Chris Lee & Partners Ltd

Market News 25 November 2024

Johnny Lee writes:

A2 Milk made an important announcement last week, providing a guidance update and unveiling its newly developed dividend policy.

After years of hoarding cash, a2 is comfortable it has enough to execute its growth strategy, and will now distribute most of its profits back to shareholders, going forward.

The share price soared following the announcement, closing up nearly 20%.

The guidance update was positive. The company is now ahead of its earlier forecasts, boosted by an improved contribution from Mataura Valley Milk. Stronger than expected commodity pricing and greater sales volumes have positively impacted the company.

The new dividend policy is to pay 60% - 80% nett profit to shareholders in the form of semi-annual dividends, while using special dividends to distribute excess cash as appropriate. Imputation credits may not initially accompany these dividends.

The decision to begin shareholder distributions will come as a relief to some shareholders, who have long pondered how the company intends to invest its retained profits. While the initial dividends will not be large, they will grow as profitability improves over time.

The first dividend is expected to be announced in February.

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Argosy’s result has been released, perhaps providing further evidence to those hoping the property trust sector has turned a corner.

After last year's $20 million loss - including a $50 million valuation decline - Argosy is back in the black and enjoyed a very modest $8 million property revaluation gain.

The dividend was maintained, and the company believes the current level is sustainable long-term, forecasting another year at 6.65 cents per share.

Argosy remains focused on ‘’greening’’ its portfolio, and plans for half the portfolio to be classified as ‘’green’’ by 2031. Argosy is confident that the market will continue to prefer - and pay more to rent - green certified buildings.

While these developments transpire, Argosy has a busy year ahead with lifting its occupancy rate, which is currently 95.8%, and negotiating expiring leases. The company is also exploring the sale of six more properties, as part of its drive to divest non-core assets.

Argosy shareholders should be pleased that revaluations are finally positive again. Like its peers in the listed property trust sector, Argosy shares continue to trade at a steep discount to NTA, which is now $1.46.

As with most listed companies, Argosy is hopeful that interest rate relief is imminent. This week’s Reserve Bank meeting is expected to provide some good news on this front.

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Vital Healthcare (VHP) is proposing a structural split for its shareholders, dividing the company into a ‘’Dual Listed Trust’’ vehicle and also listing on the ASX.

VHP owns a number of hospitals around Australasia, including Wakefield Hospital in Wellington and Grace Hospital in Tauranga. The majority of its assets are held in Australia, with its largest asset by value being Epworth Eastern Hospital in Melbourne.

The split appears to be intended largely for tax purposes, allowing New Zealand investors to hold New Zealand assets, earning income from the PIE regime, while Australian investors will receive an equivalent benefit for their Australian assets. 

Dual-listing may also have the added benefit of index inclusion in Australia, with the company hoping to be added to the ASX300.

Realistically, a structural split will likely result in New Zealand holders transferring their Australian listed securities into the New Zealand fund, and vice versa for Australian shareholders. The tax benefit of investing into these funds is a major incentive for investors. 

Stripping out the Australian assets will logically leave the New Zealand listed product significantly smaller. One detail listed in the announcement, however, implied that both funds will still carry some geographic diversification.

The announcement to market mentions an Equalisation Agreement between the two companies to share rights to income and capital distributions, although exact details were not outlined. This will be a key point for holders and differentiates this from a simple demerger. The company is trying to maintain the benefits of diversification, while gaining the tax advantage of local ownership.

Discussions remain in early stages as the company seeks feedback from major shareholders. If the proposal formalises, it will go to shareholder vote, at this stage planned for April next year.

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My Food Bag has released its annual results, revealing a modest fall in revenue. Profit climbed, and an interim dividend of 0.65 cents was declared. The company did not pay a dividend in 2023.

While no investor would enjoy seeing revenue fall, management believes demand may have stabilised this year. Delivery numbers have experienced year-on-year declines for four years now.

With revenues falling, the company has prioritised debt repayment and now, small dividends. The company seems focused on right-sizing the business, rather than investing into growth. 

The meal kit sector has never surpassed the heights experienced during Covid, and indeed may never reach those levels again. The Covid environment was a particularly unusual period for investors and saw many industries unexpectedly thrust into the spotlight.

