Chris Lee & Partners Ltd

Market News 27 May 2024

Johnny Lee writes:

Infratil’s full year result is in, showing a large increase in earnings, a modest increase in dividend and a significant commitment towards two sectors within its portfolio.

Earnings rose 63%, above previous guidance, at a time when many companies are reporting difficult conditions.

The increase in earnings was shared by virtually every sector within Infratil - data centres, renewable energy, Wellington Airport, diagnostic imaging, One NZ and RetireAustralia all reported increases in earnings.

The dividend rose 0.50 cents per share, marking another annual increase of 0.75 cents per share in total.

Looking forward, it is clear Infratil has its eye on two targets this year.

The first is a further expansion in the data centre space.

Despite the phenomenal success of the data centre industry so far, Infratil plans to commit another $2.5 billion into this sector over the next twelve months alone. 

CDC - Infratil’s data centre operator in Australasia - now has multiple new data centres planned this year, as the company highlights the relentless demand for server capacity. For now, CDC believes its land bank is sufficient to accommodate short-term demand.

It is clear that the data centre sector is not yet matching supply with demand, with the rapid growth in Artificial Intelligence technology exacerbating this imbalance. 

Those predicting this wave of investment into AI to be short-lived have so far been proven incorrect. The likes of Amazon, Microsoft, Google, Facebook and Apple continue to pour billions into the sector. Time will tell as to whether this enthusiasm is maintained.

For now, Infratil is simply riding the wave, while mitigating its risks with its other hand.

A major cost of running a data centre is electricity. 

Infratil’s other major focus has been in the renewable energy space, specifically in the United States through its Longroad Energy investment.

Longroad is ambitious, with a large pipeline of work to add capacity over the next three years, which will see electricity generation increase fivefold.

Such a pipeline is expensive, and will mean more billions invested by Infratil. These billions will come from debt and retained earnings - or at least the earnings not paid out as dividends.

Infratil notes that its strategy of focusing on US-made solar panels will help mitigate the impact of the recent tariffs announced by the US Government. 

Infratil also makes the point that a major political event (the upcoming presidential election) may create some uncertainty for the renewable sector. This is simply a risk Infratil and Infratil shareholders must accept at this stage.

At the same time as its financial results, Infratil announced it is planning a new seven and a half year bond issue, with a minimum interest rate of 6.75% p.a. The offer is open now and closes at 9am on Thursday. If you would like an allocation of this bond please contact us urgently.

The offer will also include an exchange offer for holders of the IFT230 bonds. Bondholders who elect to accept the exchange offer will receive the new bonds.

This trend towards longer dated bonds is both a positive and a negative.

For some, longer dated bonds represent an opportunity to further spread their investment risk. 2031 is a relatively light maturity year for retail bond investors so far, and locking in a higher long term rate may prove attractive to those with ample maturing money in the interim years, especially those anticipating an easing of interest rates over the period.

For others, December 2031 may seem beyond their acceptable investment horizon. To alleviate this concern the bonds will be listed on the stock exchange which enables investors to sell the bonds before maturity.

Certainly, Infratil has built a significant amount of trust with investors - both shareholders and bondholders - over many years. These results both reinforce that and give a clear outline for how the company intends to grow the company moving forward. 

---

David Colman writes:

The RBNZ (Reserve Bank of New Zealand) surprised almost no one last week as the committee delivered a decisive statement that it had reached consensus to keep the Official Cash Rate (OCR) at 5.50%.

The OCR has now remained at 5.50% for an entire year.

RBNZ commentary included:

- annual consumer price inflation (CPI), which the bank watches with great intensity, is expected to return to within the 1 to 3 percent range it targets by the end of the year.

- the decline in inflation reflects lower inflation for imported goods and services but has been slow to decline from 30-year highs.

- New Zealand labour market pressures have eased with businesses’ cautious approach to hiring in line with weak economic activity. More people are available to work due to high net inward migration.

- Wage growth and domestic spending are easing

- Inflation is higher for rent, insurance, rates, and other domestic services

They noted that their economic projections include officially available information regarding government intentions to date, but they do not include any impacts that the yet to be released government budget may have on their outlook.

The RBNZ provides a summary of its decision making which included references to slower global economic growth and that many economies are seeing weak domestic demand.

