Chris Lee & Partners Ltd

Market News

David Colman writes:

Seeka (SEK) investors were provided a stakeholder update from the fruit-growing company, synonymous with kiwifruit production, which included a forecast of full-year earnings.

The company lifted its full-year earnings guidance from a profit before tax of between $17 million and $21 million to between $21 million and $25 million.

A clear strategy, excellent fruit quality, efficiency, and improved margins were described as factors in the upgraded guidance range, which is the second such upgrade this year.

Dividends, which have been intermittent for SEK over the last few years, have returned with a $0.10 per share dividend declared (the level of imputation is unknown, but the company plans to apply the maximum allowable).

Dividend payments will be made in January instead of in April to provide a quicker restoration of dividends to shareholders.

The company will continue to reduce debt but considers a dividend appropriate.

CEO Michael Franks described the company as having a good year.

SEK has operations in the New Zealand and Australian horticultural sectors, growing, processing, and supplying fruit locally and internationally through brands such as Zespri (International), SeekaFresh (New Zealand wholesaler), and Freshmax (Asia).

Fruits processed by SEK include varieties of avocado, kiwiberry, and kiwifruit in New Zealand, varieties of kiwifruit, pear, nashi pear, and plum in Australia, and imports of banana and pineapple from outside Australasia (imported from the Philippines and/or Ecuador).

SEK shareholders with memories of shares trading at levels above $5.00 as recently as early 2022 should be at least pleased to see SEK providing much-improved guidance and a return to paying dividends but will still be hoping for conditions to be favourable for the company’s many orchards that the processing plants and fruit exports rely on.

Seeka shares rose 10% following the announcement and are up 9% for the year.

Johnny Lee writes:

NZX Limited shareholders also enjoyed a positive update, as the company announced a near 10% uplift in its profit forecasts.

The increase was due to two main factors.

Firstly, the two major capital raisings from Auckland Airport and Fletcher Building had resulted in a spike in trading activity. The two raisings totalled around $2 billion of fresh equity.

Capital raisings such as this are often a boon to secondary market trading, as shareholders sell other holdings to fund their applications. Additional liquidity is sometimes seen afterwards too, as those accepting the offer take easy profits off the table. In both cases, the share price retained a value significantly higher than the price paid in the rights issue.

The other reason given was growth in fund management and funds under administration. Smart – formerly Smartshares – continues to grow, courtesy of both underlying performance and new money being invested into the funds.

NZX Limited shares are up 30% for the year so far, as it continues its discussion with the central Government around redesigning rules for new listings.

The Exchange has endured a dearth of new listings for many years and seen more than a handful of companies head to other exchanges, enter private ownership, or fail altogether. Ensuring that regulatory settings are still fit for purpose will be a crucial step towards enticing companies both new and old to list on our exchange.

With Manawa’s potential departure next year, improving investor choice and attracting entrepreneurs to capital markets will be a keen focus in the year ahead.

Last week’s inflation data was also good news for equity holders, with momentum growing for a 50-point reduction when the Reserve Bank meets on November 27.

After beginning the year at 5.50%, the Official Cash Rate currently sits at 4.75%, with debate now focused on whether November’s cut will be limited to 0.50%, or whether it could fall further.

A 0.75% reduction is not unprecedented – it occurred during COVID – but is not yet expected, with most economists predicting a smaller cut.

There remains one crucial data point before this decision is made: labour data is due on November 6. The unemployment rate was last recorded at 4.60%, with the Reserve Bank expecting that rate to spike to around 5.50% next year. It seems almost every day the media is reporting on redundancies and job losses, with both Kiwirail and Alliance Group reportedly making plans to reduce their workforce.

The inflation data showed a 0.6% quarterly increase and a 2.2% year-on-year increase. As usual, housing costs, council rates, and tobacco remain the main drivers, while petrol and vegetables were the main declines within the index.

Council rates have long been a topic of concern among those on fixed incomes, as it is not possible to change one’s demand. One can drive less, eat less, or consume less electricity. One cannot refuse to pay a rates bill.

