Chris Lee & Partners Ltd

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