Chris Lee & Partners Ltd

Market News - 29 July 2024

Johnny Lee writes:

A lot can change in a week.

Last week saw both Arvida and The Warehouse announce separate takeover news, with the Arvida announcement significantly more detailed.

Arvida has entered into an agreement with Stonepeak BidCo, a subsidiary of New York-based Private Equity fund Stonepeak. The agreement is subject to shareholder approval, and if implemented would see the company taken over at a price of $1.70 per share.

This follows the announcement from December last year, when Arvida indicated ‘’an offshore infrastructure fund’’ had approached the company to acquire its shares at $1.70 per share, before concluding that the price offered ‘’meaningfully undervalued Arvida’s intrinsic value.’’

The board is recommending shareholders accept the offer from Stonepeak, and major shareholders representing 18% of the total equity have indicated their intention to accept the offer.

Barring the emergence of a competing offer - or a major change in circumstances - the company intends to hold a shareholders vote towards the end of this year, with the payment to follow shortly afterwards.

Such a change in circumstances is, of course, possible. This very outcome occurred as recently as 2020, when Metlifecare was approached by a subsidiary of Swedish Private Equity firm EQT. Following the COVID-19 lockdowns, EQT lowered its bid from $7 to $6 per share, which was eventually accepted by shareholders.

The Scheme Implementation Agreement between Arvida and Stonepeak contains a similar clause.

Grant Samuel has been contracted to provide an independent view on the value of the company, to help shareholders determine if the price of $1.70 is fair. The board should already have a solid grasp on the value of its company, but the independent valuation should confirm this for shareholders.

After its IPO in 2014 at 95 cents, Arvida will be departing our exchange - assuming the offer closes – with a gain of about 80%, excluding dividends. While this is below the market performance over the same period, it is significantly better than the performance of The Warehouse over the same period.

The Warehouse offer is – so far – unpriced, with discussions suggesting a potential range of $1.50 to $1.70 per share.

Adamantem Capital Partners, in conjunction with Sir Stephen Tindall, are the entities behind the interest in buying the company. Tindall, of course, was the person who established the business in 1982.

The offer has been labelled as opportunistic and indeed has occurred with the price trading at close to record lows. Confidence in the retail sector is low, putting pressure on profits and shareholder returns.

It is difficult to imagine a scenario where a company like The Warehouse would delist. The company listed back in 1994, and was once the third largest company on our index, behind Telecom and Carter Holt Harvey. Thirty years ago, our index was the NZSE 40 Capital Index, which had just replaced the Barclays Industrial Index.

However, times have changed for The Warehouse. The company is now towards the bottom of the NZX50, similar in size to Scales and Napier Port. Briscoes, another retail stock, is now worth twice as much as The Warehouse.

The proposed acquisition of The Warehouse remains in very early stages and has several hurdles ahead of it, not least of all convincing shareholders that the offer is worth their consideration.

Some shareholders will agree with the commentary around opportunism and believe that time will restore value to the share price. Others will believe that the nature of retailing has changed and that the current management will not be able to restore this value

For now, shareholders must wait and see. The board has issued a Don’t Sell Notice, allowing Adamantem the time to formally construct and deliver an offer to shareholders. Like the Arvida offer, this will likely be followed by an independent valuation and a shareholder vote, which will ultimately determine the future of an iconic New Zealand company.

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Immediately following the announcement, both Arvida and The Warehouse saw sharp rises in share price, as traders bought shares at lower levels with an eye to accepting the offers and pocketing a quick gain.

Both share prices eventually found equilibrium again, with Arvida settling at $1.62 – an 8-cent discount to the takeover price – and The Warehouse at around $1.40.

The combination of these two deals – if they eventuate – will see nearly $2 billion returned to share investors and managed funds, and with their departure, two new stocks entering the NZ50 index for consideration.

The two offers join a lengthy list of recent expressions of interest in our listed market. Comvita, Metro Performance Glass, Pushpay, E-Road, Rakon, MHM Automation and Sky TV have all had approaches over the last two years. Some of these approaches have led to full takeovers.

The news also sent related companies higher, as the market speculated on other shares that may be perceived as undervalued.