The quarterly inflation data includes a ten-year history of the expenditure weights within the index. While this data is not perfect, it does provide something of a societal snapshot of where New Zealanders are spending their money, relative to other periods.

For example, in the 2020 year, expenditure on transport – particularly oil – slowed sharply as the effects of the lockdowns created a rapid shift in how New Zealanders spend and consume.

Inflation has not been even over the last ten years, and how we spend has also changed. Restaurants and ready-to-eat food have both increased in weighting, alongside cigarette products, international transport, and, of course, housing.

Spending on private transport services has diminished – the Uber effect, perhaps – as technology-based solutions entered the market. Three weeks ago, Wellington Combined Taxis entered voluntary administration, citing cashflow difficulties.

Spending on beer and wine has also declined over the last ten years. Again, this would not be news to many, as the global trend of younger people drinking less often and consuming fewer drinks is a well-known phenomenon.

These societal changes have tangible impacts on investments. The likes of a2 Milk, Delegat Wines, Restaurant Brands, Air New Zealand, and The Warehouse are all subject to these changing winds.

Last week’s weak inflation data has pointed a spotlight towards the November 27 Reserve Bank decision. A cut in interest rates seems likely, but the size of the cut will likely hinge on data – and perhaps events – occurring before then.

Travel

Chris is giving a talk to a group in Arrowtown on November 14 and would enjoy meeting individually with clients before the 3.30 pm meeting. He has some available times in the afternoon.

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

1 November – Lower Hutt – Fraser Hunter8 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

Market News 14 October 2024

David Colman writes:

NZX-owned New Zealand investment fund manager, Smart, announced the launch of four new exchange-traded funds (ETFs), bringing its total available ETFs to 44.

Smart ETFs has formed a new strategic alliance with iShares. iShares is part of the international giant exchange-traded fund manager BlackRock, which has over US$10 trillion of assets under management (the value of the NZX main board is just over US$100 billion).

The intention of the Smart and iShares alliance is to make it easier for Kiwi investors to invest in local or international markets, with advantages described as knowing their tax rate (taxed as PIEs at 28%) and costs upfront.

The 4 new Smart ETFs include:

BTC - Smart Bitcoin ETF

GLD - Smart Gold ETF

UST - Smart US Technology (NZD Hedged) ETF

NZT – Smart S&P/NZX20 ETF

BTC - Smart Bitcoin ETF invests in the Blackrock iShares Bitcoin Trust (listed under IBIT on the NASDAQ), which tracks the performance of the price of bitcoin.

GLD - Smart Gold ETF invests in the Blackrock iShares Gold Trust (listed under IAU on the NYSE Arca), which tracks the performance of the price of gold.

Smart describes BTC and GLD as providing investors with exposure to bitcoin and gold respectively without having to buy, store, or manage them directly.

It’s hard not to notice that the issue of these ETFs coincides with Bitcoin and gold prices both at historically high levels.

Bitcoin is above US$60,000 and up 42% year to date, and gold is above US$2,600 and up 22% year to date.

UST - Smart US Technology (NZD Hedged) ETF invests in the Blackrock iShares S&P 500 Information Technology Sector UCITS ETF. Intended to track the return (before tax, fees and other expenses) of the S&P 500 Capped 35/20 Information Technology Index (100% NZD Hedged).

Smart describes UST as providing investors with exposure to the 67 leading companies within the US Information Technology sector.

In reality, 3 multinational technology giants represent over 50% of the fund’s holdings by weighting, including Apple (22%), Nvidia (20%), and Microsoft (17.5%).

NZT - Smart S&P/NZX 20 ETF invests directly in New Zealand shares and is designed to track the return (before tax, fees and other expenses) of the S&P/NZX 20 Gross with Imputation Index, comprised of 20 of the largest companies listed on the NZX Main Board.

The new ETFs are expected to be listed on the NZX Main Board from the 24th of October, but existing Smart ETF investors have been offered early access to the new ETFs and can log in and allocate funds to them earlier, between 10 October and 17 October.

