Chris Lee & Partners Ltd

Market News 27 November 2023

Johnny Lee writes:

MyFoodBag’s results are out of the bag, with virtually every metric missing the mark as the realities of this economic environment take their toll.

Revenue is down, profit is down, and the dividend has been cancelled. Fortunately, net debt also fell from $15.3 million to $14.1 million, with further decreases expected as the company reprioritises this.

The company’s focus on debt reduction and ‘’rightsizing’’ the business suggests that the company is firmly focused on survival, reducing costs by consolidating facilities and investing in implementing technology to assist with the packaging process. This approach to management has become increasingly common in this higher interest rate environment.

In practical terms, this has meant delisting from the Australian Exchange, pausing the distribution of shares to staff and maintaining previous levels of marketing expense despite general cost inflation. With a profit of only $2.5 million, such expenses can make the difference between a profit and a loss.

Marketing of products has also changed, as the company focuses further on pitching its affordability, with its lower-end Bargain Box product seeing increased volumes. A number of recent marketing efforts have attempted to draw comparisons between the Bargain Box pricing and general supermarket pricing.

The company faces something of a tightrope in this regard, proffering its value without diminishing its perception of higher quality product. MyFoodBag’s competitor HelloFresh remains hot on its heels in this regard, as it tunes its own strategy.

The company continues to trial new ideas, with several new products launching. The company is trailing large-scale meat packages, as well as one-off ‘’Summer BBQ’’ deals. If nothing else, these deals will indicate any public interest in such offerings. The wealth of data that the company has collected over time will also help tailor future offerings, targeting specific cuisines or social trends.

The company is also pushing a new ‘’convenience’’ strategy, targeting those customers with limited spare time. Again, the company will be using its own data around customer needs to try to target former customers with offerings that meet those needs.

The question shareholders are asking themselves now is: will this company see growth once economic conditions improve, or are these conditions reflecting a new normal? 

The share price reaction seems to imply the latter. The price continues to struggle, despite the already low value. Meanwhile, a number of publicly disclosed shareholder declarations show that the institutional shareholders are gradually winding down their exposure to the company. 

Trading for its shares remains very active, but in very small individual parcel volumes, perhaps indicating the type of investor currently buying into the company. Institutional buyers do not tend to buy in $100 lots.

The company hopes to pay a dividend next year, consistent with its comments from May this year at its 2023 full year result. The language did change however, noting that any such payment would be ‘’subject to the net debt position and financial performance’’ of the company. Suffice to say, expectations should now be even lower.

Overall, the company remains profitable – just – and is hopeful that declining inflation around the globe will see its fortunes improve. The company is taking steps to reduce its overheads and adapt to an environment where discretionary spending is declining. While debt levels are lighter than before, overall value of the company is declining more quickly. 

The full year result, due May, will be crucial. 

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As the year nears its end, one of the tasks financial advisors look forward to is meeting with economists, industry leaders and business owners to help form views around the direction of our economy and the impact this may have on investments over the following twelve months.

One common theme emerging is the enormous sums being invested into our infrastructure, and the even larger sums still required to be raised as these projects increase in urgency.

Councils, for example, will no doubt be forced to make difficult decisions and face the challenging task of persuading voters as to why their ‘’nice to haves’’ must wait. Some projects will simply move from short-term to long-term, ceding priority for those projects that must be actioned. The relative value of council projects – whether cycleways, water security, affordable housing or building projects – will need to be weighed carefully. 

The electricity sector is another expected to be busy, as the reality of our push towards more renewable energy hits home. These projects will total into the billions, as our generators ensure sufficient supply to meet our long-term needs.

Some of this money will simply not be raised from our shores. This is partly due to our level of investible wealth, but also due to our preference for shorter-term investments. Readers will recall Ryman’s recent experience with long-term debt, but the desire from businesses to borrow and invest longer-term remains strong. Several recent occurrences of New Zealand firms raising money from Australia suggests that these large-scale investments will happen with or without the financial support of New Zealand investors. 

