Chris Lee & Partners Ltd

Market News 30 September 2024

Johnny Lee writes:

Hot on the heels of the Auckland Airport capital raising, Fletcher Building has also confirmed it is seeking a handout from its shareholders.

Fletcher Building is raising $700 million in order to lower its debt gearing levels. The institutional component is already complete, with the smaller retail component now live.

Concerns around Fletcher’s debt levels have been flagged for many months now. In February of this year, the company issued a release to the market responding to these concerns, stating the company was not looking to raise capital. 

Between then and now, the company has offloaded several assets, including TradeLink and its Fijian construction arm. However, the sums achieved through these sales were clearly insufficient, forcing the company to issue equity through this rights issue.

The offer entitles retail shareholders the opportunity to buy one new share for every 4.49 shares held at the record date – meaning a shareholder of 10,000 Fletcher Building shares is entitled to buy an additional 2,227 shares. The price has been set at $2.40 per share.

The rights will not be tradeable and there is no discount clause applied should the price drop. Therefore, it is very likely that shareholders will wait until nearer the closing date – 8 October – before making a decision. With a current share price at around $2.70, the discount (currently) is substantial. The accelerated nature of the raise means shareholders will need to arrange their affairs quickly, should they wish to participate.

Fletcher Building last reached $2.40 per share back in 2001. In that year, Ralph Waters was Chief Executive Officer and Dr Roderick Deane was Chairman. The company had just declared it had reduced debt from $485 million to $274 million, and that it was in the process of finally settling a long-running legal dispute in Australia with its equity partner, AXA, regarding the Victorian Hospitals Co-generation Project.

Now, the company has declared it is raising $700 million of new capital to reduce its debt – currently at $1.8 billion - and is in the process of finally settling a long-running legal dispute in Australia, regarding its Iplex Pipelines subsidiary.

The discount will undoubtedly attract some level of shareholder support. Even those uninterested in remaining long-term shareholders will be tempted by the potential for short-term profit, rather than allow themselves to be diluted without recompense.

Unlike the Auckland Airport capital raising, Fletcher Building will be under intense pressure to prove it can generate long-term, sustainable shareholder returns. Excluding COVID, Auckland Airport has been consistently profitable and a reliable dividend payer. Dividends have grown over time, and company leadership has been stable.

Fletcher Building shareholders will be pleading for such a period of consistency. While construction is a cyclical industry, the company has had a number of strategic pivots, leadership changes and legal battles that have proven destructive to shareholder value. 

Raising capital to repay debt is a necessary first step. The $700 million sum should act as a reset for the company’s balance sheet. 

Shareholders interested in this offer should arrange their affairs now. 

 _ _ _ _ _ _ _ _ _ _

The Warehouse has produced its full year result, reporting a $54.2 million loss. It is the company’s first full year loss.

No dividend was declared. All three divisions – The Warehouse (Red Sheds), Warehouse Stationery (Blue Sheds) and Noel Leeming reported revenue and profit declines. 

On a product basis, the company reported grocery and technology sales were stronger, but more than offset by declines in homeware and apparel. Surprisingly, grocery sales now make up a quarter of all The Warehouse’s total sales.

Two major transactions throughout the year impacted this result. The closure of TheMarket and the sale of Torpedo7 for $1 had a significant impact on the business, both in terms of its accounting profit and its strategy moving forward.

The trend across the business remains ugly, with sales declining markedly across all three divisions. Noel Leeming and Warehouse Stationery have not seen an increase in year-on-year sales since COVID. 

Of course, this announcement was made against the backdrop of takeover interest. 

Adamantem Capital, with support from major shareholder Sir Stephen Tindall, expressed interest in buying the company in July. The takeover offer was rejected by the board, causing the share price to immediately lose the gains enjoyed following the takeover approach. 

The share price remains well below the price range indicated on the takeover announcement. Shareholders will be hoping the board's rebuff ends differently than the likes of E-ROAD or Steel and Tube, both of which struggled in the aftermath of a takeover rejection.