The likes of Zoom, Peloton and Moderna all saw their share prices rocket during the pandemic, before crashing back to earth in the years following. 

My Food Bag retains a loyal following and its Bargain Box product remains popular for these customers. It is a nationally known brand but is operating in an environment where consumers are trying to find ways to reduce spending. 

The company next reports in May, and shareholders will be hoping by then that the trend of declining revenue has finally ended. 

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A brief note for Santana Minerals option holders: Options were given to investors who held the shares prior to 28 February of this year, entitling them to purchase additional shares at $1.08 Australian at any date prior to February 28, 2025 (approximately three months from now).

Since then, Santana has completed a 1:3 stock split. New documentation was sent last week with the updated figures – detailing the new quantity (thrice the original figure) and the new price of $0.36. The shares are currently trading around $0.52 in Australia. 

Some clients have reported delays in processing times when applying for these options. Option-holders are advised to allow some leeway in this process, and ensure they have all their affairs in order well in advance of the closing date. 

Option-holders who receive documentation by post should expect the new forms to arrive over the coming week.

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Infratil has indicated that it is looking to issue a 6-year bond, with a maturity date of 13 December 2030. This would replace the IFT260 bond, which matures on 15 December 2024.

The offer will comprise both a Firm Offer and an Exchange Offer, intended for holders of the IFT260 series. The Exchange Offer is not mandatory.

Based on current market pricing, we are expecting a coupon rate around 6.20%. We note that the Reserve Bank is scheduled to meet this Wednesday, which may impact market pricing.

Investors wishing to participate in either the Firm Offer or the Exchange Offer are welcome to contact us.

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Kiwi Property Group (KPG) has announced its intention to issue a new 5.5-year senior, secured green bond.

KPG owns and manages a property portfolio valued at $3.3 billion, with a high occupancy rate of 98.4% and a weighted average lease term of 3.8 years.

Although the interest rate for these secured bonds has not yet been announced, we anticipate a rate of approximately 5.60% per annum, based on current market conditions. These bonds are expected to have an investment-grade credit rating of BBB+.

KPG will likely cover the transaction costs for this offer. Therefore, brokerage charges to clients are unlikely but will be confirmed next week.

If you would like to register your interest, pending further details, please contact us promptly with the amount you wish to invest and the CSN you plan to use.

Please note that indications of interest do not constitute any obligation or commitment to invest.

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TRAVEL

Our advisers have no new travel plans this year.

Chris Lee & Partners Ltd

Market News 18 November 2024

Johnny Lee writes:

TWO of New Zealand’s largest companies - Infratil and Mainfreight - released their financial results last week.

Infratil reported a 25% increase in earnings and a modest increase in dividend to 7.25 cents per share.

This will prove a very busy period for Infratil, with considerable activity expected across the portfolio.

Most obvious is Manawa Energy, which is currently under takeover from Contact Energy, pending regulatory approvals.

Infratil has already indicated its support for the takeover. If the takeover is successful, Infratil stands to gain gross proceeds of around $185 million, as well as a 9.5% shareholding in Contact Energy. The company has not yet revealed its long-term intent for this equity stake, no doubt waiting for greater certainty from the regulator.

Longroad continues its renewable energy development in the United States, although earnings fell from last year's high, down 36% to $21 million.

The change of political leadership poses a risk, but Infratil has been assured its short-term projects - which currently benefit from various tax incentive programmes - will remain unaffected from any change in regulation. The exact shape of any changes remains to be seen, with some expecting a greater focus on nuclear energy in the years ahead.

Meanwhile, growth in AI and data centres is fuelling renewable energy demand, and moves towards greater onshoring of manufacturing could benefit the industry further.

One NZ (formerly Vodafone) saw a modest increase in earnings, albeit driven by a continued push to control costs. Wellington Airport and Retire Australia both saw modest lifts in earnings.

The main story remains the data centre business, CDC.

CDC saw earnings growth of about 30%, but Infratil clearly has greater ambitions for the industry. It has plans to nearly septuple its current capacity, with CDC allocating more than $2 billion of spending over the next financial year. Infratil, as a 48% owner, plans to allocate nearly $700 million for capital expenditure.

