Chris Lee & Partners Ltd

Market News 26 February 2024

Johnny Lee writes:

Reporting season continues and Contact Energy’s result is in, with profit rebounding almost exactly following last year’s decline. 

The dividend has been maintained at 14 cents per share, with a clear path to dividend growth as the company’s new generation assets come online, and other opportunities for revenue upgrades become more certain. Contact remains a favourite amongst analysts, despite this dividend remaining static while its peers look to lift distributions.

A key part of Contact’s future will be the long-term plan for the aluminium smelter at Tiwai Point. Expectations are rising that there will be a solution forthcoming in this space, perhaps at a materially higher level. 

Contact remains vigilant around its credit ratings, which in turn influences ease and cost of raising debt. This requires Contact to ensure its net debt does not exceed three times its earnings (EBITDAF) over a sustained period. With net debt climbing from $1,383 million to $1,584 million, Contact will be keen to ensure its full year earnings can keep pace. 

Tauhara, the geothermal development near Taupo, is nearing completion, with the third quarter of this calendar year the current expectation. This will be helpful to the aforementioned debt constraints, as the costly project will finally be contributing to earnings.

It has a few tools in its toolkit to utilise should further delays emerge, including incentivising its dividend reinvestment plan, issuing more capital bonds and raising more capital via a rights issue. With a number of projects in its pipeline, the company will not want to be hamstrung unnecessarily. 

This year may also see progress on its Kowhai Park (solar) and Glenbrook (battery) developments, with both expecting a final decision this year. 

On the retail side, the company is expanding its mobile phone offering (Contact Mobile) and is seeing some growth in Broadband. Mobile revenue has not yet reached meaningful levels, but Contact’s service offering is expanding, which may help reduce churn as customers opt for simpler, ‘’all-in-one’’ offerings. Contact did note that bad debts are rising, although these remain immaterial for now.

With Tauhara almost complete, the next step will be finalising a decision around investing across its development pipeline. The company is carefully managing its debt ceilings, with various options on the table if further delays occur. Once certainty is known around Tiwai Point, the challenge will be to gradually increase shareholder returns alongside its capital expenditure programme.

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Contact Energy’s peer, Genesis Energy, also reported to market, giving shareholders some clues as to what the company may look like going forward.

Readers may recall Genesis announced a significant shift in strategy last November, pivoting from its high dividend strategy to a growth strategy, investing funds into renewable energy and moving away from its historical assets. The company aspires to move from 40% renewable generation to 95% over the next ten years.

Last week’s result marked the first formal result since that announcement.

The dividend declared has fallen from 8.8 cents per share to 7 cents. Capital expenditure has tripled, and profit is down 74%.

The Huntly station remains the puzzle to be solved. Genesis is rolling out new products to the market shortly, while continuing its pursuit of a biomass or gas centred solution. While there seems to be agreement that the Huntly station is necessary for a secure grid in dry years, there are also voices advocating for its disestablishment. For Genesis, as the current owner of the asset, it is a matter of finding a solution which is financially viable.

Its short-term focus is now: improving its customer-facing business, beginning construction of the Lauriston Solar Farm, completing the feasibility study of the biomass market and reaching a final decision on its Huntly battery investment.

The Kupe gas field in Taranaki is currently undergoing assessment, both in terms of performance testing and reserves. Genesis expects the results of these assessments to be released in the second half of this year.

Much like Contact, Genesis is focused on the future and ensuring it can meet the nation’s electricity demand going forward. At the same time, it is focused on ‘’greening’’ its portfolio, with a particular ambition on growing its solar portfolio. 

In a world of ESG funds and increasingly environmentally focused investors coming through, the strategic pivot brings Genesis in line with its peers. Shareholders should not be surprised by the lower dividend - this was flagged months ago. However, shareholders now have some concrete figures around guidance (capital expenditure to rise from $78 million in 2022 and $81 million in 2023, to forecast of $145 million in 2024) and will now have an idea of the magnitude of the transformation Genesis plans to undertake.

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The Warehouse has ripped the band-aid off, and announced it has sold retail brand Torpedo7 to Tahua Partners Limited for $1.

The Torpedo7 brand sold bikes, camping gear and water sports equipment, amongst other items, and was initially purchased to broaden The Warehouse’s offering as part of its multi-channel strategy. Torpedo7’s bikes range in price from hundreds of dollars, to near $10,000 per bike. Torpedo7 also offered financing options through various buy now, pay later schemes, to help those who could not afford such a cost.