For our bond investors, this may translate to a number of new investment options in the first half of next year as a way of testing appetite. While these new investments will be one driver of this, there will also be continued flow from maturing investments, as well as existing issuers looking to raise capital to meet regulatory requirements. Some of these new offerings may cause investors to re-consider their investment horizons, as some issuers push for longer-term debt.

For equity investors, however, pickings may remain slim. Very few companies appear to be aggressively pursuing growth, and the usual candidates for capital raisings have been deterred by market pricing, or in more recent history, a lack of shareholder support. Hopefully, market expectations of a more dovish Central Bank translates to renewed business confidence, and a willingness to approach shareholders with long-term plans (and long-term returns!).

On the regulatory front, we now have a Government and formal policy objectives are now public. In particular, the agreement between the National Party and the ACT Party includes a goal of removing the ‘’dual mandate’’ (inflation and employment) of our Reserve Bank and altering the goal of ‘’medium-term’’ - in relation to inflation targets - to a more specific target around timeframe. Whether or not this has any practical impact remains to be seen, but all investors should be hoping that we do not simply see a constant back-and-forth as political parties exchange power, instead seeing a best practice determined and established. Time will tell. 

Insurance costs remain an issue for households and businesses alike. Unfortunately, this issue seems to be heading in the wrong direction, leading some to underinsure or even withdraw from insuring altogether. KPMG’s recent report into the insurance industry suggests that between floods, cyclones and earthquakes, the new risks emerging to insurers is going to require better data and better co-ordination with the Government.

The main fear from economists remains the threat of rising unemployment. The next formal datapoint from Statistics New Zealand for unemployment is scheduled for the 7th of February. Between increasing immigration and more challenging market conditions for many of our major industries, it seems earlier forecasts for rising unemployment are likely to come to pass. The Reserve Bank, for example, does not expect unemployment to stop rising until 2025.

With major elections, ongoing wars and a Chinese economy continuing to ‘’normalise’’, 2024 will no doubt face its share of global challenges for investors to navigate to.

The holiday period is typically a quiet one for capital markets, and gives us all an opportunity to take stock of economic conditions and look to the future. Market participants are anticipating a busy 2024, with opportunities for investors to consider as a number of our sectors face challenges.

Chris Lee & Partners Ltd

Market News 20 November 2023

Johnny Lee writes:

Infratil’s results have been announced, showing another increase in earnings, with EBITDAF up 45%. The share price reached yet another record high immediately following the announcement, before easing back and closing lower for the day.

Debt levels rose, although the company maintains a relatively low level of gearing at about 20%. The dividend continued its pattern of quarter cent increases, lifting from 6.75 to 7 cents per share. The dividend will be paid on the 19th of December.

One NZ (formerly Vodafone) was the main driver of the uplift in earnings, although much of this gain was due to the increase in proportional ownership following Infratil’s buyout of Brookfield’s stake in June. One NZ did see an earnings uplift, as mobile revenues climbed. Users are moving to more expensive plans, while global roaming is improving as tourism recovers.

The Data Centres business CDC continues to impress, as the company struggles to meet the surging demand for its services. CDC is accelerating its growth programme to add capacity across Australasia to help meet this demand, which will bring forward some capital expenditure into the business.

Longroad, its US-based renewable energy developer, now has 72 projects in its pipeline. With the One NZ acquisition complete, Longroad is now becoming the most capital demanding asset in its portfolio. Some of these 72 projects will be sold upon completion, allowing the company to recycle the capital, while others will be owned by the company longer term.

Wellington Airport continues its post-COVID recovery, with both earnings and passenger numbers up. 

Infratil commented that it is aware that the Wellington City Council is looking to sell its 34% stake in the airport, adding that the company ‘’will watch with interest’’. 

This will indeed be an interesting process to observe. The Wellington City Council’s plan to divest its holding in the airport – to then invest into a green fund – will first undergo public consultation. Such public consultations rarely conclude with raucous cheers of approval. Nevertheless, ratepayers will be hoping the proceeds are invested carefully.

The argument proposed by the council is that such a fund will offer increased liquidity and greater diversification than ownership of a single asset in a tectonically active geography. COVID will also have highlighted the risks of asset concentration, while ongoing capital requirements will also be posing a challenge for a council highly focused on projects including the Town Hall rebuild and new cycleways.