While this increase in capacity may sound almost absurd, margins have remained very high - 75% - and the average lease period remains around 31 years. This is a highly profitable business with predictable long-term cash flows. Indeed, the challenge may be securing sites and funding. Demand is clearly not the challenge, at this point.

The next 12 months will see a period of change across Infratil’s portfolio, with Manawa, CDC and Longroad all in the spotlight as economic conditions and corporate activity continue to evolve.

Mainfreight’s annual result was also released to market last week, showing an 8% increase in revenue but an 8% decline in profit. 

The share price saw a modest gain on the day and was broadly in line with expectations following the company’s Investor Day update last month.

Last year's dividend of 85 cents per share was maintained. It is payable on 20 December.

The return of revenue growth will be a relief to shareholders, with increased revenue observed in the Australian, European, American and Asian markets. New Zealand remains the laggard, seeing both a revenue and profit decline.

Continued pressure on margins is proving problematic. There has been some improvement late in the reporting period, but it is clear that competition remains fierce and focusing on cross-selling - between transport, warehousing and air and ocean - will be key to improving margins.

The elevated level of capital expenditure, particularly in warehousing, is being maintained. About half a billion will be spent over the next few years, largely on property, to improve capacity.

Conditions remain challenging and management is focused on positioning the company to take advantage of improving economic conditions. More plainly, the company is trying to match its capital expenditure with anticipated customer demand growth.

The extraordinary conditions observed during Covid were always going to lead to a period of revenue and profit decline. Now, revenue is improving and investments are being made into greater capacity. Once this is done, greater levels of profitability will need to follow. 

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SANTANA Minerals released its pre-feasibility study to market on Friday, following two days of trading halt in the shares.

This document is mandatory reading for all new shareholders. It includes a concise breakdown of the economics of the project, its potential value to shareholders and the country, and some of the key assumptions of the project.

The summary also outlines the projected cash flows from the initial construction period, through to the ninth year of initial, expected production. 

The study estimates that the project will produce around $5 billion (NZD) of revenue, and around $2 billion of total free cash flow. The Government will likely pocket over a billion itself, between royalties and taxes.

The study includes a ‘’base case’’ gold price scenario, and the ‘’spot’’, or current, gold price scenario. Ultimately, the gold price at the time of production cannot be predicted and is part of the risk of investment. It has risen 30% over the last 12 months.

The Bendigo-Ophir project continues to take steps towards a working mine, and the pre-feasibility study released last week neatly outlines the vision. While much of the document is technical in nature, it does provide interested parties details of the risks and opportunities ahead, as the company gears up for its next phase. 

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STEEL and Tube has issued a trading update, confirming the difficult conditions being experienced across the broader construction sector.

Sales volumes are down about 20% compared to last year, with a similar decline seen in revenue.

The decline was led by both a significant decline in the demand for steel and an oversupply forcing margins lower. 

The weakening conditions for the construction sector had already been well flagged by Steel and Tube’s peers, and will no doubt force some consolidation in the sector. Steel and Tube itself highlighted that it is currently engaging with several potential acquisition opportunities.

The company’s debt-free stance - with around $15 million in the bank - may give it an advantage in this regard. 

Like many companies across the country, Steel and Tube remains hopeful of further interest rate relief to spur better economic conditions. Interest rates were in a well-established decline for many months, but have reversed course since the US election.

The update from Steel and Tube gave shareholders much to stew over. While the immediate reaction was a 4% share price fall, shareholders will be aware construction is typically a cyclical sector. The question for investors is whether construction is heading towards a recovery - as Steel and Tube believes - or whether conditions will worsen further.

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INFRATIL’S perpetual infrastructure bond - IFTHA - completed its annual rate reset last week.

The rate has been set to 5.51% for the next 12 months. This rate marked the margin (1.50%) above the one-year swap rate (4.01%).

Historically, these annually resetting securities have been advantageous for investors during periods of rising interest rates, offering an alternative to long-term fixed-rate bonds. However, the relatively low margin has resulted in the bonds trading below their par value for a long time, last trading at approximately 63 cents per dollar of face value, equating to a yield of around 8.75%.

The interest rate for IFTHA will be subject to another reset in November 2025, reflecting the prevailing interest rates at that time.