Concluding the sale will obviously mean a significant write-down of Torpedo7’s value on the balance sheet. The Warehouse is currently estimating a write-down of around $60 million.

It is difficult to frame this as anything other than a disaster from a strategic standpoint. Clearly, the retail environment has evolved to the point where the asset is regarded as a negative for shareholders, and that time was unlikely to restore this lost value. Following this logic, giving it away for $1 would be the best from a list of bad options.

The post-COVID environment for the bike market, which has previously made up about a third of Torpedo7’s sales, was highlighted as a particular concern. Bike sales surged during the COVID pandemic, but it seems the momentum may be fading in the higher-interest rate environment that followed, while the used bike market grows.

The Warehouse’s justification given for quitting its ownership after five years was to focus on its other assets, and give Torpedo7 to ‘’an owner who can focus more attention to its turnaround.’’ For the staff’s sake, one must hope Tahua Partners can achieve this.

The Warehouse has further refined its strategy going forward, stating it intends to focus on reducing its cost base and ‘’rebalancing’’ its capital expenditure. 

Torpedo7 was always a relatively small component of The Warehouse’s overall sales and its divestment is unlikely to materially impact earnings. However, it will shine a spotlight on future acquisitions – if any – The Warehouse chooses to make. Its record has been mixed when pursuing new markets, often returning to square one with lighter pockets than when it began.

The share price immediately began trading at fresh lows, and the company’s financial result on the 20th of March will see considerable pressure placed on its 15% dividend yield. 

The Warehouse news capped a poor week for the retailers, with The Warehouse update following a brief guidance update from clothing and outdoors supplies retailer Kathmandu. 

Sales are expected to be sharply down this year, with weak consumer confidence and an unusually warm winter blamed for the fall. 

Kathmandu’s own dividend yield – currently 11% - will also see pressure. The question may be whether dividends are reduced or suspended altogether.

Kathmandu now moves to focus on controlling costs, as it waits for economic conditions to improve.

Kathmandu will release its formal results on the 19th of March.

_ _ _ _ _ _ _ _ _ _

Comvita, the Manuka honey producer and marketer, has received a takeover bid from a third party to purchase all of the shares in the company. The identity of the third party was not disclosed.

The share price rose nearly 50% following the announcement.

The bid is non-binding and indicative only. There is no information regarding a price, with Comvita simply stating it represents a ‘’substantial premium’’. A rival bidder, if one exists, will not yet know what price it is competing with. 

Comvita is inviting the bidder to conduct due diligence. If it progresses further, shareholders will be formally notified and asked to vote.

For those keeping track, this is at least the eighth company said to have had takeover interest over the last year. Pushpay and MHM Automation have both concluded takeover offers successfully, while Sky Television, Arvida, Rakon, E-ROAD and Metro Performance Glass all engaged in discussions that did not lead to a formal takeover.

The board of Comvita intends to make an announcement in due course, regardless of outcome.

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An important note for unitholders of TCL shares – The City of London fund, listed on the NZX.

The company is intending to delist from the NZX, retaining only its LSE (London Stock Exchange) listing.

This may make it very difficult for shareholders to sell. Shareholders intending to retain their ownership of TCL should ensure they have some capacity to sell their shares on the London Stock Exchange.

The final day of trading on the NZX is slated for the 19th of March.

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Summerset Group Holdings Bonds

Summerset (SUM) has announced that it plans to issue a new 6-year senior bond and expects to release full details of the bond offer this week.

Summerset is one of the leading retirement village operators in New Zealand, with 38 villages either completed or in development.

The initial interest rate has not been announced, but based on current market conditions we are expecting a rate of above 6.25%.

At this stage it is likely SUM will be paying the transactions costs for this offer, so it is likely that clients will not be charged brokerage. This will be confirmed this week.

The bonds will likely be listed on the NZX.

If you would like to be pencilled on the list for these bonds, please contact us promptly with an amount and the CSN you wish to use.

We will be sending a follow-up email next week to anyone who has been pencilled on our list once the interest rate and terms have been confirmed.

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Travel Dates

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

29 February – Kerikeri – David Colman

1 March – Whangarei – David Colman

5 March – Lower Hutt – David Colman

20 March – Christchurch – Johnny Lee

21 March – Napier – Edward Lee

22 March – Napier – Edward Lee

25 March – Palmerston North – David Colman

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Market News 19 February 2024

Johnny Lee writes:

Further bad news for Fletcher Building shareholders came last week, as its financial results were announced, amongst updates from other large companies.