For Infratil, it values its 66% stake in Wellington Airport at about $650 million. The sale process from the council will no doubt test this valuation.

A public equity listing, similar to Auckland Airport, does not seem likely in the current environment.

Infratil itself gave no indication on whether it could be a potential buyer (or seller) of the Wellington Airport shares. In its current configuration, any other such buyer would be ceding control to Infratil, similar to TECT holding its minority stake in Manawa Energy. Having a partner with a history of working successfully with Infratil would be preferable for all parties.

One wonders if other councils around the country will follow suit. Most will no doubt be examining their own balance sheets and making judgments on which assets are truly core to council needs. At a time where personal budgets are being stretched, double digit rate increases will not be sustainable in the long-term for most households, especially those on fixed incomes.

The remainder of Infratil’s result was broadly in line with previous guidance. The diagnostic imaging sector is beginning to see positive tailwinds. Even RetireAustralia - after recently escaping the chopping block - saw growth across its portfolio.

Infratil’s outlook was lifted, with the company now expecting EBITDAF of between $820 million to $850 million for the 2024 year. 2023’s result was a figure of $530 million – but again, with a reduce proportional holding of One NZ.

Overall, the result showed it was a busy period for Infratil’s companies, and plenty to keep them busy in the longer term. CDC and Longroad each have a number of expensive projects underway. One NZ continues to be enormously cash generative, generating over half of Infratil’s earnings. While the share price reaction was negative, the stock remains up 13% for the year, while the market at large is down and most growth stocks, in particular, have struggled. 

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EBOS Group has entered a trading halt, as market speculation builds that the company is planning a major acquisition of Australian pet care company Greencross Pet Wellness Company. Greencross has had many valuations over time, from the hundreds of millions into the billions.

This Greencross is distinct from Green Cross Health - or GXH - in New Zealand, which operates pharmacies around the country. This similarity of name did cause some apparent confusion, necessitating several announcements for clarification. Greencross Pet Wellness Company is not listed. GXH, by contrast, is listed on the NZX.

Greencross (the pet business) is currently privately owned, with major shareholders including private equity giant TPG Capital, Australian superannuation fund AustralianSuper, and the Ontario Pension Plan. 

Greencross owns assets including veterinary clinics and retail stores, including our own Animates, which it owns jointly with EBOS.

EBOS intends to make a formal announcement tomorrow confirming or denying the speculation. The fact that the company requested an extension to its trading halt - giving it more time to respond - may offer a clue in this regard. 

As with any takeover announcement - if one eventuates - the key detail for shareholders will be funding arrangements. 

One other aspect of this process that warrants discussion is the increasing influence of market speculation, particularly from Australia.

The halt was initially requested on Thursday (16th) morning, when the company requested the New Zealand Exchange place a trading halt on EBOS, citing speculation from overseas media that it was looking to acquire Greencross. 

Today, EBOS shares remain suspended from trading for while it formulates a response. Had the shares not been suspended, some shareholders may have read the speculation – which is usually paywalled and copyright protected - and sold shares in the expectation of a capital raise diluting the company and negatively impacting the share price.

This trading halt meant that all shareholders were unable to transact any buy or sell orders.

In this instance, someone involved in the process notified a journalist of the details, who then published them on an Australian news website. EBOS quickly requested a halt to trading, before preparing a formal statement to shareholders.

EBOS is an acquisitive company and spends much of its time exploring possible new deals to complement the business. During its August results, the company explicitly stated it was searching for more opportunities to use its balance sheet to grow the business, including in the pet care space.

Another may (or may not!) be in the pipeline. Assuming the company meets its self-imposed deadline of tomorrow morning, shareholders will know soon.

Travel Dates

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

21 November – Napier – Edward

5 December – Christchurch – Chris

6 December (am) – Christchurch – Chris

6 December (from 2pm) and 7 December (until 10.45am) - Timaru – Chris

Over the next fortnight our advisers will be available to all Kapiti and Horowhenua investors.

Fraser and David will be available each day, Johnny Wed-Fri, Chris Mon & Tues, and Edward, by arrangement.