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Travel

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

15 November – Cromwell (morning only) – Chris Lee

25 November – Christchurch – Fraser Hunter (FULL)28 November – Napier – Edward Lee29 November – Napier – Edward Lee

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

Chris Lee and Partners Limited

Market News 11 November 2024

Johnny Lee writes:

American voters have made their decision and elected Donald Trump to return to the White House. 

Sharemarkets responded positively and rallied overall, with the Dow Jones rising 4% the next day.

Two of the big winners were Tesla and Bitcoin.

Tesla’s share price rose 15% immediately after market open following the election. Tesla CEO Elon Musk has been vocal in his support for Trump during the campaign, and there have been some suggestions that steep tariffs could be applied to vehicles imported into the US.

Cryptocurrency Bitcoin reached new heights, breaking $80,000 USD for the first time. The total value of Bitcoin has now exceeded one and a half trillion US dollars. Only fifteen countries remain with a GDP higher than the market capitalisation of Bitcoin.

Companies associated with Bitcoin also rose. Iris Energy, an Australian owner and operator of Bitcoin-focused data centres, saw its share price soar. Coinbase, the operator of the largest cryptocurrency exchange in the United States, climbed sharply too.

Bank shares also went up following the election result. Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase all saw share price rises of around 10%. 

In the technology sector, NVIDIA, Microsoft, Amazon and Alphabet (formerly Google) all saw gains.

While markets generally responded positively to the election, some sectors saw the opposite impact.

Declines were seen across the renewable energy sector.

First Solar, the global leader of thin-film solar panels, fell 20% before closing the day down 10%. Vestas, one of the world’s largest wind turbine manufacturers, fell even further.

Specialist electric cars manufacturers – other than Tesla – also fell. Rivian and NIO both saw share price declines. China automaker BYD also saw its share price fall the next morning, falling 5%.

Both the US dollar and US bond yields moved higher, with investors anticipating higher inflation over the four-year term. It is broadly accepted that tariffs are inflationary, as businesses adjust pricing to accommodate higher input costs. 

Both gold and silver fell around 3%, as investors looked towards other asset classes. 

On our local board, movements were much more muted. Our share market index was flat, with the gains from large caps EBOS, a2 Milk and Mainfreight countered by the declines seen in Fisher and Paykel Healthcare shortly after market open.

Infratil also saw a modest share price fall. Infratil’s Longroad business will no doubt be carefully watching any developments in the solar industry as a result of the change of US leadership.

New Zealand swap rates moved higher in the days following the election, again indicating investors are anticipating higher levels of inflation. 

Many of the movements observed following the election will be overreactions. Investors are trying to position themselves early, with threats of tariffs and regulatory change leading some to derisk by exiting those sectors they fear could be impacted. 

Investors should expect volatility in the weeks ahead, as the make-up and direction of the second Trump presidency takes shape. 

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While the aftermath of the US election continues to drive markets, New Zealand did have some economic data last week, with unemployment figures released by Statistics New Zealand.

Unemployment is rising more slowly that anticipated, with the latest data point 0.2% higher to 4.8% unemployment.

The employment rate fell 0.6%, with only 67.8% of New Zealanders in paid employment. The difference was made up by a decline in the labour force participation rate.

This has been attributed to several factors – New Zealander’s returning to study, for example – and was mainly driven by men leaving the workforce. 

Overall, the rise in unemployment was slightly better than expected. Unemployment is expected to continue climbing, as the country navigates a period of modest economic contraction. Lower interest rates may help, but the Reserve Bank current expects unemployment to rise further to around 5.4%.

The Reserve Bank next meets on the 27th of November. 

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The NZX has published a strategic update to market for its shareholders, highlighting the current challenges and opportunities facing the business.

NZX shareholders have enjoyed a terrific 2024, with the share price up 40% this calendar year and two dividends paid. 

NZX has evolved into a far simpler business than years past and is now built on three specific pillars: its Smart business, its Wealth Technologies business and its Capital Markets business.

Smart, the ETF operator formerly known as Smartshares, continues to grow both organically and inorganically. 

Following its acquisitions over the last two years, Smart now has well over $10 billion in funds under management. Cashflows into its various funds, as well as strong market returns have grown the business further. 