Indeed, share prices across the two sectors involved rose sharply following the announcements. Oceania is up 30% over the last week, Ryman is up 8% and Summerset is up 5%. Kathmandu is up 13%, while Michael Hill is up 7%.

The increases in the share prices of both The Warehouse and Arvida also give shareholders a dilemma to ponder.

Suddenly, each group has the opportunity to sell at a price significantly better than that faced only a week ago. In the case of Arvida, a likely outcome and end date is also known.

Shareholders can sell now at around $1.62. Doing so would lock in a settlement amount and realise the investment immediately. A brokerage fee would be applied, but the funds could then get to work elsewhere and the risk of the deal falling through would be passed on to the new buyer.

Alternatively, shareholders can hang on to their Arvida shares, either in the hope of a competing bid or to simply await payout, expected in late 2024.

Sometimes, this strategy of selling early pays off. When E-Road was formally approached by Constellation in June 2023, the E-Road share price almost doubled to $1.40 and shareholders faced the same dilemma. In that instance, the share price fell back to the 70 cent mark shortly afterwards, as it became clear that the takeover would not proceed. A year later, its share price has still not yet reached those levels again.

The takeover news is an exciting development for shareholders and proves that interest in our listed market remains strong. The unexpected increase in market pricing gives these shareholders an opportunity to capture a short-term gain while derisking their position, or settle in for the long haul and await further developments.

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Santana Mineral’s first two days of trading on the NZX have concluded successfully, with hundreds of transactions occurring over the two days.

The stock code is the same as its Australian listing - SMI.

The average parcel size was around 1,000 shares. No doubt the company will be welcoming many new shareholders, particularly in the retail space.

The NZX will be pleased to welcome Santana to the exchange, especially following the aforementioned developments from Arvida and The Warehouse. New Zealand needs new listings and needs success stories to help attract other entrepreneurs to our capital markets.

Santana also took the opportunity to publish its quarterly activity and cash flow report – which included the company’s current estimates and financial situation. These estimates include a net profit of $2 billion NZD over the initial ten years of mine life.

The company’s gross cash balance is currently around $33 million AUD. The company believes it is now fully funded through to its decision to mine, expected mid-2025.

Santana listing onto the NZX has enabled many new shareholders to join its register. A further update confirms that next year will be a major one for the company, as it looks to make the transition into an active gold producer.

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New Investment Opportunity

BNZ - Perpetual Preference Shares 

Bank of New Zealand (BNZ) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for BNZ’s regulatory capital requirements and to have a credit rating of BBB.

This investment is perpetual, with an optional (and in our opinion likely) redemption date in six years’ time.

The initial six-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of around 6.90% per annum.

BNZ will be paying the transaction costs on this offer; accordingly, clients will not have to pay brokerage.

More details are expected on 5 August.

BNZ is one of the top four banks in New Zealand and a subsidiary of National Australia Bank. It has a strong credit rating of AA-.

If you would like to be added to our list, pending further details, please contact us promptly with an amount and the CSN you wish to use.

Indications of interest will not constitute an obligation or commitment of any kind to acquire this investment.

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Travel

21 August – Christchurch – Johnny Lee

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

Chris Lee & Partners Limited

Market News 22 July 2024

Johnny Lee writes:

The rapid decline in interest rates over the last two weeks has spurred a burst of enthusiasm on our stock exchange, with our main index now approaching two-year highs, as we head into the next reporting season.

The decline in swap rates was also accompanied by a shift in rhetoric, with economists no longer debating whether interest rates are cut this year, but rather how many cuts will be needed to ensure inflation does not slow too quickly.

Equity markets were fairly swift in responding, with the likes of Mainfreight, Fisher and Paykel and Ryman Healthcare benefiting from the change in sentiment. At the same time, analyst reratings are occurring, pushing stocks further as confidence returns.

There was also some tentative optimism returning to the Listed Property Trusts, with Vital Healthcare, Argosy, Kiwi Property Group and Goodman Property Group all enjoying modest increases in both share prices and volumes.

Of course, this is not the first time we have seen enthusiasm regarding interest rate moderation in recent history. There have been a number of false starts both here and abroad. Nevertheless, the rebound of equity prices will be welcome news to beleaguered shareholders.