The expansion of New Zealand-listed ETFs is welcome as it provides investors access to a greater variety of investments traded in local currency, which can be registered to their New Zealand Common Shareholder Number rather than the alternatives, which have tended to involve investing in foreign markets, sometimes with the addition of extra currency risk.

---

Auckland International Airport (AIA) announced that its NZ$200 million retail offer closed oversubscribed.

The retail offer was part of Auckland Airport's $1.2 billion equity raising announced on 16 September, which included a fully underwritten NZ$1 billion placement of new shares to institutional and other select investors.

New shares under the Retail Offer were issued at the same price as shares issued in the placement of $6.95 and rank equally in all respects with AIA’s existing ordinary shares.

AIA received applications totalling approximately NZ$223 million under the Retail Offer.

25,470 shareholders applied under the Retail Offer with an average application of approximately NZ$8,772.

Applications were scaled on a proportionate basis in accordance with the number of AIA shares held by the applicants on the 13 September record date, with shareholders allocated at least their pro rata proportion of the total offer amount (or the lesser amount they applied for), subject to the maximum of NZ$150,000 per shareholder.

Refunds of the surplus application amounts paid will be made to applicants on or before 18 October 2024.

Allotment and settlement of new AIA shares issued under the Retail Offer is expected to occur on 11 October 2024.

AIA shares traded well above the offer price of $6.95 for the duration of the placement and offer and on Friday was trading above $7.40 per share.

The funds raised will be used to reduce net debt, repay AIA’s $150 million October 2024 bonds, which mature this month, repay $100 million of unhedged drawn facilities, and provide flexibility to fund part of Auckland Airport’s planned terminal integration project.

---

Fletcher Building Limited (FBU) also announced the successful completion of its retail entitlement offer, which included a $418 million underwritten 1-for-4.49 pro-rata accelerated non-renounceable entitlement offer.

FBU raised a total of $700 million from both a placement and entitlement offer announced on 23 September 2024.

New shares were offered at $2.40 (or A$2.20) per new share.

Gross proceeds of approximately $587 million were received under the institutional entitlement offer and placement, and approximately $113 million in gross proceeds under the Retail Entitlement Offer.

FBU welcomed strong support from its retail shareholders for the offer, who subscribed for approximately NZ$83 million of new shares, including approximately NZ$20 million of oversubscriptions.

Shareholders who took up their entitlements in full and applied for new shares in excess of their entitlements received all of the new shares they applied for.

The effective take-up rate by eligible retail shareholders was approximately 73%, with 13 million new shares that were not taken up allocated to the underwriter and/or to sub-underwriters procured by the underwriter.

The new FBU shares to be issued under the Retail Entitlement Offer are expected to commence trading on the NZX Main Board on Tuesday, 15 October 2024 and rank equally with existing FBU fully paid ordinary shares.

The equity raising was described by FBU in eerily familiar terms, somewhat echoing the 2018 capital raising, as a prudent measure to strengthen FBU’s balance sheet and improve financial stability and resilience in the current challenging environment.

Some of the funds raised might need to be earmarked for legal expenses related to litigation regarding Iplex Pipelines Australia and Winstone Wallboards.

Similar to AIA above, FBU shares traded well above the offer price of $2.40 for the duration of the placement and retail offer and on Friday was trading above $3.00 per share.

Every trader knows to avoid buying high and selling low.

FBU has done just that over the years. The company’s enormously costly habit of issuing new shares when the share price is historically lower and buying back shares when they are higher must be broken.

Between the previous capital raise (new shares issued at $4.80 in 2018) and this one (new shares issued at $2.40), which both involved selling new shares at a discount, FBU bought shares through buybacks at premiums to today’s share price.

FBU bought back 41,212,820 shares at an average price per share of $6.63 between June 2021 and May 2022.

It is telling that the most recent capital raising involved selling shares at half the price of the 2018 capital raising.

The NZ50G has gained by 48% since May 2018.