New products – such as the Bitcoin and Gold ETFs introduced recently – have captured further funds. These have also had the benefit of introducing new investors to the Smart platform and ecosystem.

Wealth Technologies continues to grow and expects to be cashflow positive soon. The business has onboarded a number of new users over the last year and has a number of parties contracted to enter the platform over the long-term. 

The Capital Markets business, historically the bread and butter of the NZX, continues to benefit from a steady diet of bond issues and the occasional rights issue. 

The NZX is keenly aware that the listing pipeline has been non-existent for some time, with far more departures than entrants to our exchange. 

Recent chatter regarding a potential Kiwibank listing would no doubt be a boon to the exchange. Whether such a transaction can be packaged in a politically viable and mutually beneficial way remains to be seen.

Outside of such a transaction, the NZX intends to target foreign companies operating within New Zealand, and medium-scale companies with real revenues. The last few years have seen a number of new companies join our exchange. Some of these have worked, while others have either capitulated or are currently on the brink of doing so.

The sum total of these three businesses is that the NZX has reliable recurring revenue, diverse revenue streams, and various pathways to modest growth. The share price of the NZX rose 5% following the update.

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New issue

BNZ Bank (BNZ) has opened a new 5-year senior note to raise up to $1 billion.

Based on current market conditions we are expecting an interest rate of approximately 4.75%.

BNZ will not be paying the transactions costs for this offer, accordingly clients will be charged brokerage.

The bonds will be listed on the NZX and will have a strong credit rating of AA-.

We have uploaded more information on this bond issue to our website on the link below:

https://www.chrislee.co.nz/uploads//currentinvestments/BNZ190.pdf

The offer is open today, and closes Wednesday, 13 November at 10am.

Payment would be due no later than Monday, 18 November.

If you would like a firm allocation, please contact us promptly with an amount and the CSN you wish to use.

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Travel

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

13 November – Ellerslie – Edward Lee15 November – Auckland CBD – Edward Lee14 November – Arrowtown – Chris Lee (FULL)

15 November – Cromwell (morning only) – Chris Lee

25 November – Christchurch – Fraser Hunter28 November – Napier – Edward Lee29 November – Napier – Edward Lee

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

Chris Lee and Partners Limited

Market News 4 November 2024 

Johnny Lee writes:

Spark Limited has provided a much-anticipated update to market, after recording one of its worst monthly share price declines ever, in August.

Our largest telecommunications provider has seen its share price decline from near $4.50 in early August to around $3 today, with some investor concern surrounding its ability to maintain dividends against a declining economic backdrop.

Last week’s update confirmed those fears, with the dividend now forecast to decline from 27.5 cents back to 25 cents per share. Imputation of 75% is still expected by the company.

The reduction in the dividend follows an update to Spark’s earnings guidance, which is approximately 4% lower than previous guidance. To accommodate this, the company is reducing its capital expenditure at the same time, and accelerating cost savings across the business.

The decline in dividend, while in fact only a return to the dividend paid two years ago, will be disappointing for shareholders a mere two months after providing formal guidance to the contrary. 

Downgrades so shortly after the publication of financial results are particularly disappointing. Clearly, the situation is degrading quickly, or the August estimates were too optimistic.

The share price actually saw a modest bounce after the news, reaching around $3 per share. This equates to a dividend yield of around 10.7%. The share price pared back in the days following.

The other news of note in the announcement was Spark’s intention to sell its remaining holding in the mobile tower business, named Connexa.

Spark sold 70% of its tower business in 2022 to Canadian shareholder the Ontario Teachers’ Pension Plan, realising around $900 million for the sale. Later that year, Spark competitor 2Degrees sold its own cellphone tower business to the same group, a deal Spark declined to participate in, instead allowing itself to be diluted from 30% to 17%. Now, it is looking to quit the sector altogether.

Of the $900 million, a significant proportion was used to buy back its own shares, a decision that may look questionable in hindsight. The company also retired some debt, reducing its leverage.

The potential Connexa sale was not the only major asset up for review. Spark later confirmed it would be reviewing its holdings across several other assets, including its share of the Southern Cross fibre optic cable and its recently developed Mattr business.

These sales were part of a ‘’return to core’’, with a renewed focus instead on its mobile data and data centre businesses.