The bond market saw the inverse reaction, with both liquidity and yields waning. The recent Mercury bond – issued only weeks ago at 6.42% - is now seeing buyers at over $1.03 in the dollar. Mercury’s timing could not have been unluckier.

The term deposit market was also characteristically swift. The banks wasted no time in cutting their offerings, with lending rates following suit shortly afterwards.

The decline in swap rates was preceded by a number of data points, including both general inflation and food price inflation, which both suggested that the Reserve Bank was beginning to win the battle. More data points will emerge soon, with various confidence surveys and labour market statistics due over the next three weeks.

The next three Reserve Bank Monetary Policy Statements are due on the 14th of August, the 9th of October and the 27th of November. The August statement will be very closely scrutinised by investors, looking for clues as to the likely trajectory and timing of interest rate movements. 

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Sky City’s decision to voluntarily close its Auckland casino for five days this year – as part of a deal with the Department of Internal Affairs – will come at some cost to shareholders and may act as a ‘’final warning’’ for the company.

The DIA had received a complaint from a customer, relating to Sky City allegedly failing in its obligations to detect incidents of continuous play. The now former customer reportedly gambled at the casino for about four years before lodging the complaint in February 2022. After two and a half years, the matter is now concluded.

Regardless of one’s view of personal versus host responsibility, the fact is Sky City has accepted the compromise of a five-day closure, which will cost it (meaning its shareholders) about $5 million in lost earnings.

The company has since begun investing into a raft of new compliance measures, including enhancing its various facial recognition technologies and increasing its investments into training programmes for frontline staff. Staff will also monitor ATMs and increase its interactions with customers to assess for signs of problem gambling.

Sky City also intends to institute carded play to their casinos next year. This will give the company even greater control over customer gambling, allowing them to effectively cut off those customers who gamble for too long and manage to evade other protections in place.

Hopefully, the combination of these measures will mean those unable to prevent themselves from circumventing the rules will be forced to explore other options.

Ultimately, the $5 million loss of revenue may be less relevant than the desire to move on and begin work on proving itself again as a reputable operator focused on long-term shareholder returns.

For shareholders, the fear will be another compliance failure, which would almost certainly lead to a harsh response from the regulator. 

Sky City’s response to these failings has been significant, and this has been recognised by the regulator. This response will be costly, but was necessary within the regulatory framework the sector operates within.  

Investing into the gambling sector will always have this heightened regulatory risk, and investors of Sky City will have long since accepted this. With dividends suspended for some years yet, the rewards for this risk will have to wait, as Sky City finally put the long-running legal saga to bed.

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Contact Energy has provided an early indication for shareholders ahead of next months result, as the new Tauhara geothermal plant finalises construction and testing.

Contact now turns its attention to the Wairakei geothermal plant replacement, which is due for its final investment decision later this year. This pipeline of new development is part of its ‘’Contact26’’ strategy.

Helpfully, Contact has also provided guidance around its short-term dividend outlook. The dividend is expected to lift 4 cents in two increments of two cents over the next seven months, or around 11%. Further increases are unlikely while the Wairakei project is active, a project that is expected to take around two years to complete.

The new long-term deal with New Zealand Aluminium Smelters has provided the electricity sector with much needed certainty and has helped turn opportunities into decisions. These companies will be more confident in New Zealand’s growth profile for electricity demand, and can plot the needed supply of power without fear of a major user withdrawing from the market.

Next month’s reporting season will be an important one for shareholders of this sector, as each company outlines both its capital needs for the years ahead, and its cashflows and dividend outlook. 

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The upcoming dual-listing of Santana Minerals – which is expected to occur this Thursday - has led some investors to ponder the decision of whether to shunt their shares to New Zealand or remain on the Australian board. 

While this is not an appropriate forum for individualised financial advice, there are benefits to each which can be discussed in generalised terms.

It is almost certain, in the short-term, that the ASX will remain the home of most of the shares and most of the liquidity for the company. Liquidity allows larger shareholders to enter and exit stocks quickly at guaranteed pricing. Over time, new shareholders buying on the NZX may change this balance. With no other listed gold miners to compete with for airtime, I would expect New Zealand media coverage to highlight Santana’s progress better than the Australian business news, where Santana remains a small fish in a large pond.