Internationally, it is common to observe inflation easing faster for goods, energy and food than it has for services which have declined less than was anticipated at the start of the year.

New Zealand’s current low rate of productivity was discussed in terms of whether it is a temporary or a more persistent issue with the former seemingly considered more likely.

Expectations of a relatively neutral budget (neither inflationary nor deflationary in aggregate) were shared.

Commodity prices, specifically oil, which can be influenced by events in exporting regions such as the Middle East, has not risen sharply despite conflict in the region.

Raising the OCR was discussed as there are near-term inflation risks, but the RBNZ ruled out a hike based on confidence that inflation will ease in the medium-term.

The committee agreed that interest rates may have to remain at a restrictive level for longer than previously anticipated.

For now the RBNZ is acting in its largely robotic way and keeping the OCR unchanged as the annual CPI figure of 4% in the March quarter is still above its 3.00% range.

Annual headline CPI is expected to fall within the target band in the December quarter of this year with that data released in January 2025.

I have written before that many people are hoping for a lower OCR which might nudge borrowing costs lower but the latest RBNZ commentary indicates that those people will likely have to be prepared to wait until the new year for such a change.

---

My Food Bag (MFB) delivered welcome news to shareholders with the resumption of dividends despite a fall in full year revenue, EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) and NPAT (Net Profit).

In the full year revenue was $162.2 million, down 7.7% compared to FY23

EBITDA was $16.0 million, compared to $18.2 million in FY23NPAT of $6.0 million, compared to $7.9 million in FY23

The second half of the full year showed improvement with NPAT of $3.5 million which compared favourably to $2.0 million in the same period the year before.The company noted that they had achieved successful implementation of automatic pick technology with an average of 99% accuracy in the second half of the full year 2024.

Net debt reduced by $3.5m to $11.8mThe dividend will be a fully imputed final dividend of 0.5 cent per share, payable on 20 June.

The average order value was $129.54 across the year, marginally down from $130.11 in FY23. This was largely driven by an upswing in Bargain Box customers. Bargain Box deliveries were up 19.5% for the year.

Mark Winter, CEP, and Tony Carter, Chairman, shared statements including that steps taken in early 2023 to realign the business to reflect trading conditions, capitalise on market opportunities and add value for our customers are working.

He noted that in a difficult macro-economic environment, MFB had transformed its operations, and the second half of the year demonstrated that it has stabilised and reset the business and expects to continue to grow profit.

Active customer numbers were down marginally to 56,800 at the end of FY24 from 57,500 the year before.

Gross margin was stable at 48.5%, compared to 48.4% during FY23.

Outlook included that market conditions remain challenging, but the company believes it is well-positioned to further strengthen its brand, improve convenience, build a seamless customer experience, and supply unique ready-made solutions with ambitions of increasing customer numbers.

The first 8 weeks of full year 2025 trading showed overall net sales and active customers (59,009) broadly in line with the prior year and its partnership with the New Zealand Olympic Team has been successfully launched.

MFB forecasts continuing to pay dividends in full year 2025.

---

Positive news was also rolled out by EROAD (ERD) last week with the release of its financial results for the 12 months ended 31 March 2024.

Financial Highlights included:

- Achieved positive Free Cash Flow (to the firm) of $1.3m in FY24 compared to negative free cash flow (to the firm) of $29.9m in FY23. This improvement is the result of growth in units, price increases and cost control.- Revenue increased to $182.0m for FY24 from reported revenue of $174.9m in FY23 and normalised revenue of $165.3m in FY23. This represents a 10.1% increase against normalised revenue for the prior comparable period, normalising for the one-off acquisition accounting adjustment of $9.6m in FY23 relating to the Coretex merger. Growth in revenue was delivered across all markets.- Annualised Monthly Recurring Revenue increased by $24.1m (15.7%) to $177.8m in FY24 from $153.7m in FY23, reflecting growth across all markets and support by favourable foreign exchange.- EBIT of $0.8m in FY24 compared to $1.7m in FY23. Normalised EBIT increased to $4.4m in FY24 up from $(4.5)m in FY23. Normalised for 4G hardware upgrade costs of $3.6m in FY24 and integration costs of $3.4m and one-off acquisition revenue of $9.6m in FY23.