FBU has fallen by 51% over the same timeframe – the shares have been volatile, reaching levels above $7.50 in 2021, and are a long way from the $10 per share last seen in 2016.

---

Insurance company Tower (TWR) updated full year 24 (FY24) guidance last week.

TWR anticipates full-year underlying Net Profit after Tax (NPAT) to be around $83 million, up from greater than $45 million as previously advised, due to no large events being recorded in the financial year and stronger-than-expected business performance, particularly in claims.

Tower’s previous market guidance assumed full utilisation of the FY24 large events allowance, which was conservatively set at $45 million.

As no large events were recorded in the financial year, the unused allowance has increased expected underlying NPAT by $32 million ($45 million less tax).

Reported profit is expected to be around $74 million after allowing for an increase in payments related to customer remediations and associated costs, including those related to regulatory action.

The company has truly had a very fortunate year for an insurer, and its share price reflects this.

I suspect there must be some TWR workers who have had very little to do as the company has simply enjoyed a period of receiving premiums with minimal claims.

TWR opened the 2024 year at 60 cents per share and on Friday was above $1.35 (up over 120% for the year to date).

TWR will provide full details of its FY24 performance in its financial results announcement on 28 November.

---

Kiwibank – Perpetual Preference Shares

Kiwibank (KWB) has announced its offer of perpetual preference shares (PPS), expected to constitute Additional Tier 1 Capital for KWB’s regulatory capital requirements.

This investment is perpetual, with a likely redemption opportunity in approximately 5.5 years. The PPS will be listed on the NZX under the code KWBHB, giving investors flexibility to sell at any time.

The final rate will be determined on Thursday but if the rate were set today, it would likely be approximately 7.45% per annum. The final rate could be higher or lower than this.

Kiwibank will cover transaction costs for this offer, meaning clients will not incur brokerage fees.

The investment statement and presentation are available on our website below:

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

If you would like a firm allocation, please contact us by 10:00 am, 17 October, with the investment amount and your CSN.

Payment is due no later than Tuesday, 22 October.

---

Travel

Chris is giving a talk to a group in Arrowtown on Nov 14 and would enjoy meeting individually with clients before the 3.30pm meeting. He has available times from 11.30am to 2.15pm.

29 October – Takapuna – Chris Lee

30 October – Ellerslie – Chris Lee

13 November – Ellerslie – Edward Lee14 November – Albany – Edward Lee15 November – Auckland CBD – Edward Lee

14 November – Arrowtown – Chris Lee

28 November – Napier – Edward Lee

29 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 7 October 2024

David Colman writes:

October marks the start of the final quarter of 2024 and I noticed the run up to the holiday season has begun as I walked through the Farmers store at Coastlands during the last weekend of September flanked by Christmas trees and decorations already for sale.

I would like to share the optimistic nature displayed at the department store despite New Zealand's economic conditions have been muted for much of the year.

Expectations seem to be growing that the economy is in a position to improve towards the end of year and beyond with ANZ’s business confidence survey results improving in each of the last 3 months.

Unemployment was 4.6% in the June quarter 2024 (up a full percentage point from the same time the year before) and based on news of closures of a pulp and paper mill in the Hawkes Bay, and a meatworks in Timaru, it seems likely to unfortunately, and sadly, rise.

Treasury forecast unemployment to be 4.9% for 2024 and reach 5.2% in 2025 before falling in the years beyond (possibly to 4.5%).

Global Market Trends have been mixed although the New Zealand market, which was flat for the first half of 2024, has improved of late and is now up 7.00% year to date reflecting some optimism on the back of the long-awaited Reserve Bank of New Zealand's (RBNZ's) Overnight Cash Rate (OCR) cut in August.

The RBNZ and other central bank rates that have also been cut reflect inflation data that has eased which may result in further loosening monetary policy (lowering rates).

RBNZ release another Monetary Policy Statement and OCR announcement on Wednesday 9 October and inflation data is expected on Thursday 17 October.

Australian and Chinese share markets have also improved lately and have positive performance for the year to date with the S&P/ASX200 (Australia) up 6.8% and Shanghai (China) up 15.8%.