However, the New Zealand settlement system – utilising singular Common Shareholder Numbers and FINs – is preferable for some investors, particularly those who may hold Santana across multiple accounts. 

New Zealanders may also find the New Zealand share registries to be substantially easier to deal with than their counterparts across the Tasman Sea. From experience, this is particularly true when dealing with Estates, as the regulatory requirements can be challenging to navigate from abroad.

Traders seeking an arbitrage opportunity may also look to shunt their shares, taking advantage of the lack of liquidity to sell at higher levels.

The decision to shunt is not an urgent one and can be reversed at any time, should priorities change. 

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New Investment Opportunity

BNZ - Perpetual Preference Shares

Bank of New Zealand (BNZ) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for BNZ’s regulatory capital requirements and to have a credit rating of BBB.

This investment is perpetual, with an optional (and in our opinion likely) redemption date in six years’ time.

The initial six-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of around 7.00% per annum.

BNZ will be paying the transaction costs on this offer; accordingly, clients will not have to pay brokerage.

More details are expected on 5 August.

BNZ is one of the top four banks in New Zealand and a subsidiary of National Australia Bank.

BNZ has a strong credit rating of AA-.

If you would like to be pencilled in on our list, pending further details, please contact us promptly with an amount and the CSN you wish to use.

Indications of interest will not constitute an obligation or commitment of any kind to acquire this investment.

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Travel

24 July – Christchurch – Fraser Hunter

25 July – Ashburton (AM) – Fraser Hunter

25 July – Timaru (PM) – Fraser Hunter

26 July – Timaru – Fraser Hunter

25 July – Auckland (Ellerslie) – Edward Lee

26 July – Auckland (Albany) – Edward Lee

1 August – Wellington – Edward Lee

21 August – Christchurch – Johnny Lee

Chris Lee and Partners Limited

Market News 15 July 2024

David Colman writes:

On 10 July, the Reserve Bank of New Zealand (RBNZ) kept the Overnight Cash Rate (OCR) at 5.50%. However, it seems to have a hand on the scissors required to cut this rate.

The RBNZ is busy sharpening these scissors due to signs that the Consumer Price Index (CPI), used to measure inflation, is approaching the RBNZ’s target range of 1% to 3%.

Inflation pressures appear to be easing, suggesting that the RBNZ's monetary policy has been effective in curbing the rate at which prices rise.

Some New Zealanders have benefited from higher interest rates on their savings, while others have struggled since the OCR began rising from 0.25% in October 2021 to its current 5.50%.

The OCR had remained at 0.25% since March 2020, when COVID-19 concerns peaked, and there was a potential for an unprecedented 0% or negative OCR.

In November 2021, the national median house price peaked at $925,000 (Auckland's median reached $1,300,000). Today, the national median is closer to $770,000, and Auckland’s median is just over $1,000,000.

Higher house prices in late 2021 led many homebuyers to take on significant debt. Mortgages that were affordable at less than 3% p.a. are now challenging at rates of 7% p.a. or higher.

These homeowners and others with substantial debts face higher rates and insurance costs, likely tightening budgets and affecting consumer spending.

Migration peaked in October 2023 with an annual gain of 136,000, but the net migration gain for the year ended May 2024 was 82,800. This trend is driven by data that shows a greater number of adventurous Kiwis are seeking employment overseas and perhaps there are fewer global citizens seeing New Zealand as more desirable than other countries.

Company liquidations have increased in the year to date and unemployment has crept higher to 4.3% by the end of March 2024. This figure is still low by historic measures but is up from 3.4% for the same period the year before.

The New Zealand Central Bank is not alone in considering rate cuts as measurements of consumer prices, rising unemployment and other economic factors are indicating that inflation has eased in other countries as well.

Federal Reserve Chair Jerome Powell describes the US labour market as strong and more balanced but no longer over heated.

There is a risk that US unemployment rises before inflation falls to the 2% target and that the timing of policy settings adjustments may be too little, too late to avoid undesirable economic weakness.

This is a very similar scenario that the RBNZ faces.

Inflation data will primarily dictate what action central banks take and the data for now is pointing towards settings staying the same with potentially a cut before the end of the year.

The next US Federal Open Market Committee (FOMC) meetings are scheduled for 30-31 July, but a rate cut is not anticipated soon.

