and bridges – will need to be rebuilt. This will mean urgent and elevated demand for the likes of concrete and steel, as well the people to needed to rebuild. These will mean workers moving from other cities to the Hawke's Bay region. This same dynamic occurred after the Christchurch earthquakes, when many workers left other cities to help the rebuild.

The other two concerns surround the price of vehicles and accommodation. Again, the experience of the Christchurch earthquake helps inform views around this. People moving to the region to assist with the rebuild will need somewhere to live, which will influence rental prices in the area.

One big unknown is unemployment. Both Reserve Bank and commercial bank economists are predicting a steep rise in unemployment to near 6% over the next year or two. Yet wage growth and retail spending remain strong. Normally, these signals would not indicate a sudden increase in unemployment. Instead of fearing the loss of employment, New Zealanders are earning more and spending more.

The other issue is an expected uplift – a sharp uplift at that – in tourism. Both migration and tourism numbers are rising, as the world moves on from the COVID-induced lull experienced over the last two years. These new arrivals will need accommodation, food, transport and entertainment.

The economic impact of the cyclone will be widespread and enduring, and likely inflationary in the short-term. Whether this necessitates an even higher interest rate than previously forecast remains to be seen. Expectations remain that the OCR will peak this year – perhaps middle to late this year – before plateauing and gently easing in 2025 or 2026.

If this month has shown us anything, it is that unexpected events can occur at any time, ready to introduce more volatility in an already volatile world.

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Summerset Senior Bond

Summerset have now confirmed the details for its bond issue. It will be offering a 6-year senior bond, with a minimum interest rate of 6.45% (interest paid quarterly).

It has also announced that it will be paying the transaction costs for this offer. Accordingly, clients will not be charged brokerage.

The offer is open now, and closes at 10am, Thursday 2 March. If you would like a FIRM allocation please contact our office ASAP.

Meridian Energy Senior, Green Bond.

Meridian Energy have also announced that it plans on issuing a bond next week. The details are not yet known, but we would expect an interest rate around 5.80%.

We have started a list for this bond issue which clients are welcome to join. Once more details are known we will contact our list.

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Travel

Edward will be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

He will also visit Blenheim on 17 March, Taupo on both 20 & 21 March, and Wellington on 24 March.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Edward will be in Napier on 31 March (Mission Estate) and in the Wairarapa on 3 April.

Clients are welcome to contact us to arrange an appointment.

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Market News 20 February 2023

Johnny Lee writes:

While reporting season remains ongoing, Ryman Healthcare has stolen the show, announcing a large capital raising in the midst of company results. Ryman is raising $902 million, roughly a third of its market capitalisation.

Ryman is offering shareholders the opportunity to buy additional shares, at a ratio of 1:2.81, at $5 a share. As an example, a current shareholder with 2,000 shares will be invited to buy another 711 shares for $3,555 in total.

The full year dividend has also been cancelled, a normal reaction for growth companies seeking to raise cash. Income shares may occasionally continue paying dividends whilst raising capital, especially those who prefer to keep dividends consistent for shareholders who may rely on the income.

Existing shareholders will be invited to bid for additional shares beyond their allocation if they wish, acquiring the rights from those who elect not to participate. Importantly, this offer includes the use of a Maximum Retail Oversubscription Price. This means that those bidding for additional shares beyond their entitlement will not pay more than this price for that oversubscription. This maximum will be set based on the closing price of Ryman shares on the 8th of March.

However, there is no adjustment made if the share price declines. If the share price falls below $5, those taking up the offer will still pay $5 a share. There are no prizes for applying early.

The decision to use a maximum price in this way is an interesting one, and one that will place undue importance on the closing auction on the 8th. If Ryman shares finish weakly on that day, whether deliberately or not, it may lead to a perverse outcome with regards to the bookbuild. If the bookbuild closes a single cent higher than this price, retail investors will not be allocated any shares.

The logic behind a maximum price is stated as giving a guarantee to investors that they will not pay beyond a particular price.

The proceeds from the offer will be used to repay debt, focusing on repaying its long-term US Private Placement debt that it accrued as recently as April 2022. A significant component will also be used to fund the transaction itself.

The $902 million is expected to render net proceeds of $872 million ($30 million in transaction costs!). This $872 million will be used to retire $709 million of debt, pay $134 million in ‘’costs associated with full repayment’’ (!!!) of the debt and bolster the company’s cash reserves by $30 million.