Fletcher took centre stage due to both the news, how it was released and the share price reaction.

The news was not positive. The company has made a loss of over a hundred million dollars, the CEO is leaving, the Chairman is leaving, the dividend is cancelled and guidance going forward is well below expectations. 

Debt levels are beginning to reach troubling heights, although Fletcher has responded by reducing its capital expenditure and beginning a plan to sell off assets.

TradeLink, Fletcher’s plumbing supplies distributor in Australia, is the first such asset to be sold. This may end up in the hands of private equity, and Fletcher’s was careful to keep up appearances of being a reluctant seller.

The Iplex pipe leak issue in Australia may be nearing a resolution, although what this solution looks like is not yet known. Testing has suggested that the installation process (not the quality of the product) is the most likely culprit. However, the hefty price tag associated with remediating 15,000 homes will be weighing heavily on both sides of the debate.

The share price reaction to Fletcher Building was very negative, falling 15% almost immediately. It took some time to find willing buyers, and although it appeared oversold shortly after, further selling has emerged since and pushed the share price down even lower. 

This will inevitably attract bargain hunters. Believers in Fletcher’s long-term trajectory could view this as a very attractive opportunity to top up – bearing in mind that Fletcher’s paid 34 cent dividends only last year, and 40 cents the year prior. Unfortunately, such believers are in short supply at the moment.

The release of the announcement was also muddled.

Fletcher Building went into trading halt the day before, stating that analyst estimates were significantly out of line with the forthcoming result and the market was misinformed. This proved correct. 

It then announced – to the ASX, not the NZX – that its CEO was considering standing down. It then made a further statement, correcting a media report that Fletcher Building was selling Iplex, instead of TradeLink. It was then forced to issue a correction in its financial results, almost 3 hours after trading had already begun.

Suffice to say, there was significant confusion, some of which was Fletcher’s own making and some of it not. Certainly, later comments from Fletcher’s regarding the media suggest the company is growing increasingly frustrated with the newfound expectation that the company follow and correct errors in news reporting. 

This marked the second time in a week Fletcher’s was asked to correct an incorrect media report. While some may view this as the responsibility of a publicly listed company to ensure the market is not misinformed, perhaps speculation needs its own carveout in the rules to help readers better understand the quality of information being presented.

Fletcher’s significant decline in value this year has worsened and a management and board shake-up is now underway. The fall in share price has attracted some risk-takers, some of whom will be averaging down on previous purchases while others hope the recent difficulties are cyclical and temporary. The Iplex issue remains unresolved, with hopes that the solution will ultimately be immaterial to Fletcher Building. Meanwhile, an asset is now on the chopping block in Australia, as Fletcher’s tests the market appetite for construction supplies. 

It will be a busy year. 

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Vulcan Steel also announced its results, showing a fall in virtually every metric as conditions worsen in the construction sector.

Revenue is down 12%, profit has fallen 53%, volumes are down 6% and the dividend was cut in half to 12 cents. Dividends are specifically tied to profitability, and will be inconsistent as the company sees its profit wax and wane.

Vulcan is increasingly confident that market conditions have bottomed out, commenting that sales activity is ‘’beginning to stabilise’’, hopefully marking the first step towards a gradual recovery in construction activity and sales of materials.

The company is trying to balance investing for growth with shareholders returns, while also balancing its financing headroom with this growth. 

Two main drivers going forward are likely to be easing interest rates (leading to greater activity in the construction sector, and therefore demand for materials) and potential revitalisation of our water infrastructure. Whether either of these comes to pass remains to be seen - certainly, recent commentary from Reserve Bank Governor Adrian Orr suggested that he remains wary of persistent inflation and is not convinced inflationary pressures have been tamed.

For Vulcan, its results release saw little reaction on a share price that has been remarkably stable over the last six months. It is hoping that the worst is behind it, and that two key tailwinds will lead to a longer-term rebound. _ _ _ _ _ _ _ _ _ _

Vital Healthcare Property’s was next to post its figures, showing a modest increase in net income. Its Net Tangible Assets fell from $3.17 per unit to $2.70.

The dividend was maintained, but Vital has eliminated the already modest discount on its Dividend Reinvestment Plan. 