The next NZ Monetary Policy Committee update is on 14 August. However, the quarterly inflation data to be released on 17 July may be a key indicator of the RBNZ’s next move.

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Recent bond issues have traded at a premium upon listing, continuing a trend seen this year. All new bond issues in 2024 are currently trading at premiums, offering lower yields than the coupon rates.

We have been told many times over the last year that central banks are expected to cut rates. Although this has not come to pass yet, I warn investors that interest rates for new issues in the months ahead might be lower than comparable issues released earlier in the year.

To expect higher interest rates for comparable fixed interest investments than earlier in the year is looking unrealistic.

Underlying rates, such as swap rates, which are added to a margin in the calculation of interest rates for new issues, have slid significantly of late. Expectations of further easing appear to be influencing what returns investors, anticipating lower interest rates, will accept.

Mercury Energy recently issued bonds (MCY070) which included a margin of 2.0% and a 5-year swap rate of 4.42% resulting in an interest rate of 6.42% for the first 5 years of the bondswhen the offer closed on 27 June. 

Swap rates have slipped to 4.20% since the rate for the bonds was set and the first day of trading in MCY070 bonds on Friday 12 July saw the bonds trade at a yield as low as 5.88% (pricing the bonds at approximately $10,230 per 10,000). 

The one-year swap rate, which is more susceptible to OCR policy, as part of short-term interest rate expectations, has fallen to a hair above 5.0%, a level not seen in 18 months. All NZ swap rates are below 2023 peaks. For context, the one-year swap rate reached a high of 6.04% in May 2023 with all other swap rate durations peaking in October/November 2023.

Many depositors will have noticed that major banks’ term deposit rates have fallen. I expect these rates will continue to fall, particularly for shorter terms, as we move closer to the RBNZ cutting the OCR.

An OCR cut should not indicate that interest rates will fall off a cliff but rather that they might soften.

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Synlait Milk (SML) shareholders voted emphatically on Thursday to approve Bright Dairy’s shareholder loan.

Bright Dairy owns 39.01% of Synlait shares and provided a loan of $130 million to be used to repay bank debt due on 15 July.

A2 Milk Company (ATM) which owns 19% of SML shares informed the market on the morning of the day of the vote that it would vote in favour of the loan.

By the end of the day 99.59% of the votes cast were in favour of Bright Dairy’s proposal.

Synlait chair George Adams thanked shareholders for an outcome that kept a potential liquidation at bay. He described the loan as the first step in resetting Synlait’s balance sheet.

The board now plans an equity capital raising, which, when announced, will further test shareholders’ resolve and provide a measure of their financial commitment to one of the more dramatic companies this year.

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Infratil (IFT) capped off its recent capital raising with the non-underwritten retail offer closing oversubscribed.

The company received enormous shareholder support with applications from over 37,500 eligible shareholders totalling over $420 million.

IFT elected to accept an additional $125 million in oversubscriptions due to the high level of participation increasing the total raised from the retail offer from $150 million to $275 million.

The total amount raised through the equity raising including both the placement and the retail offer was $1.275 billion which is an impressive sum.

Also impressive was that the share price remained in the vicinity of $11.00 throughout the capital raising process which could be seen as evidence that shareholders buying new shares still see value over and above current levels.

Eligible shareholders that bought shares through the capital raising at $10.15 appear destined to be sitting on a profit per new share when new shares are allotted tomorrow (16 July 2024).

IFT’s market value has reached new heights with its market capitalisation (the value of IFT shares on issue multiplied by the IFT share price) now exceeding $10 billion for the first time.

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New Talisman Gold Mines (NTL) last week became a contender for the record of the most rights issues for a New Zealand listed company.

NTL’s latest rights issue, under the code ‘NTLRG,’ is yet another effort by the company to raise additional capital with the goal of finally becoming a producing gold mine.

Rights issues are a valid way for companies to raise capital but multiple issues of new shares over many years will tend to test shareholder’s patience and longstanding NTL shareholders have seen no measurable gains for many years. NTL shares are down over 68% over the last 5 years (adjusting for a 1:10 consolidation in February 2023).