It seems increasingly likely that Spark will need to find a capital partner to help fuel this investment in data centres. Spark has a number of the necessary pieces in place – land, consents and customers – but may not have the financial flexibility to fund the projects on its own. 

The data centre industry has produced many market darlings over the last few years, fuelled by a seemingly unending demand for both data storage and processing capacity. The growth and investments made into Artificial Intelligence has pushed this demand even higher. 

The supply response has come too. New Zealand has a number of data centres expected to come online over the medium term to help meet this demand. For example, Amazon, the largest operator of data centres globally, is one that has plans to increase its presence in New Zealand.

Spark is clearly betting that there is still significant growth to be seen in this sector. The company is expecting a strong return on equity over the medium term from its push into data centres. However, such a move is not cheap, and shareholders currently claim a significant share of the company’s profit through dividends.

Income investors will be anxiously awaiting further clarity around these future dividends. While the current dividend yield will look very appealing – especially if interest rates continue their decline – the key consideration will be the future trajectory of dividends going forward. Spark makes a healthy profit each year. However, Spark also has significant capital expenditure planned, and limited room to manoeuvre. The sale of assets looks to be the preferred source of funding.

Finding the balance between necessary expenditure and shareholder returns will be key. As the company looks to ‘’return to core’’, the sales of seemingly unwanted assets like the towers and cables will simplify Spark and return it to a business focused on its biggest revenue stream – mobile data. 

A less charitable view could restate this as Spark abandoning several poor investments, and placing increasing emphasis on a diminishing number of revenue streams.

Spark’s half year results - including confirmation of its dividend - are due in February. 

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Fletcher Building has confirmed to the market that the Commerce Commission is proceeding with legal proceedings against the company.

Fletcher’s discussed this possibility in August, with the Commerce Commission alleging Fletcher Building breached the Commerce Act in relation to its GIB manufacturing arm Winstone Wallboards. The alleged breaches relate to Winstone’s use of volume rebates.

Fletcher Building intends to defend itself in these proceedings, and has warned shareholders this legal action may take some time to resolve.

This issue is entirely separate from the $155 million Western Australia plumbing issue with its Iplex division. 

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Financial market news is likely to take a back seat this week, with Wednesday’s (NZ Time) United States election captivating headlines worldwide.

The political ramifications of the election are front page news, and will no doubt remain so for many weeks after the election.

For investors, the election could also have long term effects on their investments. Economists around the country are now trying to position themselves ahead of either eventuality, with implications for sharemarkets, bond markets, currency markets and commodity markets alike.

Sharemarkets tend to dislike uncertainty, and a resounding result in either direction may see the most positive response from sharemarkets around the globe. Inconclusive results – or worse, unrest – will have the opposite impact.

Certain sectors – renewable energy, electric vehicles, oil, technology – may be more impacted longer term depending on the result.

Debates around tariffs could also influence the global economy, particularly for export dependent nations.

One stance agreed by virtually every economist is that US debt seems likely to rise. This assumes, of course, that plans outlined in the campaign trail become policy. The presidential election is not the only vote being cast, with Congress and House of Representatives seats up for election.

For New Zealand sharemarket investors, some companies on our exchange have direct exposure to the US economy. Infratil, Fisher and Paykel, Mainfreight and a2 Milk are all examples of companies with varying degrees of exposure to the US market.

These investors will be hoping for as little disruption as possible.

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Fonterra – 5-year senior bond

Fonterra has confirmed that the rate for its senior bond will be 4.60% per annum, fixed for a 5-year term.

Fonterra will not cover the transaction costs for this offer, so clients will have to pay brokerage.

The investment will be listed on the stock exchange under the code FCG060 and should be relatively liquid, allowing investors to sell at any stage.

Payment would be due no later than Thursday, 7 November 2024.

Full details of the offer can be found on our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/fcg060.pdf

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Travel

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

8 November – New Plymouth – David Colman13 November – Ellerslie – Edward Lee14 November – Albany – Edward Lee15 November – Auckland CBD – Edward Lee14 November – Arrowtown – Chris Lee28 November – Napier – Edward Lee29 November – Napier – Edward Lee

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

Chris Lee and Partners Limited