Operational Highlights included:- Customer Retention of Contracted Units remains high at 94.8% in FY24 (NZ 95%; AU 96%; NA 95%), same as last year.- Key enterprise customer wins and expansions during the period. Programmed in Australia (+3k connections), renewed and expanded Boral (+1.3k connections) and SkyBitz (+1.5k) in Australia and Kinetic (owner of NZ Bus +1k connections) in New Zealand, and expanded US Foods (+1.3k connections) in North America. 68% of new enterprise units were expansions from existing customers, demonstrating strong customer value from EROAD.- 250,000 units milestone passed. Globally, EROAD has now hit the 250,000 unit milestone, driving operating scale.

Chair Susan Paterson noted that the FY24 result met or exceeded all of the guidance metrics set at the start of the year with cash consistently generated in the latter part of calendar year 2024 a result of a disciplined approach.

She believes ERD has the right skills, capital structure, cost-base, product-set and customer focus to capitalise on growth opportunities ahead to decarbonise transport as governments look to sustainable revenue streams.

Co-CEO's Mark Heine and David Kenneson were pleased with the progress EROAD is making again noting a disciplined approach was needed which included increased focus on customers, removing non-essential costs, and positioning it to take advantage of growth opportunities (such as in North America).

Global revenue of $182m was ahead of guidance with top line growth seen in all 3 markets the company is in.

ERD provided outlook and guidance that it will be focused on fiscal and operational discipline, with considered investment in growth, with potential expansion within key markets and plans to deepen engagement with existing customers and may partner (with other firms) where appropriate to meet the evolving needs of the market.

ERD’s FY25 guidance noted that it had turned the corner on costs and productivity and is now accelerating its new product introductions and go-to-market strategies in all markets. This is well underway, and expectations are that it will be in-place in mid-to-late Q2.

FY25 Revenue guidance was forecast to be $190m to $195m with EBIT guidance of $5m to $10m (normalised for the 4G hardware upgrade program).

EROAD expects to be free cash flow positive in FY25.

---

Infratil Limited – 7.5-Year Senior Bond

Infratil has announced its plans to issue a new 7.5-year senior bond. Full details of the offer can be found on our website.

Infratil is an infrastructure investment company with significant holdings in Digital Assets, Renewable Energy, Healthcare, and other infrastructure assets. It anticipates earnings for FY2025 to be approximately one billion dollars.

The bond will have an interest rate of at least 6.75% per annum, with interest paid quarterly.

Infratil will cover the transaction costs for this offer, accordingly clients will not be charged any brokerage fees. 

The offer will comprise two separate parts:

The firm offer is open now and closes at 11am on 30 May 2024, with payment due 13 June.Exchange offer opens on 31 May 2024 (following the Firm Offer). Under this offer, all New Zealand resident holders of the IFT230 bonds maturing on 15 June 2024 will have the opportunity to exchange some or all their maturing bonds into these new bonds.

If you are interested in a FIRM allocation for these bonds, please contact us promptly with the desired amount and the CSN you wish to use.

If you are an existing IFT230 bondholder and would like to exchange your bonds into this offer, please inform us at the time of your request.

Travel

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

29 May – Wellington – Edward Lee

30 May – Levin – David Colman 

5 June – Nelson (FULL) – Chris Lee

6 June – Blenheim – Chris Lee

11 June – Tauranga – Chris Lee

13 June – Auckland (Ellerslie) – Edward Lee

19 June – Lower Hutt – David Colman

25 June – Napier – Chris Lee

Please contact us to arrange a meeting office@chrislee.co.nz 

Chris Lee & Partners Limited

---

Market News 20 May 2024

Johnny Lee writes:

A number of announcements over the last week were released to market, one week before the opening of reporting season for the May cohort. This grouping of reporting companies includes Mainfreight, Ryman, Fisher and Paykel Healthcare and Infratil.

One anticipated announcement made last week was from Kiwi Property Group, which finally updated the market regarding the sale of the Vero Centre in Auckland. This sale had been flagged in February, when the company reported that it was in discussions with a buyer regarding the sale.

The buyer - an unnamed Hong Kong-based conglomerate - will pay $458 million for the asset, representing a 1.9% discount to the book valuation. The share price saw a small rise following the announcement.