The NTL chair, Samantha Sharif, openly admits that the previous $980,000 capital raising in February 2023, that was intended to be the last amount of funding required before achieving production, is now inadequate.

NTL seemed to blame the need for yet another capital raising on the time it took to obtain an Access Arrangement from the Department of Conservation (DOC). NTL describe the yearlong DOC process as a delay, but perhaps the company simply underestimated how long regulatory approvals can take and how much capital it actually needed.

If the company can raise the funds it seeks, can successfully piece together the necessary plant, equipment and staff, and is then lucky enough to extract gold in commercial quantities, it may benefit from both a government that appears enthusiastic regarding the mining sector, and from historically high gold prices.

Gold last traded above US$2,400 (up 23% in the last year).

The company warns (echoing its previous capital raising) that if the capital raising is unsuccessful, it has limited options left. It also highlights the risks associated with taking the mine into production, making the project highly speculative.

Fortunes have been made and lost in the pursuit of Midas’s favourite metal.

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Travel

Our advisors will be in the following locations on the dates below.  Please contact us if you wish to make an appointment:

19 July – Wairarapa – Fraser Hunter

24 July – Christchurch – Fraser Hunter

25 July – Ashburton (AM) – Fraser Hunter

25 July – Timaru (PM) – Fraser Hunter

26 July – Timaru – Fraser Hunter

25 July – Auckland (Ellerslie) – Edward Lee

26 July – Auckland (Albany) – Edward Lee

Chris Lee & Partners Limited

Market News 8 July 2024

Johnny Lee writes:

Santana Minerals has confirmed it is intending to list on the NZX, targeting July 25th as the effective listing date. It will remain listed on the ASX, meaning the stock will become dual-listed.

Dual listings are common, with most major NZX-listed companies also listed in Australia. This includes New Zealand companies with an alternative listing in Australia such as Infratil, Meridian Energy, and Chorus, and Australian companies listed here, such as ANZ Bank, Ampol, and Australian Foundation.

New Zealand companies tend to use alternate listings to broaden their access to capital. The pool of capital in Australia is undeniably deeper, and many Australians either lack a way of investing in New Zealand stocks or simply refuse to consider stocks outside of the ASX, necessitating a dual listing.

Some companies, like New Zealand Oil and Gas and Xero Limited, have even made the switch out of New Zealand completely.

Australian companies choosing to list in New Zealand is rarer, but Santana’s cohort of New Zealand-based shareholders provided a compelling reason for the company to consider a local listing.

News of the listing will also bring cheer to the tiny number of critics who feared the Bendigo-Ophir project would see New Zealand wealth transferred overseas. This dual listing means there will be an even easier avenue available for such people to assume the associated risks of gold mining themselves.

Santana’s decision might also bring life to the almost defunct NZX All Materials index. The Materials sector, as defined by the Global Industry Classification Standard, remains very underrepresented on our shores.

If the company’s share price continues to grow, and volumes traded in New Zealand rise commensurately, Santana may find itself joining more relevant New Zealand indices and see itself included in those funds – including Kiwisaver funds – that track our exchange.

Our index, of course, is far smaller and more concentrated than the Australian exchange. The ASX 200 index includes companies ranging from $1.7 billion to $250 billion in size. Our own NZX 50 has a range of nearer $200 million to $15 billion, a boon for smaller companies.

Once the dual listing concludes, shareholders will be able to elect to switch from one exchange to the other. This process varies depending on how shares are registered but may involve completing a form and submitting it to the share registry, MUFG (formerly Link Market Services).

Santana Minerals may provide further details on this process closer to the date. A solution may also be needed for the live bonus share issue at $1.08 AUD.

This may mean liquidity on our exchange is initially quite low, as sellers go through this process. Eventually, arbitrageurs will fill this void.

An arbitrageur, in this context, refers to a trader who purchases shares on one exchange and sells them on another, profiting from the price difference. This practice is already widespread on our exchange, particularly in the two banks where liquidity can be inconsistent and price discrepancies can be large.

With Santana, brokers will be taking care not to allow the two share prices to differ too widely, in accordance with Good Broking Practice.

Any currency volatility may be more evident too, as the price will reflect this day to day. Currently, New Zealand-based Santana shareholders tend to see the currency impact only at the conclusion of the trade.