This will be difficult for some shareholders to stomach. The idea of significantly diluting shareholders to pay fees to international lenders is a very challenging proposition to defend. One imagines the next shareholder meeting will include some questions enquiring as to the lessons taken from this affair.

Its major shareholders have already committed to the rights issue, and underwriters have done the rest. Ryman will raise the money it seeks. The question now is whether shareholders want to commit further or allow themselves to be diluted.

It will be interesting to observe the shareholder response to this offer. The share price is at a ten year low, meaning that dilution will be severe to those who choose not to participate. Certainly, the institutional bookbuild (at $6.00 per share) suggests that there is significant demand beyond the $5 price – for now.

Is the price on offer compelling long-term value? Or is the decline observed over the last 18 months simply the beginning?

Shareholders do not need to act now. The offer does not close until the 6th of March, and those who apply closer to that date will have the advantage of better knowing what conditions await them come allotment of the shares. The events unfolding over the two weeks across the country show that unexpected and uncontrollable events can occur at any time.

Ryman has long campaigned on its stance that the company is ‘’self-funded’’, meaning that cashflow from operations was sufficient to fund its forward growth. This is no longer the case, with debt slowly climbing to bridge the gap between expenditure for growth and income from operations.

The announcement of the rights offer also coincided with a significant design change for future villages.

Future villages will ‘’rebalance’’ towards a greater proportion of townhouse style developments, and a decreasing focus on care beds. Lower density developments, such as townhouses, are faster to design, consent and build, improving cash flow and therefore the debt burdens.

Ultimately, Ryman was growing too quickly. Its investments in future growth began outstripping its operating cashflows – deferred management fees, care fees and property resales – requiring it to increase debt to fund this growth.

The debt it used was either poorly timed or poorly structured.

This capital raise helps rectify that, repaying a significant amount of its debt, at the same time that the company pauses some of its developments. The rights issue will mean dilution for shareholders and a slower growth profile, but puts the company on more stable footing ahead of the difficult conditions that it is glimpsing on the horizon.

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Fletcher Building has reported to market, with the company signalling a poorer outlook for the year ahead.

It reported a modest increase in revenue, while profit was down on a headline basis after a $150 million provision. The 18-cent dividend – no change from last year - was confirmed, bringing the dividend yield to well over 10%. The share price saw a modest decrease, but overall the result was in line with market expectations.

The construction industry has been plagued by a number of failures over the last few months, as smaller participants finding themselves with expensive debt, inflating prices and falling demand.

Fletcher’s size and diversified portfolio allowed it to avoid some of these issues. While the residential arm struggled in the face of a weak housing market, the Australian division, the distribution division and the concrete division all saw improved metrics.

Debt has grown over the same period, with its gearing now sitting closer to 30%. This is not necessarily a problem – but is a metric shareholders will be watching closely over time in this environment.

2024 is expected to be challenging, with a focus on maintaining margins and controlling costs. Volumes will be lower across most of the business, especially across the residential construction sector, which is seeing continued weakness.

The company touts its flexibility as one of its core strengths. With a significantly softer outlook for the 2024 financial year ahead, this may be the time to prove it.

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An update from My Food Bag has confirmed it is cancelling its dividend, as economic conditions facing the Meal Kit maker worsen.

Having paid a 7-cent dividend in 2022, its implied yield was approaching 30%, strongly suggesting that the market did not believe its dividend would be sustainable in the short-term.

The share price declined another 30% following the trading update to reach fresh lows at 25 cents per share, before rebounding slightly as retail investors began punting on the stock. Trading volumes, in some cases as low as 500 shares, gave some hints as to the type of investor making these punts.

Costs are rising, customers are either leaving or switching to the cheaper (and lower margin) Bargain Box brand, and the economic conditions ahead are no more positive than the current situation.

The company is taking some measures to improve its situation. Some of this improvement is expected to be driven by efficiencies achieved through its ‘’pick’’ technology being rolled out across its assembly facilities. The company hopes that dividends will continue next year.

Dialogue now centres around whether My Food Bag, with a valuation now well below $100 million, will present itself as an opportunity for a larger player to capture market share by acquiring the company outright in a takeover.

The counter argument to this is whether such a larger player would have the ability to employ capital at levels that would justify such a purchase. The same themes affecting My Food Bag (rising costs, consumers trying to cut spending) will be impacting all participants in the sector.