Wakefield Hospital (Wellington) and Ormiston (Auckland) are near completion and attention is now turning to its next projects for redevelopment. Vital has a number of projects ‘’shovel ready’’, as it prepares to lock in commitments from tenants and begin the work.

The sale of non-core assets has continued and will continue further. The company has raised over $300 million from asset sales over the last five years, rolling the proceeds into its development programme. 

Vital Healthcare makes a note that the company intends to adjust its Statement of Investment Policy and Objectives, and has notified unitholders of this proposal. The change is intended to make it easier for the fund manager of Vital to earn management fees when engaging in capital partnership agreements with third parties.

The proposed structure for this will need careful examination from unitholders. Vital’s track record will no doubt lead unitholders to consider such proposals carefully and ensure that the structure strikes a balance of fairness for both sides.

Unitholders can expect communication from Vital Healthcare on this topic soon.

Vital Healthcare’s result saw a modest increase in net income, and a more than modest fall in net assets. Gearing remains near its upper range, and may remain there for the foreseeable future, as the company continues to pursue its development strategy._ _ _ _ _ _ _ _ _ _

Ryman Healthcare has provided an update to market, warning that its next result, due in May, will make for unpleasant reading.

Ryman is forecasting a significant reduction in underlying profit, new sales and even margins.

The company expects these lower numbers may rebound in 2025, as construction of key sites complete.

Its debt levels - the issue at the front of mind for shareholders - are not yet expected to improve, remaining around the same figure as September’s result.

If one is determined to find a silver lining, it would be that Ryman is showcasing improved communication with shareholders. Hopefully, this will be an ongoing trend.

With market conditions proving challenging for Ryman, its attention now turns to controlling costs and improving the efficiency of the business. Ryman has already made some changes to its land bank, selling assets no longer fit for purpose as it looks to right-size the business.

Summerset - a major competitor of Ryman - will be posting its result next week on the 26th, as the company is on the February/August cycle for financial results.

Ryman shareholders would not be blamed for peeking over the fence and seeing how it compares. 

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Bond Issues

SBS Bank

SBS Bank announced its interest rate for its new issue of subordinated bonds last week.

It set the interest rate at 7.62% per annum, with interest paid quarterly.

The bonds will have a set maturity date of 10.5 years; however, SBS Bank will have the option of repaying these bonds under certain conditions after 5.5 years.

SBS will cover the transaction costs for this offer. Therefore, clients will not be charged brokerage fees.

Please contact us if you are interested in an allocation of these bonds.

Wellington Airport

Wellington International Airport (WIA) has announced that it plans to issue a new senior bond maturing in 6.5 years’ time.

The initial interest rate has not been announced but based on its credit rating of BBB, we are expecting an interest rate of approximately 5.75% - 6.00%.

The minimum investment size is likely to be 10,000 bonds.

It is anticipated that WIA will not cover the transaction costs associated with this offer. Accordingly, clients will likely be charged brokerage. This will be confirmed next week.

If you would like to be pencilled onto our list pending more information, please email us with an indicative amount and your CSN and we will get in touch this week with further information.

Travel Dates

Our advisors will be in the following locations, on the dates below:

21 February – Christchurch (Russley Golf Club) – Fraser (full)

29 February – Kerikeri –David

1 March – Whangarei – David

5 March – Lower Hutt – David

20 March – Christchurch – Johnny

21 March – Napier – Edward

22 March – Napier - Edward

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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Market News 12 February 2024

Johnny Lee writes:

Fletcher Building’s poor start to the year worsened further last week with confirmation that its impairment charge for the Convention Centre project in Auckland would need to be significantly increased, this time by a further $165 million.

Its Wellington Airport carparking project also saw $15 million set aside for remediation.

Fletcher’s full net profit after tax last year was $235 million.

The announcement saw its share price slip further, and is now approaching the lows seen during COVID. Sentiment is clearly against the company, as sellers line up and buyers retreat. 

Fletcher’s tale has included many highs and lows. At one point our most valuable company, more recent developments include fending off court cases and criticism from all corners, media, shareholders and analysts alike.

When CEO Ross Taylor was appointed in 2017, the company vowed to learn from its prior mistakes, initially withdrawing from vertical construction altogether as it looked to reposition itself.

The share price since then has fallen by about a third.

It has now reached a point where market updates are dreaded by shareholders, fearing more bad news. Last week's update proved no exception.