Santana’s decision to list on our exchange is a good one and should see more New Zealanders engaged with the company as shareholders. In time – if the company meets its goals – inclusion into indices could see even more New Zealanders involved, courtesy of their KiwiSaver funds.

Liquidity will be an issue initially, while shareholders decide whether to shunt their shares to New Zealand. Ultimately, I would expect many shareholders to make the shift from Australia to New Zealand, if only to simplify their affairs under a single Common Shareholder Number.

If the listing is approved for the 25th, Santana intends to retain the code SMI.

For the New Zealand Exchange, the potential new listing would be a welcome respite from the exodus experienced over the past decade, with a combination of takeovers, receiverships, and delistings impacting the size of our exchange.

In the past 30 days alone, we have seen New Zealand Oil and Gas delist and Geneva Finance propose a delisting. This proposal was subsequently approved, despite some opposition from the New Zealand Shareholders Association.

The new listings replacing the departures over the past few years have been less than stellar. The medicinal cannabis boom seen in 2019 and 2020 has been disastrous for investors so far, while another recently listed company is resorting to legal action as a means of improving shareholder value.

New listings, like Santana, are urgently needed. Selldowns from the likes of private equity, venture capital, and councils have been quiet. Hopefully, continued progress from Santana will persuade others to take the leap into public ownership.

This new listing is a win for our exchange, and Santana deserves its plaudits for making it happen – but one must hope it marks only the beginning of a more positive trend.

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Infratil has posted a brief update following its latest round of valuations, showing a 10% increase to its data centre arm since its last valuation in March.

CDC is now valued at around NZ$5 billion, a figure equal to roughly half of Infratil’s market capitalisation. Five years ago it was valued at around $900 million. The growth has been simply outstanding.

The growing demand for data storage and processing has been unrelenting, with the major US technology companies investing billions into artificial intelligence tools, which has been one of the key drivers of this growing demand.

Infratil has responded by raising capital and accelerating its build programme.

The current capital raise ends at the close of business today. With a share price above $11, and an offer price of $10.15, take-up will likely be very strong.

Shareholders participating in the offer will have their shares allotted on 16 July. If scaling occurs, refunds will be made within 5 business days following this allotment.

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Travel

Our advisors will be in the following locations on the dates below.  Please contact us if you wish to make an appointment:

11 July – Tauranga – Johnny Lee

12 July – Hamilton – Johnny Lee

19 July – Wairarapa – Fraser Hunter

25 July – Auckland (Ellerslie) – Edward Lee

26 July – Auckland (Albany) – Edward Lee

Chris Lee

Chris Lee & Partners Limited

Market News Monday 1 July 2024 

Johnny Lee writes: 

Synlait Milk has now put forward its plan, guiding the company to a crossroads and handing the decision to its shareholders. 

Bright Dairy is proposing to lend Synlait Milk $130million to repay its bankers. As Bright Dairy is a major shareholder, shareholders other than Bright Dairy must now vote to agree, with a simple majority (50%) required to institute the plan. Following this vote, Synlait intends to announce a capital raising from its shareholders. 

A meeting will take place on 11 July and all shareholders (except Bright Dairy) will have the right to vote to determine which path the company is sent down. 

All shareholders - particularly those who also own also Synlait bonds – should exercise their right to vote. Shareholders who have elected others to vote for them should communicate with their proxy leading into the vote. 

The terms of the loan agreement are crucial for shareholders to understand. 

The loan facility exists for either one or two years - at Synlait’s discretion - and will cost 8% for the first year. If Synlait chooses to extend the loan to a second year, it will be refinanced at a rate based on the underlying interest rates at the time, with an added margin.  

The cost of the debt, including the margin, is clearly much lower than market rates, especially for the security associated with the loan.  

The $130 million being lent by Bright Dairy is subordinated behind bank debt but ranks ahead of the listed bonds (SML010) in the event of default. Bondholders are effectively ceding $130 million of priority, should the company default. 

This means a shareholder with $2,000 worth of shares and $20,000 of face value of the bonds may have a more difficult decision to make than the same shareholder without a holding in the bonds.  