Since listing, My Food Bag’s share price has declined approximately 80%. In the same timeframe, Hellofresh has declined about 60% on the German exchange. The growth observed in the sector during the COVID lockdowns has been difficult to maintain.

The Chairman makes the point that My Food Bag is still profitable, has little debt and has a strategy to lower costs and raise revenues. It is not done yet.

My Food Bag is due to report their full year results in May.

Bond Issues

We are expecting several bond issues to come out over the coming months, with the next one coming from Summerset.

Summerset is proposing to offer a 6-year senior bond. The interest rate has not yet been set, but based on market comparisons we are expecting a rate above 5.80%.

More details on this bond will be announced next week.

If you would like to be penciled in on the list for Summerset, pending further information, please contact us.

Travel

Edward will also be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

He will also visit Blenheim on 17 March, Taupo on both 20 & 21 March, and Wellington on 24 March.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Edward will be in Napier on 31 March (Mission Estate).

Clients are welcome to contact us to arrange an appointment.

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Market News 13 February 2023

Johnny Lee writes:

Mainfreight provided a trading update to shareholders last week, pouring a dose of reality on some of the market enthusiasm that has built up since the start of the year. Mainfreight’s share price had risen 15% for the year prior to this announcement, before falling back 4% after the release of the update.

Revenue for the year thus far – the first 43 weeks – is up 17% from last year, a satisfactory result to most, but a slower growth rate than last year. While the Asian and American markets have stalled, Europe and Australasia continue to improve, particularly in the warehousing segment.

Last year’s February update saw revenue up 45%, however part of that leap was driven by high freight rates, as the global supply chain struggled with the post-Covid rebound. Freight rates have since moderated.

The struggles in America were partly blamed on reduced import volumes, themselves due to the various shutdowns occurring in China. The recent push from American leaders to encourage ‘’American-made’’ – including statements made during the presidential State of the Union speech – signal that the world’s largest economy is looking to further reduce its reliance on China, even if data suggests such a transition will be difficult.

Mainfreight’s full year growth last year (89% increase in net profit) seems unlikely to be replicated. Freight rates have declined in line with Mainfreight’s earlier warnings, while the large-scale investments announced over the past few years continue to develop and take shape. Some of these projects will take some time yet to conclude. Such is the nature of long-term growth.

Nevertheless, 2023 will likely remain a record year. Profit before tax is already ahead of last year’s full result, which led to a large leap of shareholder dividend. Whether this year sees another jump will largely depend on the board’s view on the sustainability of the result. Mainfreight does not tend to reduce or cancel its dividends.

Its full year result will be announced in May.

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AN embarrassing display during a prototype demonstration saw Alphabet, the parent company of Google, lose more than a hundred billion of sharemarket value, almost 8% of the company’s purported value.

Google was showcasing the abilities of its ‘’Bard’’ Artificial Intelligence bot, which provided incorrect information during the demonstration.

Artificial Intelligence has become something of a battlefield for technology companies, as Microsoft’s ChatGPT tool captivates both enthusiasts of artificial intelligence, as well as genuine users, who use it to perform time-consuming but menial tasks. Microsoft now intends to integrate the technology throughout its Windows platform, including Excel and Word. Windows is used on more than 75% of desktop computers, a market share that has been very gradually declining over the past decade but remains well ahead of its competitors.

The concept of bombastic, live displays of new technology is somewhat foreign in New Zealand. Indeed, America seems to have a monopoly on these performances – Apple’s annual displays of new devices are front page news to some, while Tesla’s annual showcases are similarly anticipated.

The intention is to create headlines, hype, and a subsequent share price reaction.

The risk is that the demonstration fails, causing a sudden loss of faith from investors and customers alike.

In 2019, Tesla CEO Elon Musk took to the stage to discuss Tesla’s new ‘’Cybertruck’’ and to demonstrate the ‘’unbreakable’’ nature of its glass design. To prove this, he asked one of designers of the vehicle to hurl a ball at the glass. The glass broke. The share price fell 6%.

The truth is that such a failed demonstration would be meaningless behind closed doors. Alphabet is not suddenly worth $100 billion less because the AI made an easily-rectified error. What was lost is the belief that Google would emerge with a ground-breaking technology, ready to compete with Microsoft’s new tool.

Once consumers become accustomed to a technology and begin to integrate it throughout their lives, it can be very difficult to catch up. The early leader advantage is real. Time is of the essence, and the market’s reaction shows that traders are not going to patiently wait for Google to catch up.