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

Chris Lee and Partners Ltd

Market News 13 November 2023

Johnny Lee writes:

Mainfreight’s half year result has been announced to the market and should provide some comfort that the company is now sailing towards calmer waters. 

The headline result saw revenue fall 22% and net profit decline 43%. Last year’s dividend of 85 cents was maintained, and commentary around the result suggests the company is determined to ensure that future dividend growth is made at levels that are consistent and predictable, rather than paying outsized dividends during good years that are cut during poorer years.

To provide additional context, this year’s revenue of $2.4 billion and net profit of $124 million is almost 50% higher than 2020’s result and is not dissimilar to 2021’s result. The decline from 2022 reflects extraordinary conditions during that year, when freight prices were higher than today’s levels.

This was perhaps best shown in the breakdown of the result. Of the three divisions within the company – Transport, Warehousing, and Air and Ocean – the latter struggled the most, with revenue and profit reduced by half. Warehousing actually saw an increase in revenue, while Transport revenue was relatively flat. 

In terms of a regional breakdown, Australia and New Zealand are seeing better conditions than the international markets. Between falling margins in the United States, lower activity levels out of Asia and higher levels of competition out of Europe, the company is clearly experiencing a more challenging environment than the bumper period experienced during the COVID lockdowns.

Mainfreight has maintained a positive cash position (or negative net debt), although this figure is substantially lower from the year prior. In an environment where debt is expensive, the company is electing to avoid that trap altogether.

Mainfreight has also decided to ‘’re-prioritise’’ its spending, reducing its capital expenditure by over $100 million as future needs are reconsidered following the changes in economic conditions, while some projects have been pushed outside of the short-term window.

Perhaps the most important part of the result was the tradition update and provisional outlook.

Post-result trading had improved, suggesting that the worst is now behind the company. Mainfreight states that it is confident that it will see further improvement in the second half of the year, leading up to its full year result in May.

The share price response to the half year result – which saw the share price rally strongly – is perhaps an indication more of the low expectations leading up to the result than the result itself. But while the headline result was poor, it represents a strong increase over the last three years, as the company battles challenging conditions across many of the regions it operates in.

For our advised clients, we have uploaded a results summary and investment outlook to the private client page of our website.

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 SKY Network Television has announced that it has terminated discussions with the unknown, third-party looking to acquire the company.

The conclusion is a rather baffling end to the entire saga, and the response from shareholders suggests that the process for handling such offers is in need of change, or at least requires formal guidance as to best practice.

The last month has been something of a roller coaster for Sky TV shareholders. The company announced it was suspending its buy-back of shares on the 13th of October, following the receipt of an offer from the third-party to purchase the entire company. No price was provided, nor any indication as to who the third-party was.

Naturally, the share price soared, climbing 15%. Takeover announcements are almost always positive for share price performance. It is assumed that any offer to buy the company would be in excess of its current market value – a board would not usually waste its time evaluating an offer below on-market valuations.

On the 8th of November – almost four weeks later – the company announced it had terminated discussions with the third-party as it believed the offer undervalued the company, based on internal valuations and ‘’recent unsolicited feedback’’ from their larger shareholders. The rejection of the offer led to the share price falling, closer to the price observed prior to the announcement.

The 8th of November was also the date of the company’s AGM, where the company fielded questions from shareholders seeking more detail on the takeover approach. The company did not choose to elaborate, citing confidentiality clauses from the third-party. While this is a fair response, it does leave shareholders nonplussed as to what conclusion to draw from this affair.

Nothing Sky TV did appears to be in breach of the listing rules, nor was it necessarily anything outside of standard market conduct. An offer was received. The market was informed, and its share buyback suspended. The offer was rejected, and confidentiality enforced. 

Perhaps the most charitable interpretation is that a silver lining exists from having endured this experience over the last four weeks. That is, that one must assume that future offers will not require such a lengthy period of time when determining whether an offer met ‘’the Board’s view of the fair intrinsic value’’ of the company. 

This might also represent a teachable moment for the NZX Regulatory team to issue further guidance on how to handle such offers. 