KPG’s share price continues to trade at nearly 30% below its Net Tangible Asset valuation, a figure similar to most of its Listed Property Trust peers. 

The proceeds from the sale will be used initially to reduce debt, before being re-invested into other opportunities.

The modest discount applied to the sale would seem to support CEO Clive Mackenzie’s view from April, when he made the point that the markets selldown of Kiwi Property Group was ‘’overdone’’. So far, recent sales from the Listed Property Trust’s have been near book value.

The Vero Centre was Kiwi’s second largest asset (behind Sylvia Park) and represented about 15% of the total portfolio value, and a similar proportion of the company’s operating income.

Assuming the company maintains its focus on its ‘’Mixed-use’’ assets - including Sylvia Park, LynnMall and The Base in Hamilton - the sale of Vero will mark a further shift towards this strategy.

This shift in strategy towards large scale, mixed used assets will take a major step forward soon, with its residential offering in Sylvia Park set to reach a major milestone. 

Kiwi’s financial results, including any dividend, will be announced on the 27th. 

_ _ _ _ _ _ _ _ _ _ 

Fletcher Building’s market update made for more unpleasant reading for beleaguered shareholders.

We may have reached the point where ‘’Fletcher Building Market Update’’ is almost synonymous with bad news, with this particular announcement reporting slow-downs across several divisions within the company.

The weakening residential sector, both here and in Australia, has had flow-on effects to both distribution and material sales, including the troubled Iplex arm.

Three months ago, Fletcher Building’s guidance was for a full year result in August to show earnings of between $540 million and $640 million. As a result of the worsening conditions, guidance has been updated to between $500 million and $530 million. Last year's figure was nearer $800 million.

The downgrade is significant and sent the share price plunging, and now sits below $3 a share for the first time in over twenty years. 

A reasonable volume of stock has begun trading hands at these prices, suggesting there remains some conviction on both sides of the argument - those fearing further downgrades and share price falls, and those convinced the company will survive and recover in the longer term. 

Fletcher Building does not currently pay a dividend. Dividend payments were suspended in February in an attempt by the board to strengthen its balance sheet. 

The balance sheet remains the primary concern, with the company now looking to immediately prioritise cost control and efficiencies in an effort to control net debt. Market concerns now centre around a possible capital raising, with its largest shareholder publicly pleading with the company not to pursue such a path. 

It is clear that the construction sector is distressed, and - like several sectors in our economy - is grimly clinging on waiting for conditions to improve. Discussions no longer focus on growth or opportunities for expansion, and instead companies are now making efforts to control costs and restructure debt profiles. 

With a share price not seen since Taine Randall captained the All Blacks, it is clear that many shareholders are nervous about the possibility of conditions worsening. If a capital raising cannot be avoided, this may place further downward pressure on the share price.

 _ _ _ _ _ _ _ _ _ _ 

Scales Group has issued an update, announcing the acquisition of 240 hectares from Bostock Group for $47.5 million. The 240 hectares includes owned and leased land. The acquisition also includes the 50% of Profruit - the juice concentrate company - that Scales did not already own.

Scales also announced its intention to divest of some 186 hectares of existing orchards. The change in composition will increase Mr Apples exposure to premium fruit, including an increased exposure to the DazzleTM apple variety. 

This is part of a strategy to increase the company’s focus on Asian and Middle Eastern markets and the higher margins associated with those markets. 

The 2024 financial result will likely see no material change from the acquisition. However, Scales intends to include updated forecasts around the 2025 impact in August. The uncertainty from orchard sales has made it difficult for Scales to determine the likely net impact on company earnings.

The acquisition will initially be funded from cash reserves and increased debt. Once the sale of the existing orchards completes, Scales intends to repay some of this debt.

The market responded positively to the announcement - climbing nearly 7% - but the stock remains down in a year that has been difficult for primary industry stocks. 

Contact Energy has had an update to market, with one of its planned upcoming geothermal developments - GeoFuture in Wairakei - now under review following revisions to the cost of the project, and the subsequent economics of the project. 

GeoFuture is an entirely separate project from Tauhara, the geothermal development in the same region. Tauhara is expected to formally begin generation soon, with the February 2025 result likely to show the contribution of the new asset.