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 THE announcement of two new solar projects from Genesis Energy and Contact Energy to add to our renewable energy stocks is both a positive step and a strong signal that the major electricity generators are beginning to follow the market leaders into the solar sector.

Solar in New Zealand has long lagged behind international peers. While there is a raft of reasons for this, the reality is that much of our electricity generation is already renewable, which has led successive governments to target other areas to focus on for decarbonisation, such as motor vehicles and agriculture.

Solar has also suffered from a prevailing belief – supported by many experts – that future prices will be substantially lower, incentivising generators to delay investment as these efficiencies are realised.

Genesis Energy’s project is expected to generate 80 GwH of electricity a year. Contact’s project is expected to provide 290 GwH. Both will be located in Christchurch.

Lodestone Energy, an unlisted company backed by an array of wealthy investors, is also looking to build five solar farms around the North Island, generating 350 GwH of electricity. Both farms pale in comparison to the solar project in Taupo, headed by Nova Energy - a subsidiary of Todd Corporation - which is expected to generate 650 GwH. Several other companies are also looking at suitable sites around the country to enter the solar generation market. The industry is clearly growing.

Some of these may not make the leap from concept to construction. Economic conditions have changed dramatically over the past few years, and the mathematics behind the assumptions used during the concept stage may no longer hold.

To minimise risk, Contact Energy states its project will eventually ‘’be home to green hydrogen generation,’’ helpful for ensuring demand for the electricity it produces. 

Green hydrogen is another sector that is starting to capture imaginations.

Indeed, it appears that Christchurch has become something of a leader in this space. Christchurch-based engineering firm Fabrum was also in the news, after raising $23 million from private investors to fund its growth plans. Fabrum produces systems that create and store hydrogen.

Fabrum has also hinted that its long-term growth plans might include an IPO, allowing it to access capital and increase the scale of its operations. New Zealand investors have long expressed an interest in investing in this space and would welcome the opportunity to consider such an investment, although such a move from Fabrum is likely to be in the distant future.

The trucking and air travel industry are also evaluating the viability of hydrogen as a fuel source. This may come to nothing, but investment is starting to ramp up in the sector.

New Zealand’s move towards solar has been slower than some, but finally appears to be picking up steam as both major and minor players make the move from the consenting stage to development stage. Some of them may yet postpone or cancel development, especially as the cost of capital begins to rise.

However, last week saw two new projects confirmed from two reputable and competent firms. If the projects are completed to plan, it will represent a win-win for both the country and the shareholders at large.

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WHILE the solar and hydrogen sector begins growing in stature, one sector that is in clear decline is the troubled ‘’Buy Now, Pay Later’’ sector (BNPL).

I wrote recently regarding LayBuy’s decision to delist from the Australian Stock Exchange as part of its drive to cut costs and survive a period of difficult financial conditions. LayBuy’s shareholder vote, on 23 February, will determine its fate.

OpenPay, a competitor in the BNPL sector and nominee for the oddly specific 2022 CANSTAR Outstanding Value Buy Now Pay Later Award, made a different announcement. On 31 January, it announced it had a ‘’record quarter driven by continued growth’’ and was ‘’pleased to announced that Q2 has set new records’’.

Six days later, OpenPay had collapsed and was making the call to appoint receivers. Put simply, the company had run out of cash.

The ultra-low interest rate era marked a period where a number of companies, across a number of sectors, found themselves on borrowed time and borrowed money. Industries expanded, attracting competitors willing to disrupt and endure short-term cash losses in order to gain market share.

The bigger, more established players simply had to wait. The cost of capital gradually increased, making the prior loss making unsustainable as shareholders eventually demanded a return. ‘’Record revenue growth’’ became meaningless as profitability remained elusive and cash balances disintegrated.

Indeed, one wonders if the departure of one participant from the sector strengthens the position of the surviving members, rather than damaging the industry as a whole. The users of BNPL services will likely continue to do so, simply pivoting to a new provider.

The counter-argument is that the continued demise of the industry weakens it as a whole, as shareholders exit and lose confidence in the sector.

OpenPay’s receivership ends the downward spiral for its shareholders, who have witnessed its value drop from the hundreds of millions to whatever value the receivers are able to extract. Perhaps the receivers will navigate to a positive outcome. This is rare. If further capital is required, very few investors would be willing to pour funds into the company in these conditions, unless control was wrested from existing shareholders.