Fletcher Building continues to look for recompense from its insurers, although it stressed that these claims may take years to resolve.

The two projects in question are part of its ‘’legacy projects’’ portfolio, which are all expected to be wound up by the end of this year. Both shareholders and management will be pleased to run a line through these projects, which have been plagued by cost overruns and delays.

The increased impairments led to media speculation of a potential capital raise, which Fletcher’s formally denied with a further announcement to market.

Responding to media speculation is rare, so as not to create scenarios where a failure to refute implies accuracy in the speculation. In this instance, Fletcher Building obviously felt the market would be sufficiently misled by the speculation to warrant a formal response.

This close to its formal result – due this Wednesday (the 14th) - means that making a public statement along those lines will be impossible to walk back. 

Fletcher Building’s share price over the last ten years has had many ups and downs, and last week’s development saw it reach the lowest point in years.

Shareholders will not blame them for fires and global pandemics. But following the leaky pipe saga in Australia, the last thing shareholders needed was another huge increase in remediation estimates.

This week’s result will need to be a good one, to reverse the damage. 

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Protests from within China have drawn a response from its Government, which has now begun to take steps to halt its tumbling share markets.

Tens of thousands of Chinese share investors are reported to have taken to social media, asking the Chinese and US Governments to help investors following the continual decline in the share prices.

While this might seem absurd from a New Zealand perspective, it was followed by a report that the Chinese state investment fund would inject more money into the share market.

The Chinese sharemarket index responded positively, but remains well down for the year. A combination of deflation, population decline, declining consumer confidence and a property market losing steam remain real problems that aren’t fixed by buying hundreds of billions of shares from investors.

Such responses may be politically popular, but only buy time. Structural problems need to find solutions - otherwise it is simply a case of digging bigger holes. 

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Another market experiencing stress is the commercial real estate sector, with US Treasury secretary and former Federal Reserve chair Janet Yellen raising concerns that the sector is facing mounting difficulties, and that the issues threaten to flow into difficulties for the bank’s lending on these properties.

Yellen’s comments came days after Deutsche Bank had indicated that it would increase provisions for losses expected in the commercial real estate sector.

A number of other smaller banks have also highlighted emerging risks from this sector, as a huge amount of debt nears maturity and borrowers prepare to rollover this debt at interest rates many times the original cost.

National office vacancy rates in the United States are at the highest level in over 40 years. A combination of a transitioning work culture and an historic oversupply has led to more empty buildings. Hybrid or remote working, particularly in the technology sector, is one factor that is driving this change.

A worker shortage over the last few years has also led businesses to consider remote workers, broadening their available talent pool.

Higher interest rates also puts pressure on valuations for commercial property owners, especially those that allowed themselves to overleverage during the era of virtually nil interest rate lending. This year alone will see over half a trillion dollars of debt maturities in the US commercial sector.

In New Zealand, most of our listed property trusts report relatively steady vacancy rates, and while rising interest rates have indeed brought about large devaluations in the property sector, the major LPTs have yet to hit the panic button. Instead, most are quietly shuffling off non-core assets and repaying debt.

Some unlisted syndicates have had their liquidity tested, and investors in these products may find themselves forced to endure this period of stress, as they wait for buyers to re-emerge. Listed securities have the advantage of visible liquidity.

The real estate sector is adapting to a new interest rate environment, and the commercial sector is facing some challenging new social dynamics in the fallout of COVID. Failures in this space will impact their lenders, with global banks now preparing for write-downs as they run the ruler over their books. 

New Zealand will not be immune.

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Reporting season begins this week, with the likes of Vulcan Steel, Vital Healthcare, Skellerup Holdings and, as mentioned, Fletcher Building acting as first cabs off the rank and releasing their results in the first week.

This is typically a busy period for markets, with profits and dividends being announced, and the occasional rights issue or takeover made public.

It also adds a vital piece of context to our economic picture, being that of our corporate sector. Recent data regarding our labour market showed the high levels of immigration has been matched by job growth, suggesting our economic health is better than expected. The prospect of rate hikes was even raised by some quarters.

Some stocks have already seen trading interest ahead of their results, including Genesis Energy, A2 Milk and Heartland Bank. Expect volatility.

Between construction, property, energy, retail and banking, the financial results over the coming weeks will be a useful gauge for the overall health of our economy.