The Shanghai market up 18% in the last month on the back of Chinese government stimulus. 

New Zealand and Australia will welcome the seemingly improving fortunes of their largest trading partner.

2024 has been an extraordinary year for gold which has increased in price by 29% for the year to date.

Interest rates have fallen across the board this year exemplified by term deposit rates.

1 year term deposit rates a year ago were typically 6.10%p.a. or higher and are now at or just above 5.00%p.a.

5 year term deposit rates a year ago were about 5.60%p.a. but have fallen to 4.30%p.a.

New issues of bonds, capital notes, and perpetual preference shares listed earlier in the year are all trading at premiums (cost more to buy than when they were issued) validating views earlier in the year that interest rates were destined to ease.

Current expectations are that this trend of easing interest rates will continue into the new year with expectations beyond 2025 having a bias towards a continuation of easing rates.

Longer term views are understandably vague but the RBNZ has previously noted an OCR of about 3.9% could be a reasonably neutral rate (neither stimulatory or restrictive) to maintain an inflation rate of 2% over the long term.

Fans of lower interest rates will still need to be aware that inflation, that dictates the direction of interest rates, may rise again.

Instability associated with harrowing conflicts particularly in Eastern Europe and the Middle East continue to inflict heavy human losses but appear somewhat ignored by global exchanges despite the major uncertainty they expose markets to.

A war in Ukraine and Russia still rages.

Escalating events involving Israel, its allies, its neighbours, and its enemies have pushed oil prices higher.

Increases in energy costs such as oil and electricity tend to be an inflationary factor.

---

Synlait Milk Bondholders are reminded that the option of early redemption will close on 15 October.

A change of control event occurred on 1 October with Bright Dairy increasing its stake in the company from 39.01% to 65.25%.

Bondholders who want to elect to have their Bonds redeemed early can do so online using the webpage: www.synlaitbond.co.nz

If Holders elect to redeem their bonds, that election will be irrevocable.

Bondholders who elect to have their Bonds redeemed early will have their Bonds redeemed on Wednesday, 13 November 2024.A suspension of trading of the bonds will apply for the 10 working day period until pre-market open on 16 October 2024.Holders who do not elect to have their Bonds redeemed early will be able to trade those Bonds once the suspension of trading is lifted on 16 October 2024. In that case, holders should note that the reduced number of outstanding bonds on issue may impact trading of the remaining bonds during the period from when the suspension of trading is lifted until the bonds cease trading on 4 December 2024. Those remaining bonds will mature on 17 December 2024.

Advised clients who hold SML010 bonds are welcome to contact us regarding this offer.

----

Fletcher Building (FBU) shareholders should be aware that the company’s Retail Entitlement Offer closes at 5.00pm on Tuesday, 8 October 2024.

The offer is available to eligible retail shareholders at the same application price as the Placement and Institutional Entitlement Offer of NZ$2.40 per New Share.

Advised clients who hold FBU shares are welcome to contact us regarding this offer.

-------On Friday 5 December 1952, a dense, dark fog coalesced in the streets of London.

The next four windless days allowed the putrid air to penetrate endless nooks and cranny’s city-wide including indoors.

The city was famous for smog but the Great Smog of London was a more deadly course of ‘pea soup’ than the multitude of exhaust pipes and chimneys had served before.

The smog was so thick that visibility in some areas could be just a single metre during the day and zero at night.

Air borne particulates included smoke, sulphur dioxide, carbon dioxide, hydrochloric acid, sulphuric acid, and fluorine compounds.

The toxic air was inhaled into the lungs of men, women and children with thousands of deaths resulting directly from the calamity with tens of thousands more suffering respiratory illnesses.

Electric trams had been abandoned in the decades prior to the event as they were seen as out-dated and had been all but replaced by diesel buses. Notably buses could hardly operate in the smog and public transport was halted until it cleared.