If this is the end of the line, then another warning shot has been sent across the sector. Shareholders in the remaining BNPL stocks will need to carefully examine their investments and ensure that their investments remain sustainable in this new economic environment.

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Wellington Airport Bonds

 

Wellington International Airport (WIA) has announced that it plans to issue a new senior bond maturing in 5.5 years’ time.

A minimum interest rate has been set at 5.60% but the final interest rate may be slightly higher.

The minimum investment size is 10,000 bonds.

 

These notes have an investment grade credit rating of BBB.

WIA will not be paying the transactions costs for this offer. Accordingly, clients will be charged brokerage.

We have uploaded the term sheet and presentation to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/WIA090.pdf

The offer is open now, and closes no later than 9am, Friday 17 February. Please note that WIA reserves the right to close this early.

If you would like a FIRM allocation, please contact us promptly, with an amount and the CSN you wish to use no later than 9am, Friday 17 February.

 

Please note that this bond issue may be scaled.

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Travel

 

In February and March our advisors will be visiting Hamilton, Christchurch, Wellington, Taupo, Kerikeri, Whangarei, Nelson, Napier, Blenheim, Auckland and Northland and are available on the following dates:

Edward will be in Nelson (Beachcomber) on Friday 17 February, and in Napier 22 February (Mission Estate) and 23 February (Crown Hotel).

Edward will also be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

He will also visit Blenheim on 17 March, Taupo on 20 March, and Wellington on 24 March.

Chris will be in Hamilton on Tuesday February 21, at the Ventura Inn & Suites boardroom, 23 Clarence Street.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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Market News

 

6 February 2023

Johnny Lee writes:

FEBRUARY is now upon us, as we consider two major events to occur through the month.

The first to ponder is the Reserve Bank decision on February 22.

It seems a forgone conclusion that interest rates will rise again. The question is by how much, and what tone the RBNZ wishes to set for the remainder of the year. 

Recent data releases regarding unemployment suggest a gradually growing problem on that front, as unemployment moved slightly higher in the December quarter.

Unemployment is a key indicator for economists and analysts seeking to judge the financial health of a nation. 

The global rise in interest rates will present a huge challenge to those carrying mortgage debt, especially those who entered the market when prices were near their peak. Rising mortgage costs means less money available for other necessities.

But unemployment becomes a problem for the banks and financial institutions too, both in terms of writing new loans and the ability to service existing ones.

We are not at this point yet. Unemployment is increasing from an historically low base. But recent high profile mass layoffs may be an early sign that the Reserve Bank's warning of sharply rising unemployment is beginning to come to fruition.

The other major point of interest for investors this month is reporting season.

Most of our listed companies will be reporting this month. This includes Spark, Heartland, Chorus, Vector, most of the electricity generators, the property trusts and other majors like A2 Milk and Ebos.

The other cycle - the May and November cycle - includes the likes of Infratil, Mainfreight, Ryman and Fisher and Paykel Healthcare.

Reporting season gives an opportunity for shareholders to receive answers. 

Will Chorus and Spark confirm their upward revisions to long-term dividends? What are Vector's plans following the sale of its metering business? How well are Heartland and Ebos's recent acquisitions integrating into the overall business?

Major share prices movements are rare, as companies tend to err on the side of disclosure in modern times. Many companies now publish regular market updates, keeping investors informed and preventing unpleasant surprises.

Of course, there are some issues which cannot be disclosed, such as those that require confidentiality. Capital raisings are one such example, and one that tends to lead to dramatic repricing of shares. 

The overall tone of the commentary accompanying the results will be of interest. The last few years have been characterised as extremely timid and uncertain, as companies debated hoarding cash and withdrawing from investment, nervous of rising interest rates and receding economic activity.

Globally, there have been clear winners and losers across different sectors as financial results are reported. The likes of Apple, Meta and Amazon are soaring this year. Oil companies are announcing share buybacks due to a surplus of cash. Walmart, the retailing giant, is down for the year, bucking the trend of the overall market.

Reporting season gives us a chance to confirm the pulse of the companies we invest in, and the country at large.

Last year was largely a year of caution, as companies either delayed plans or took low-risk options like buying back their own stock.

With the cost of debt increasing, one could expect many companies to look to reduce these debt levels. Similarly, companies that ramped up growth during the low interest rate era, will seek to reduce staffing levels and focus on efficiency and cost control. We have already begun seeing these dynamics play out this year.