Contact has enjoyed a marvellous run this year, with its share price up over 10%, but retreated following the announcement. Meridian has been the other strong performer in the sector, up around 12%.

Contact blamed the price overruns on construction cost inflation and a weak New Zealand dollar. These cost pressures will not be unique to Contact.

GeoFuture has been removed from the Contact Energy website. While the project may still go ahead, Contact has indicated it may need to change its approach to the project, perhaps taking a more piecemeal, modular approach to the expansion.

The drive to add more electricity generation continues, and a number of the larger gentailers have plans to expand capacity over the decade ahead. However, the economics of these projects will change as costs rise and the costs of capital change, and assumptions are revisited.

Travel

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

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May – Wellington – Edward Lee

29 May (am) – Christchurch – Chris Lee

30 May – Levin – David Colman

5 June – Nelson (FULL) – Chris

6 June – Blenheim – Chris

11 June – Tauranga – Chris

19 June – Lower Hutt – David Colman

25 June – Napier – Chris

Please contact us to arrange a meeting office@chrislee.co.nz   

Seminars

Chris Lee will be holding the last of our investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 042961023.

Chris Lee & Partners Limited

---

Market News 13 May 2024

Johnny Lee writes:

When discussing movements in share prices, people often refer to a movement of an index – a basket of stocks measured against a base-line date, to provide context to how the overall market has performed.

The basket, of course, is in constant flux. Companies are taken over, companies grow and shrink, companies go broke. Larger companies have more bearing on the index. The highs and lows of smaller companies may impact the investors involved, but will not materially influence the index.

The index usually referenced for New Zealand shares is the NZ50G – which represents the largest fifty NZX-traded companies, based on a variety of factors including overall size and liquidity. The G refers to the fact that our index is a Gross index, meaning that it includes the payment of dividends in its performance. Most indices are Capital indexes and exclude dividends.

Last month, reference to our index was less than useful, due to some unusual circumstances around the weighting of our index.

A small number of our largest companies have been dragging the index higher, disguising some rather dramatic declines amongst some of our other stocks.

Over the last month, our index has fallen 2%, worse than most of our peers. The Dow Jones rose about 2%, the Australian 200 was up 2%, and the FTSE in London was up 5%.

However, the figure of 2% does not tell the true story of what has transpired here over the last month.

Fisher and Paykel Healthcare, our largest company, saw its share price climb 9%. A2 Milk has risen 9% over the same period, adding some rare green to the ledger.

Infratil fell 2%, Auckland Airport fell 5%, and Mainfreight was flat.

However, a number of companies outside of these major stocks have had much wilder rides over the last month.

Fletcher Building’s share price has lost 12%, Ryman has fallen 18%, Vulcan Steel has declined 22%, The Warehouse is down 16%, Air New Zealand is down 9%, and even Port of Tauranga is has dropped 8%.

Spark’s share price has fallen 7%, and now trades a gross dividend yield of near 9%.

Spark’s decline has at least been backed by a market announcement, with the company releasing an update last week reducing its guidance.

The dividend guidance has not changed. The company intends to pay 27.5 cents per share this year, a modest increase on 2023’s dividend. Capital expenditure has not changed.

What has changed is earnings expectations, which were lowered from a midpoint of $1.24 billion to $1.19 billion.

The downgrade was blamed on market conditions, with Spark citing weaker demand from Government and the private sector, with both cutting spending on IT services, while sales of mobile devices – iPhones and the like – have been much softer, as people redirect spending elsewhere.

The bread and butter of the business – mobile and broadband revenue – has not changed. Customers continue to pay for their internet and cellphone data.

In response, Spark is bringing forward its plans to cut costs, focusing on efficiency initiatives. Hopefully, the human cost of this – job losses – are minimised.

Consumers focusing on core necessities - while businesses postpone investment – tracks with many of the other signals economists are seeing around the country. Families will pay their internet bill before splurging on a new Smartphone.

Indeed, this logic may explain the recent movements in The Warehouse’s share price.

The Warehouse’s decline in share price preceded its third quarter sales update, which was once again painful reading for shareholders. Warehouse – Red Shed – sales were down 8%, Warehouse Stationery – Blue Shed – were down 8% and Noel Leeming sales were down 9%.