Power stations such as Battersea (an iconic building with 4 chimneys that featured on the cover of Pink Floyd’s ‘Animals’ album), which was conveniently located close to where the electricity it produced was used, contributed greatly to the situation.

Battersea systems intended to reduce pollution instead exacerbated the issue.

Coal was being burnt commercially and in people’s homes in great quantities as colder temperatures demanded its use for warmth and a lack of wind for days meant the smog stagnated.

The coal used was of low quality domestically in England as higher quality coal was exported to pay off the debts associated with World War 2.

New Zealand joined the coal polluting countries of the world as Genesis Energy (GNE) was burning the dirty fuel again at Huntley over winter as gas supply was insufficient.

The gas for Huntley is supplied by the Kupe gas field which is 46% owned by Genesis, 50% owned by Beach Energy (BPT.ASX) and 4% by New Zealand Oil & Gas (NZO).

Gas production in New Zealand has declined faster than expected and unfortunately means more coal will be used in its place.

Not only is coal more harmful to the environment than burning gas, it is also more expensive to buy in a country that is not a major coal producer.

Genesis Full year operating earnings are forecast to be down by $20million to approximately $430million.

The company’s share price, which had been on an upward trajectory from $2.31 in November 2023 to $2.57 in February 2024 (likely due to the company’s clearer plans regarding transitioning to renewables) has since tumbled to $2.13.

The current GNE share price is close to the low of $2.00 briefly reached in the depths of the early 2020 covid-19 dive.

Genesis expects to burn through much of its 500,000-tonne coal stash and then replenish as needed to maintain a stockpile of 350,000 tonnes.

The cost of CO2 units for Genesis are well below higher levels seen in 2022 which might partially offset the more expensive and less efficient fuel for Huntley.

There is still much debate about whether the purchase of carbon credits actually has a meaningful impact on global pollution.

The company’s plans are to have 95% renewable generation by 2035 (the Gen 35 Strategy).

Genesis has had to tap the brakes on this transition due to the use of coal but is committed to a $1.1 billion investment in renewable electricity infrastructure including the recent $150 million investment in a 100 MW/200 MWh grid-scale battery at Huntly Power Station and delivering up to 500 MW of grid-scale solar by FY28.

Genesis last week acquired a majority stake in New Zealand’s largest nationwide electric vehicle (EV) public charging network known as Chargenet.

Chargenet operates more than 400 public fast-charging points across New Zealand with Genesis paying $64 million for a 65% stake in the business.

Genesis and Chargenet plan to expand the country's charging infrastructure with a doubling of charge points targeted by 2030. This is intended to make EV adoption more accessible, convenient, and support the government’s goal of a national network of 10,000 chargers by 2030. Value for shareholders will be another goal of the plan.

It is disappointing to see coal use return in earnest in New Zealand and it is worrying that some of our country’s energy sources look uncertain.

Progress towards goals regarding pollution, that were committed to in treaties such as the Kyoto Protocol (New Zealand signed in December 2002) and the Paris Agreement (2016), are proving challenging for New Zealand (an archipelago with a low population density) and likely more so for the world in general.

The Great London Smog was over 70 years ago and despite the obvious polluting factors associated with its use, international coal use hit an all-time high in 2023 with India and China heavily reliant on coal for electricity.

Air pollution is estimated to lead to the deaths of approximately 7 million people a year.

---

Kiwibank - Perpetual Preference Shares

Kiwibank (KWB) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for KWB’s regulatory capital requirements and to have an investment grade credit rating.

This investment is perpetual, with a likely redemption date in 5.5 years’ time.

The initial 5.5-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of between 6.75- 7.00% per annum.

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

More details are expected on 14 October.

KWB has a strong credit rating of AA.

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

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

---

Travel

8 October – Ashburton – Chris Lee

9 October – Timaru – Chris Lee

16 October – Albany - Edward Lee

18 October – Ellerslie – Edward Lee

29 October – Takapuna – Chris Lee

30 October – Ellerslie – Chris Lee

14 November – Arrowtown – Chris Lee

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

Chris Lee and Partners Limited