If the proposal fails to achieve the necessary shareholder support, Synlait has indicated that the company will need to immediately enter into negotiations with its banks. If these negotiations fail, Synlait’s board believes the company may need to begin the insolvency process. 

Getting to a 50% threshold in either direction may largely hinge on how its largest eligible voter – a2 Milk with 33% - chooses to vote. 

A2 Milk’s priority will be making a decision that adds the most value to its own shareholders. At the current share price of Synlait, a2 Milk has about $10 million worth of Synlait shares. A2 Milk is worth $5.1 billion dollars, at current pricing. A2 Milk has not yet provided any clues as to its intentions. 

Accompanying the announcement was confirmation that a rights issue is likely to follow the vote and may be announced as early as August. 

No shareholder should be surprised by this. The company has been very transparent regarding the need to raise capital, and those who have remained shareholders to this day should be well prepared for a further capital injection.  

The terms of this offer will be important. The current share price of around 20 cents leaves little room for incentivisation, unless the offer is creative in its structure.  

There is another aspect to a potential rights issue that warrants discussion. 

Bright Dairy has confirmed it will participate if a rights issue proceeds. A2 Milk has made no such public commitment. If a2 Milk does not participate, and investor participation is poor, there is a possibility that the Bright Dairy shareholding drifts over 50% of the total company. It is currently 39%. 

If this occurs, it will trigger a ‘’Change of Control Event’’, and grant bondholders the right to immediately call the debt. Synlait has publicly stated that it expects bondholders to take this option if it is presented to them, and Synlait will take steps to prepare for such an outcome. 

Synlait did not mention any OIO implications involved with such an outcome. 

Both Bright Dairy and a2 Milk will be aware that this is a probable eventuality if a capital raising plays out as described.  

The market reaction to the announcement by Synlait was interesting and diverged significantly between the two investor classes. 

The share price fell to fresh lows, falling to 20 cents and a market capitalisation of 45 million.  

Meanwhile, the bonds saw a resurgence of support, with a flurry of buyers emerging. With the bonds trading at around 65 cents in the dollar and sentiment seemingly changing week to week, the situation remains very volatile. 

The first step for shareholders will be the vote. Bright Dairy cannot participate in the vote, and a2 Milk’s intentions are, as yet, unknown. If a2 Milk does not vote in favour, the vote can still pass. However, it would require significant support from ordinary shareholders.

Shareholders have been warned that failure to pass the measure could result in insolvency, and total loss of value. 

Bondholders without any shares will simply have to watch from the sidelines, as a new lender jumps the queue. 

If the vote passes, the conversation will then turn to a potential capital raising. Shareholders should also be preparing for this outcome in the months ahead.  

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Vital Healthcare Property Trust has published a brief update for unitholders, with good news for unitholders and, perhaps, unitholders of the other listed property trusts. 

Indicative valuations declined less than 1%, equating to a less than 2 cents per share fall in NTA. Its NTA is currently around $2.72. The share price last traded at $1.81. 

This follows the recent update from Kiwi Property Group and comments from the KPG CEO that market valuations were not declining in line with market expectations, and share prices were being oversold.Vital continues to progress its development pipeline, with three more projects reaching practical completion since the last update in April.

Vital also confirmed its debt remains at acceptable levels for now, bordering the 40% threshold it set for itself. The company also hinted its capital recycling programme was nearing its conclusion, with $180 million of the portfolio left under consideration for sale.

The Listed Property Trust sector was a popular investment for income investors during the last interest rate cycle. When interest rates were declining, borrowing costs fell, asset prices rose and the dividend yields on offer became an attractive option.

When interest rates rose sharply after Covid, these trends reversed and with that reversal came a decline in the share prices of these listed property trusts.

Prudent debt levels saw all of the major property trusts survive the downturn, and the senior leaders in the sector are becoming increasingly confident that valuations have, at least for now, plateaued.

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Travel

Our advisors will be in the following locations on the dates below.  Please contact us if you wish to make an appointment:

5 July – Wellington – Edward Lee

11 July – Tauranga – Johnny Lee

12 July – Hamilton – Johnny Lee

19 July – Wairarapa - Fraser

25 July – Auckland (Ellerslie) – Edward Lee

26 July – Auckland (Albany) – Edward Lee

Johnny Lee

Chris Lee & Partners Limited