Do tyre kickers really need to be disclosed to the market? While it is fair that genuine, proposed takeover offers should be disclosed – so as to keep the market equally informed – shareholders gain little value from timewasters offering 50 cents for a dollar coin. 

Is the use of a trading halt warranted in these scenarios? The purpose of a trading halt is to ensure that trading does not occur when a company’s shareholders are at risk of trading with an imbalance of material information. While it would not be reasonable to place a company into trading halt for four weeks, perhaps four weeks is the unreasonable aspect of such a consideration.

The other issue of institutional shareholders informing the board as to their external valuations is also difficult to navigate. Choosing not to advance an offer to all shareholders – because the board and certain undisclosed shareholders believe the price is too low – needs to be carefully managed. If an offer has no possibility of meeting its conditions, then disclosure may be moot. However, if not, a majority of shareholders may disagree with internal valuations and prefer to make their own decision.

Overall, the drawn-out affair has introduced significant market volatility for a conclusion that added no real value to the company. The opinion put forward by the Chair – that the existence of such an offer implies the company is undervalued – may be true. The rejection of the offer may in fact imply the reverse. Unless the offer proceeds outside of Board approval, we may never know. However, if another offer is received, one hopes that the market recalls this experience before making any decisions on the market.

Travel Dates

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

21 November – Napier – Edward

5 December – Christchurch – Chris

6 December (am) – Christchurch – Chris

6 December (from 2pm) and 7 December (until 10.45am) - Timaru – Chris

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

Chris Lee and Partners Ltd

Market News 6 November 2023 

WHAT a difference a week can make.

A series of data points announced last week have highlighted just how precarious market sentiment is at this point in time, as the market threatens to take yet another turn.

After months of questioning whether markets were ‘’at’’ or ‘’near’’ the peak of interest rates – and watching swap rates rise – continued dovishness from the United States Federal Reserve and poor data locally has reinforced the argument that further rate hikes will not be required.

A growing number of economists are now advancing the view that our next movement may be DOWN, potentially as early as next year.

The first data point was a significant fall in building consents, down 20% compared to the year ended September 2022.

Owners of Fletcher Building shares will already be aware of this cooling market, which has firmly left the ‘’boom’’ part of the cycle.

But the major news of note was unemployment data, which showed a higher than expected increase to 3.9%, slightly above the Reserve Bank’s internal estimates.

The data showed both fewer people in work, and an increase in the working-age population. The reduction in employment was borne particularly amongst women, with the gap between male employment and female employment growing further. 

This gap tends to widen and tighten over time, partly due to the growth or contraction of certain industries. Some sectors – like construction and health – tend to have heavy tilts towards employment of specific genders.

RBNZ Deputy Governor had previously discussed the importance of our relatively low rate of unemployment, and the pressure this was placing on inflation. While rising unemployment is never good news, it will relieve some of this pressure and give the RBNZ more flexibility before announcing its decision on the 29th to either lift or maintain the 5.50% rate. 

Market expectations remain firmly of the view that the rate will not change on the 29th, with interest instead turning to the following meeting, in February next year.

A number of high-profile failures have also made headlines, with the closure of online supermarket Supie calling time on its attempt to disrupt the supermarket sector, with administrators being appointed.

In terms of listed companies, relative newcomer TradeWindow has announced its intentions to dramatically scale back its operations as access to cheap capital dried up.

TradeWindow is a developer and marketer of logistics software, assisting importers and exporters with managing their data and trade flow.

The company last declared a loss of $9.8 million - a modest improvement compared to the previous year - but a sizeable loss for a firm worth barely $30 million today. 

Its announcement last week saw it lower its revenue forecast by about 10%, despite being affirmed as recently as August. It was also looking to sell assets.

The company would also be reducing its employee headcount by 80 - including one of its directors - and attempting to cut its overall costs in half, as part of its drive towards a position of monthly positive cashflow.

Coupled with a series of high profile, but smaller scale company failures in the news - restaurants, media outlets, construction companies and the like – it is clear that higher interest rates are beginning to apply significant pressure to the economy. This is by design. The question now is whether the screws need to be tightened further, or whether we will begin to see a loosening of settings soon.