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Bond Issues

SBS Bank

The SBS Bank today confirmed that the interest rate will be set with a minimum of 7.35%, with interest paid quarterly for the initial 5.5-year term. 

The bonds will have a set maturity date of 10.5 years; however, SBS Bank will have the option of repaying these bonds under certain conditions after 5.5 years. 

SBS has also confirmed that it will be paying the transactions costs for this offer. Accordingly, clients will not be charged brokerage. 

If you would like to participate in this issue, please contact us no later than 9am, Thursday 15 February. Payment would be due no later than Tuesday, 20 February.

Wellington Airport

Wellington International Airport (WIA) has announced that it plans to issue a new senior bond maturing in 6.5 years’ time.

The initial interest rate has not been announced but based on its credit rating of BBB, we are expecting an interest rate of approximately 5.75% - 6.00%.

The minimum investment size is likely to be 10,000 bonds.

It is anticipated that WIA will not cover the transaction costs associated with this offer. Accordingly, clients will likely be charged brokerage. This will be confirmed next week.

If you would like to be pencilled onto our list pending more information, please email us with an indicative amount and your CSN and we will get in touch next week with further information.

Travel Dates

Our advisors will be in the following locations, on the dates below:

14 February – Auckland (North Shore) – Chris15 February – The Wairarapa – Fraser15 February – Auckland (Ellerslie) – Chris21 February – Christchurch (Russley Golf Club) – Fraser29 February – Kerikeri –David1 March – Whangarei – David5 March – Lower Hutt - David 

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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Market News 5 February 2024

 

Johnny Lee writes:

 

The US market continued its strong outperformance last week, as the US technology giants posted their financial results to market and led the Dow Jones index to record heights.

Meta – formerly listed as Facebook – declared its first-ever dividend, accompanied by a buyback of 5% of its listed shares. Its market capitalisation quickly rose beyond the trillion-dollar mark, and its share price reached record highs, now trading above $470 per share. For context, this is more than double its price from a year ago.

Amazon, the online shopping giant and global conglomerate, saw its share price respond to its own result, its share price up almost 15% for the year. It is now close to its November 2021 peak.

Microsoft is another enjoying outperformance over the last twelve months, up 60%.

The various funds that include these stocks, such as the US based Smartshares ETFs and Australian listed FANG, have also soared to record heights. US dollar strength has further increased the relative value of some of these funds.

Apple’s results were more mixed, negatively impacted by particularly weak sales from China, a market that is clearly beginning to struggle.

While the US indices hit records, the Shanghai Composite Chinese index is now down 8% for the year to date, and down 16% over the last 12 months. The downturn in its real estate market has been accompanied by (and perhaps caused by) rising youth unemployment and deflation, while the falling birth rate and changing societal norms threaten to compound the issue in the years to come.

Last week saw a Hong Kong court order the liquidation of Evergrande, one of the largest property developers in China. While this outcome has long been expected and will take years to resolve, it puts a spotlight on both the Evergrande liquidators, their competitors in the property development space, and the Chinese Government itself. 

Offshore creditors are owed billions by Evergrande, which owes $300 billion in total, including billions to local Chinese investors. Assuming there is a shortfall from the asset liquidation, impacts will be felt from all groups – including local contractors, employees, and suppliers. The world will be watching as this unfolds.

Chinese ETFs – a common instrument for international investors looking for exposure to China – have been amongst the worst performing over the last twelve months, a sharp contrast from the performance of US based ETFs, which have climbed substantially on the back of outperformance from the technology sector.

This gap between the US and Chinese share markets has continued into 2024, and China will be navigating many economic and demographic challenges this year. The first one may be dealing with the fallout of a struggling real estate sector, and the billions at risk from both within China and further abroad.

The unexpectedly strong US corporate results reversed a modest decline from earlier in the week, after US Federal Reserve chair Jerome Powell indicated that the expected March interest rate cut was now unlikely.

Powell indicated that, while the US economy was performing strongly and unemployment was low, inflation had not yet reached the point where cuts would be warranted, with financial markets now expecting these cuts to occur in early May.

Our own Reserve Bank is not scheduled to announce its next decision until later this month, which is broadly expected to see no change. Rate cuts are expected in the second half of the year, data dependent.

The RBNZ recent statements suggested it holds a similar view to the US Federal Reserve, with Chief Economist Paul Conway’s speech last week highlighting that ‘’we still have a way to go to get inflation back to the target midpoint.’’ 