Three months after selling Torpedo7 for $1, the company has confirmed it will close its online marketplace business in June. TheMarket had not met expectations and would not be included in the long-term strategy for the company.

The company warned that trading conditions were very challenging, and the company would focus on controlling costs and protecting gross margin.

The share price reached fresh lows following the announcement, briefly touching $1.20 per share.

The question shareholders are asking themselves now is – what is the future of the company? Three years ago, the company was paying 35 cents per share in dividends and trading at around $4 a share.

Now, revenue is consistently declining as consumers close their wallets and embrace overseas competitors. Multiple strategic initiatives have failed, and, frankly, much is being pinned on the belief that economic conditions will ease and consumer confidence will be restored. Perhaps it will.

The decline in our share market over the last month – a modest 2% fall – is an average of two wildly different extremes. While Fisher and Paykel and A2 Milk - $22 billion worth of market capitalisation – have risen sharply, a number of smaller companies have seen hefty falls in value.

Hopefully, the array of companies reporting over the next two weeks will bring some positivity back to investors.

---

David Colman writes:

A significant number of individuals and institutions are eagerly anticipating lower interest rates, highlighting the extensive reliance on debt within both the domestic and global economies.

Debt should be viewed as a burden, and its viability depends on how the borrowed funds are used and the borrower's ability to repay.

The purchase of large assets often requires debt, and many recent New Zealand home buyers have learned over the last two years that capital gains are not a given for property, in contrast to what might have been assumed looking back over the 2010s.

Financially, over the long term, these home buyers may find justification in borrowing to purchase a residence, given the non-financial benefits of home ownership.

In some regions, declines in property values are common. For instance, Japan faces a significant issue with over 9 million abandoned houses, known as 'akiya', which have depreciated due to a declining population and a trend of properties outside major metropolitan areas being abandoned.

Japanese councils can struggle to identify abandoned property owners and are left with a multitude of properties that no-one wants despite providing enticements to prospective owners such as  property maintenance, renovation allowances and child-care subsidies.

Abandoned house numbers in Japan have ballooned due to low birth rates, an ageing population, low migration, tax burdens for second homes, and a desire for newly built homes.

Existing houses, previously occupied, are often viewed similarly to, or perhaps even less favourably than, second-hand cars. Moreover, constructing new buildings is not prohibitively expensive and can often be less costly than renovating an older property.

Homes outside of city centres in Japan are not seen as investments like houses in New Zealand might be, noting most New Zealand cities would probably be considered rural to people from Tokyo and other Japanese cities.

Unlike Japan, New Zealand’s population is increasing, mainly driven by net migration, and supply of new buildings is not meeting demand. Building costs in New Zealand are high and there is no hesitation to buy homes that have been lived in before.

Despite underlying demand for properties to live and work in, the market performance for investors with exposure to New Zealand property over the last two years has been poor.

A slowly, increasing, unknown number of New Zealanders have been tightening their belts as household budgets cope with the increased costs associated with mortgage interest, council rate hikes, insurance premiums, groceries, and other costs.

Property valuations that have declined and the sharp rise in interest rates to service debt are costing households and property related businesses in kind.

Higher inflation is the root cause of the higher interest rates we see today.

The Reserve Bank of New Zealand is keenly aware of inflation but the institution is itself waiting for data to provide unequivocal evidence that the CPI (Consumer Price Index) is heading towards 2% and that its primary tool for taming rising prices, the OCR (Overnight Cash Rate), is working.

The RBNZ increased the OCR rapidly. From October 2021 to May 2023 it was increased from an all-time low of 0.25% to a level not seen since 2008 of 5.50%.

A Monetary Policy Statement and OCR announcement are expected on 22 May. The announcement will mark the first anniversary of the OCR being set and held unchanged at 5.50% - an anniversary of a year that on the one hand has hurt many local property and share investments but has involved higher term deposit rates, savings rates and higher yielding bonds.

Savers currently enjoy the benefits of higher interest rates which many had waited over a decade for but many bemoaning borrowers are struggling to pay off sums that at 2% to 3% were deemed affordable but at 7% to 8% may not be.

Taking a much longer-term view of historic interest rates reveals that rates at current levels, that are high glancing back over the post-GFC period (2008 to today), are not particularly high compared to rates while Lehman Brothers, the 150 year old bank that infamously collapsed in 2008, still existed.