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WHILE much of the economic news has been dreary, last week did see a big win for shareholders of listed small cap firm MHM Automation.

MHM Automation is an entirely separate company from Scott Technology, another automation firm which was discussed several weeks ago.

MHM Automation has announced that privately owned US-based firm Bettcher Industries, a global leader in handheld meat trimmers and tools, was buying the Christchurch-based company for $1.70 a share. This would value MHM at about $150 million New Zealand dollars, almost double its value prior to the announcement.

MHM Automation, previously known as Mercer Group, was perhaps best known for its steel products and fabrication business. Today, the company is investing heavily towards automation, a sector that continues to see strong growth.

MHM recently acquired Wyma Engineering, a name familiar to many in the rural sector, as a manufacturer of fruit and vegetable processing equipment. 

MHM had reported 43% revenue growth in its August update to market, citing a strong demand globally for automation equipment, particularly from the meat sector. This demand follows years of difficulties in securing access to labour, both nationally and internationally. 

One must wonder whether increasing automation – across every sector – will be required as working-age populations eventually shrink and the globe becomes more regionalised. 

Indeed, interest in investing into the automation sector remains strong. The automation and robotics ETF – BOT.NZX – continues to see demand from long-term growth investors, as its share price goes from strength to strength.

The takeover of MHM Automation represents a significant premium to the last five years of trading, and perhaps – if all conditions are met – an exit point for shareholders. 

But while this offer will be welcome news for shareholders, the takeover for MHM Automation will likely see yet another company leave our exchange. 

This year has seen takeover offers emerge for both E-ROAD and Metro Performance Glass, while an informal offer is supposedly in the wings for Sky Network Television. None of these have - yet - reached a successful conclusion. 

We did see a completed acquisition of Pushpay in March, while last year we saw Z Energy complete its takeover and delisting, taken over by Australian based Ampol. 

We have also seen a handful of companies delist this year, including TASK Group Holdings and Embark Education. Good Spirits Hospitality, another small cap, is intending to delist shortly. 

Investor choice continues to diminish as these departures occurs. Meanwhile, smaller companies are now entering the spotlight, as they enter prominent indices and see new shareholders join the register. The NZ50 index is made up of our 50 largest, liquid companies - meaning that when one leaves, the 51st enters the list.

Attracting new listings remains a priority not just for the NZX, but globally, as countries struggle to persuade companies to raise capital and grow. KiwiSaver funds and retail investors alike are certainly ready to listen to new investment opportunities.

Perhaps with the number of councils publicly suggesting that asset sales will be required to fund their agendas, there may be opportunities for the investing public to play a role.

Private equity sell downs may also represent a means for growth in our listed markets.

For now, MHM Automation shareholders have a decision to make, with the formal offer likely arriving soon. 

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Spark, our largest telecommunications provider, has presented an update to shareholders, as well as reaffirming guidance for next year.

Earnings, dividends and investment are all expected to increase next year, as the company focuses on what it sees as its the three core avenues for future growth.

These three areas are data centres, 5G technology and MATTR, Spark’s digital identity platform.

Data centres is the largest of these investments, and while the data centres sector is seeing an enormous amount of capital invested nationally, Spark is confident that the tailwinds behind this sector will create enough room for all this growth to exist without a risk of oversupply.

5G investment - with a goal to be nationwide within 3 years - will allow Spark to compete more aggressively against Chorus in the broadband space.

The company reiterates that these investments will take some time to generate meaningful cash flows, but should represent permanent, recurring revenues to deliver returns for shareholders.

Overall, the brief update shows that the strategy remains on track and shareholders can look forward to improving returns in the short-term.

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Travel Dates

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

9 November – Auckland (Albany) – Edward

10 November – Auckland (CBD) – Edward

17 November – Arrowtown – Chris (one appt. left at 2.45pm)

20 November – Christchurch – Edward

21 November – Napier – Edward

5 December – Christchurch – Chris

6 December (am) – Christchurch – Chris

6 December (from 2pm) and 7 December (until 10.45am) - Timaru – Chris

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

Chris Lee and Partners Ltd