Indeed, market expectations are for interest rates to consistently fall over the next 24 months, with market pricing now deviating significantly from the Reserve Bank’s previous forecasts. 

Investors would have seen this illustrated in the term deposit market, where short-term rates remain strong and long-term rates are less compelling. Banks continue to search for short-term money, assuming that subsequent years will be considerably cheaper.

Conversely, borrowers must pay more to borrow on short-term rates, doing so on the assumption that rates will fall the following year. Banks are offering lower rates for long-term mortgages, a good option for those who disagree with current market pricing.

Last week’s statements suggest that both central banks are singing from the same song sheet – inflation is heading lower but has not yet reached the point to justify rate cuts. Markets are expecting these cuts to occur this year, and those making investment decisions – both borrowers and investors – will need to consider their next move carefully.

_ _ _ _ _ _ _ _ _ _

Sky City Entertainment has quietly doubled the provision put aside for its fines and legal costs, following the investigation into its Adelaide casino. The share price responded positively, indicating relief at what will be seen as a cap on the level of the fine. 

The breaches relate to ‘’serious noncompliance’’ of its anti-money laundering obligations and are unrelated to the dispute with the Auckland casino, which related to its obligations of care towards its patrons.

The provision for the Adelaide dispute is now $73 million, more than half of Sky City’s full year (normalised) profit in 2023. Some earlier estimates had expected a final penalty north of $100 million.

Shareholders will justifiably feel let down and will be looking for confirmation that real change has been made to compliance practices across the business. Casinos will continue to attract people from all walks of life, including people with intentions that run counter to Sky City’s legal obligations.

Anti-Money laundering requirements, while obnoxious to some, are a part of risk management now and are unlikely to be significantly wound back. Sky City will no doubt work with regulators and experts to develop best practice in this space.

Sky City’s hearing date is in June.

 _ _ _ _ _ _ _ _ _ _

Briscoes Group has provided its full year sales, edging out last year’s record numbers with a fresh record of $792 million, up 0.8%. Its share price moved higher following the announcement.

The sales update precedes the full year result – due mid-March – but did include an updated estimate, with guidance now suggesting a net profit of $83 million, down $5 million from 2023’s record figure.

Online sales have been maintained at around 19% of total sales, despite expectations that this figure would fall after the lockdowns of 2020. Consumers continue to engage with the website, which is proving a valuable tool for the company.

Those Briscoes shareholders who have been enjoying the growing dividends observed over the past three years will be quietly optimistic that this trend will be maintained. The high dividend yield of the company – currently around 9% gross - has provided justification for a share price that has seen some volatility, especially since COVID. 

2020 saw extreme fluctuations in the company’s value, before the post-COVID rebound saw a record high in October 2021. The price has since come back sharply, with market sentiment changing over time in line with market conditions. Retail stocks tend to move the most when investors look to reduce risk, a common theme over the last two years.

Those investors looking for Briscoes to act as bellwether for the retail sector will see a company that is comfortably profitable and continuing to innovate to maintain margins. Briscoes warns that conditions are worsening but is confident that its strategy is the right one and will see the company well placed to tackle these difficult conditions if and when they come to pass. 

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New Bond Offer

SBS Bank has announced plans to issue a new subordinated bond, with further details to be announced later this week. While the interest rate is not yet known, based on current market conditions, we expect it to offer approximately 7.00% per annum.

The bonds will have a set maturity date of 10.5 years; however, SBS Bank will have the option of repaying these bonds under certain conditions after 5.5 years.

SBS will cover the transaction costs for this offer. Therefore, clients will not be charged brokerage fees.

If you are interested in an allocation of these bonds, please contact us with an indicative amount and the CSN you would use. We will send further information to those on this list next week. Please note that requesting more information does not commit you to invest.

If you have any questions regarding this offer, please feel free to contact our office.

 

Travel Dates

Our advisors will be in the following locations, on the dates below:

7 February – Christchurch – Chris8/9 February – Ashburton (FULL)/Timaru – Chris12 February – Tauranga (PM) – Chris13 February – Tauranga (AM) – Chris14 February – Auckland (North Shore) – Chris15 February – The Wairarapa – Fraser15 February – Auckland (Ellerslie) – Chris21 February – Christchurch (Russley Golf Club) – Fraser29 February – Kerikeri –David1 March – Whangarei – David

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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