Until 2008 NZ 5-year Government bond rates were consistently between 5%p.a. and 6%p.a..

They are today at about 4.50%p.a.

A 1-year fixed rate mortgage in September 2008 was above 9.00%.

Today the same rate is about 7.15%

I cover this topic to provide some context to those that hope for lower interest rates, specifically those that might have tied their financial future to the hope that interest rate levels will fall and accommodate better local share market performance.

Inflation is easing and expectations are that interest rates will ease at some point in the future, 

The public sector, including government ministries and institutions such as ACC are coping with redundancies with up to 10% of staff in certain departments facing an uncertain future.

An increase in unemployment might slow inflation further but I don’t know of anyone expecting interest rates to fall at the same pace that they rose.

Share market performance has a somewhat reverse correlation to interest rates with lower corporate borrowing costs tending to drive asset values and profitability higher.

If interest rates ease it will provide some relief to borrowers, but it is looking increasingly appropriate to consider the future with interest rates closer to longer term historic averages (corporate borrowing costs of 5% to 6%) than to rates seen during covid concerns (corporate borrowing costs of 2% to 3%).

The classic, but flawed, phrase ‘hope for the best and prepare for the worst’ comes to mind but economic reality will lie somewhere between the best and the worst especially noting that the best for some can be the worst for others.

Travel

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

15 May - Auckland (Ellerslie) – Edward Lee (FULL)

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee (FULL)

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

30 May – Levin – David Colman

5 June – Nelson – Chris (FULL)

6 June – Blenheim – Chris

11 June – Tauranga – Chris

19 June – Lower Hutt – David Colman

25 June – Napier – Chris

Please contact us to arrange a meeting office@chrislee.co.nz   

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 042961023.

Chris Lee & Partners Limited

---

Market News 6 May 2024

Johnny Lee writes:

The listed Fisher Funds - Kingfish, Barramundi and Marlin - feature prominently across New Zealand retail investment portfolios, despite a general decline in usage since COVID, when growth stocks lost favour to more defensive assets.

Investors use these funds to combine two normally mutually exclusive characteristics: growth exposure and dividend income. 

Growth shares typically retain earnings rather than pay large dividends, focusing on using their profits to fuel future growth.

The Fisher Funds endeavour to return 8% of their net tangible assets in the form of dividends, meaning that as share prices rise, dividend income follows - and vice versa. Over the last few years, both capital value and dividends have been declining, leading many to exit the funds, often in favour of traditional utility stocks that lack the growth component but produce more predictable income.

The fund manager of these funds typically charges a management fee of 1.25%, although this can range between 0.75% and 2.5% based on relative performance.

Regular discounted warrant issues - effectively just options or long dated rights - ensure the funds continue to grow as investors can elect to purchase more shares. Lately, these warrant issues have offered little value, expiring unexercised, as the share price has lagged the exercise price on the warrants.

Complicating the fund structure further, the company offers an optional dividend reinvestment plan (issuing shares in lieu of paying a dividend) and often buys back its own shares on market when the shares trade at significant discounts to their underlying value.

With growth stocks generally out of favour in this environment, both share price performance and dividend income have struggled to keep pace with investor expectations. Despite this, they remain commonplace across investor portfolios, particularly those investors wanting an income generating diversified growth portfolio, but lacking the means to construct and maintain one themselves.

The underlying portfolios across the three funds have seen some evolution over the last few years.

Kingfish, the New Zealand fund, now sees half the fund comprising only three stocks - with Fisher and Paykel Healthcare, Infratil and Mainfreight now making up half the fund. The likes of A2 Milk, Freightways and Delegat Wines, which featured prominently when values were higher, are now relatively small positions within the portfolio and have less bearing on the overall performance of the fund.

Auckland Airport, Contact Energy, Summerset, EBOS and Vista Group are the next largest holdings.

The likes of Mercury Energy, Spark, Fletcher Building and Chorus are not included.

Kingfish’s year to date performance has been modestly higher than the index, with Fisher and Paykel’s 20% share price gain driving much of the outperformance. 

The Australian fund, Barramundi, offers similar traits but - being listed in Australia - it carries different sector exposures.