Reporting season begins next Monday, with Contact Energy being the first scheduled to report to the market.

Briscoe Group's updated sales figures last week paint a picture of a company in a strong financial position, and one focused on staying ahead of the curve. After several years of double-digit growth, this year's increase will likely be more modest, as the post-Covid rebound begins to wane. Online sales, as a proportion of total sales, are gradually falling as lockdowns are lifted. Consumer fears around Covid seem to be abating. Foot traffic is returning.

Pressure on margins remains a problem. Costs are rising, and passing on these costs is proving a challenge. Briscoes' share price has gradually declined over the past 12 months, alongside most of our listed retailers. As Briscoes itself points out, the forecast near-term economic conditions look problematic, as consumer discretionary spending weakens and margin pressure continues to build.

Its current share price implies a dividend yield of near 8.5%, higher than the market average. If the dividend can be maintained long term, shareholders will receive ample return for their risk.

In times of falling consumer spending, the challenge for the retail sector will be to convey an image of quality as well as value. The management and executive team at Briscoes have proven up to the task in the past. Its success is not due to luck.

Briscoes' final result will be reported to market on 15 March.

The big news in Australian markets this week was the takeover of Newcrest Mining, from prior owner Newmont Mining.

Newmont Mining is the largest listed gold mining company in the world, with operations spanning the globe.

Newcrest Mining is the largest listed gold mining company in Australia. Newcrest also has some copper mining operations.

The takeover values Newcrest at nearly $25 billion Australian. For context, that valuation is nearly double that of our largest company, Fisher and Paykel Healthcare.

Both gold companies are considered part of the ''Big 10'' amongst gold miners, a list dominated by Canadian companies. The deal would add considerably to Newmont's reserves, while also adding some diversification to its asset base.

Importantly, the offer is in scrip, meaning that those accepting the takeover will receive American shares in Newmont, rather than a cash settlement. If the offer receives approval from both groups of shareholders, Newcrest Mining shareholders would need to sell their shares on market, prior to the completion date, if holding American shares was not convenient.

Newcrest shares rallied 10% following the announcement, after hitting 5-year lows in September last year. The gold price has also been recovering sharply after a decline in the middle of last year.

Of course, a competing bid may emerge following the announcement. These stories tend to have twists and turns.

One group impacted by this news is holders of the ''Australian Resources'' (ASR) Smartshares Fund, which has a direct stake in the takeover, as the fund carries a small holding in Newcrest Mining. The fund, presumably, will look to sell its stake in the company should the deal proceed, as American companies fall outside of its mandate.

The question now is whether we are about to see a period of consolidation across the mining sector. Simply buying competitors may be seen as a safer option than exploration and mine development. To this effect, assets in countries perceived as stable and respectful of property rights - like Australia - are particularly attractive.

The next step is for the board to recommend a course of action for shareholders to consider. The board of Newcrest will consult with external advisers to determine the best result for its shareholders. 

An exciting time for both Newcrest shareholders, and the gold industry as a whole.

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New Bond Issues

ANZ Bank

The ANZ Bank has today launched a 5-year senior bond, with a likely interest rate of around 5.00 – 5.10%.

This bond has a minimum application size of $10,000 and is open now and closes at 10am on Thursday (9 February).

More details can be found on our website.

Please note that brokerage will be charged for this offer.

If you would like a FIRM allocation for this bond, please contact us urgently.

 

Wellington International Airport

WIAL has announced that it is considering issuing a 5.5-year senior bond. More details will be released next week, however we are expecting the bonds to have an interest rate of around 5.25%.

We have started a list pending further details. If you would like to be pencilled on our list please contact us.

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Travel

In February and March our advisors will be visiting Hamilton, Christchurch, Wellington, Nelson, Napier, and Auckland and are available on the following dates:

Chris will be in Hamilton on Tuesday February 21, at the Ventura Inn & Suites boardroom, 23 Clarence Street, and in Christchurch on February 14 and 15, at the Airport Gateway Motel.

Edward will be in Wellington on Friday 10 February, in Nelson (Beachcomber) on Friday 17 February, and in Napier 22 (Mission Estate) and 23 February (Crown Hotel).

Edward will also be in Auckland on Wednesday March 1 (Ellerslie), Thursday March 2 (Wairau Park, North Shore) and Friday March 3 (Auckland CBD).

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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