For The Warehouse, 2024 will hopefully be defined as a year when tough choices were made to better place the company moving forward. The historically low share price has generated some acquisition interest, but for now, the company is pursuing its own path for restoring shareholder value. 

 _ _ _ _ _ _ _ _ _ _ 

The Arvida takeover has been overwhelmingly approved by shareholders, and the company will now delist, pending final regulatory approvals.

There is nothing further for shareholders to do. Shareholders are expected to be paid the $1.70 payout on 13 November.

Bondholders of the Arvida bond – ARV010 – are expected to continue to receive interest payments until the maturity date in 2028. 

This contrasts with the Manawa bonds, which Contact Energy has publicly confirmed it will immediately repay if its acquisition of Manawa is approved.

Arvida’s departure from the index will mean the introduction - or perhaps the re-introduction - of a new stock to the NZX50. Such inclusions can lead to improved liquidity and occasionally, analyst coverage.

International interest in New Zealand’s assets remains strong. The overwhelming investor support for the offer suggests shareholders are happy to accept this dynamic, passing the risks - and rewards - to longer-term, overseas investors.

_ _ _ _ _ _ _ _ _ _

A2 Milk shareholders can anticipate a major announcement this week, with the company requesting a trading halt late on Friday.

The halt is to give the company time to prepare a statement to the exchange, relating to an acquisition being made by a2 Milk.

A2 has long held an excess of cash on its books. Indeed, the interest income on its term deposits has become a meaningful addition to the company’s revenue stream.

More information on this potential acquisition is expected over the next two days.

_ _ _ _ _ _ _ _ _ _

New Issue

SBS Bank (SBS) has opened a new 5.5-year senior bond.

Based on current market conditions we are expecting an interest rate of approximately 4.95%.

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

The bonds will be listed on the NZX and will have an investment grade credit rating of BBB+.

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

https://www.chrislee.co.nz/uploads//currentinvestments/SBS030.pdf

The offer is open today, and closes Thursday, 3 October at 10am.

Payment would be due no later than Wednesday, 9 October.

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

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

7 October – Christchurch – Chris Lee

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

Market New 23 September 2024

Johnny Lee writes:

Auckland Airport is raising $1.4 billion dollars from its shareholders to construct a new domestic jet terminal.

Auckland Airport is one of our largest companies and a constituent of virtually every Kiwisaver account in the country. While its performance has struggled since COVID, it remains a cornerstone of New Zealand’s infrastructure. The $1.4 billion dollars being raised compares to a market capitalisation of about $11 billion.

$1.2 billion of the deal has concluded already, courtesy of a placement with institutional investors. Institutional investors supported the offer at $6.95 per share, a modest discount to the current rate of around $7.15.

It is easy to lose sight of the sheer magnitude of these sums. $1.4 billion dollars is greater than the market capitalisation of most of our publicly listed companies, comparable to perhaps Arvida or Vital Healthcare Property Trust. It is a significant sum to be raising.

Readers will recall that the Auckland City Council reduced its shareholding in the airport last year, selling down from a 18.1% shareholding to become a 11.1% shareholder. One of the reasons given at the time was a concern that a future capital raising would place a significant burden upon ratepayers – or result in heavy dilution. 

It seems those concerns were well founded. The shares were sold at an average price of $8.11. The mayor of Auckland has since raised the possibility of selling the remaining shares, in order to invest into a diversified fund, arguing that owning a small proportion of many assets was more prudent than owning a large proportion of one.

The Wellington City Council undertook a similar strategic pivot when it voted to sell its Wellington Airport shareholding. The risks observed during COVID have shown the risk of holding large, concentrated portfolios.

For now, attention turns to the retail component of Auckland Airports capital raising – being the balance of $200 million.

This leg of the capital raising has been priced at the lower of the price paid by the institutional investors - $6.95 – or a modest discount should the price fall. This gives retail holders some degree of insurance. With geopolitical tensions soaring, such insurance would be necessary for both parties.

Retail investors are invited to apply up to $150,000 worth of new shares at the offered price. This figure will mean that almost every shareholder will have the opportunity to bid for their proportional allocation, with only the very largest missing out.