Barramundi’s largest positions are held in CSL Group, Wisetech and CAR Group.

CSL Group is a diversified biotechnology company based in Melbourne, and a supplier of various treatments and vaccines, including a seasonal influenza vaccine.

Wisetech is a logistics technology company, while CAR Group is a marketplace operator, with brands such as Carsales, providing motor vehicle owners a platform to trade.

Barramundi also has a holding in industry darling NextDC, a data centre owner and operator that has seen tremendous success during the data centre boom over the last few years.

The data centre sector has been one of the most exciting for growth investors, with long term supply agreements providing guaranteed revenue in an era where demand is expected to continue to grow.

The expansion of this sector has also led to opportunities in adjacent sectors, including construction and electricity generation.

The third listed Fisher fund is Marlin.

Marlin invests further abroad and its largest holdings are focused on the United States, with Microsoft, Amazon, Alphabet and Meta making up a third of the fund. 

Marlin has only a handful of positions outside of the US, including Chinese gaming giant Tencent, British food conglomerate Greggs, and Irish listed Clinical Research Organisation Icon.

Marlin has recently exited two large positions, namely AliBaba in China and PayPal in the US. This active management approach is intended to add value to shareholders, weeding out those companies which face worsening prospects, in favour of those with new tailwinds.

Other ETFs, like the Smartshares products, tend to invest alongside index weightings, charge lower fees and forgo dividend income in favour of capital growth. 

The three Fisher Funds, despite falling out of favour in the current high interest rate environment, have some unique characteristics that appeal to certain investors, particularly those without the means to build a portfolio themselves. The funds trade on the market like any other listed company, and pay dividends on a quarterly basis.

_ _ _ _ _ _ _ _ _ _

One of the smaller holdings within the Kingfish portfolio is winemaker Delegat Group.

While Delegat has had periods of fantastic performance, the company has had a horrid post-COVID hangover, losing almost half its share price value over the last five years. Profit growth has been very modest, while changes in consumer behaviour make forecasting and strategic decision-making difficult.

Its Oyster Bay brand remains popular in the US, but recent trends - people drinking ‘’less but better’’, while indulging in a broader range of beverages including spirits and seltzers - have changed the dynamics for the industry.

The rising cost of debt is also weighing on financial performance, particularly as the company looks to invest into its existing vineyards to increase volume.

Recent profit downgrades, and last week's harvest update suggest significantly lower volumes, and have sent the share price towards decade lows. Cold weather has been blamed, and has impacted local competitors at the same time.

Delegats is not the only company within the primary industry struggling - Seeka has this year reported a sharp decline in volumes and a large loss, while Scales apple division reported a decline in both volume and profit. Both have experienced significant declines in share price.

An additional problem, amongst all these market changes in the primary sector, has been the total lack of liquidity in Delegat shares, particularly on the buy side. Sellers have been forced to accept steep discounts, often completely unable to sell without finding a private buyer first. 

This often becomes a self-fulfilling concern, as new buyers become reluctant to become shareholders, fearing an inability to sell should the need arise. 

For holders like Fisher Funds, the lack of liquidity and subsequent market tension means exits need to be managed carefully. 

The primary sector stocks, including Delegats, are enduring tough conditions at present. Volumes are down, debt is expensive and investor confidence is low. Share prices have responded, and buying interest remains weak. Enduring these conditions will prove challenging, and careful strategic planning will be needed in the short-term.

Auckland Airport Senior Bond Offer

Auckland Airport (AIA) has announced that it plans to issue a new 6.5-year Senior Bond.

The interest rate has not been set but will likely be in the vicinity of 5.50% with a minimum investment size of $10,000.

AIA has a strong credit rating of A-.

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

More details regarding the bonds, including a presentation, have been uploaded to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/AIA280.pdf

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

Please note that this investment offer closes this Wednesday at 9am, with payment due no later than 13 May.

Travel

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

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

30 May – Levin – David Colman

5 June – Nelson – Chris

6 June – Blenheim – Chris

11 June – Tauranga – Chris

19 June – Lower Hutt – David Colman

25 June – Napier – Chris

Please contact us to arrange a meeting office@chrislee.co.nz 

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 042961023.

Chris Lee

Chris Lee & Partners Limited

---