While shareholders will naturally question the price tag, Auckland Airport is confident that the new terminal – expected to cost over $2 billion in total – will enable the company’s facilities to better cope with an expected increase in passenger demand.

Auckland Airport did receive some criticism from the New Zealand Shareholders Association. The NZSA argued that special placements to institutions need to be more clearly justified when used in place of a pro rata entitlement, to avoid the possibility of preferential treatment for institutions.

Placements are a common tool when certainty and haste are required. Pro rata entitlements must be given time - to allow shareholders to arrange their affairs - and can fail if share prices decline during the offer period. Institutional placement can be conducted within days. 

Whether $200 million is enough to satisfy retail demand remains to be seen, and may hinge on the share price performance over the next two weeks.

The retail offer is open for existing shareholders now. It closes on 4 October.

_ _ _ _ _ _ _ _ _ _

Interest rates continue to decline, as the US Federal Reserve cut rates by 0.50% last week.

The decision was not unanimous. One Governor dissented, believing that inflationary pressures still remained and voted for a 0.25% reduction instead. 

Predictably, share prices responded positively almost across the board, with the Dow hitting a new record of 42,000, only a few months after crossing the 40,000 threshold for the first time.  

The New Zealand exchange remains modestly higher for the year, largely carried by the phenomenal performance of Fisher and Paykel Healthcare, which is up nearly 50% this year so far.

The fall in interest rates would be evident to even the most disengaged investor. Bond yields - once over 7% - are now trending nearer to 5%. With the exception of perhaps Fletcher Building, almost every bond is now down from last year.

Term deposits, particularly those at the long-dated end of the spectrum, are now priced around 4.30 – 4.40%. 

Our own Reserve Bank next meets on 9 October. Like the US Federal Reserve, the RBNZ is expected to continue cutting interest rates. The question is how quickly rates need to come down, and to what level. 

_ _ _ _ _ _ _ _ _ _ 

Synlait shareholders have overwhelmingly approved the capital raising transaction with the company’s two largest shareholders, paving the way for bondholders to demand repayment.

The two choices facing bondholders now are fairly straightforward.

On 1 October, bondholders will be able to log in to a specially created Synlait bond website and nominate for their bonds to be repaid. Those who do are expected to be repaid on 13 November. From there, all association with Synlait will end.

Those who do not elect for their bonds to be repaid will instead be repaid on the nominal repayment date of 17 December. 

Even when accounting for the sharp decline in swap rates, the coupon of 3.83% is unlikely to inspire bondholders to wait the additional month. After months of roller-coaster bond valuations, most bondholders will likely simply request early repayment. 

Future bond issuance from Synlait seems unlikely. 

For equity holders, the vote means extreme dilution, in exchange for what the independent directors view as the best chance for survival. Bright Dairy now owns most of the shares in the company, and has paid for the right to call the shots. Retail shareholders should be under no illusions going forward. 

Clearly, the first job for Synlait will be to woo back those suppliers who have handed in their cessation notices. An update on this could be seen as early as at the half year result next March, as the company’s ‘’outreach programme’’ begins. 

The enormous loss of value from Synlait over the last five years has been catastrophic for investors. A combination of events both inside and outside its control has led to the company seeking a bailout from its two largest shareholders.

Now, the company must try to rebuild, both financially and reputationally.

_ _ _ _ _ _ _ _ _ _

New Bond Issue

Contact Energy (CEN) has announced a capital green bond offer.

The bonds will have a 30-year maturity date, with an election option for repayment after 5 years, allowing Contact to repay investors early. It is likely that Contact will repay investors at the election date if investors would like to be repaid.

The interest rate is yet to be set but will have a minimum of 5.65% per annum.

CEN will cover all transaction costs for this offer, meaning clients will not incur any brokerage fees.

The offer is now open and will close at 10 am on Thursday, 26 September.

Payment must be made no later than Tuesday, 1 October.

If you would like a firm allocation of these bonds, please contact us promptly with your desired amount and the CSN you wish to use.

Full details of the offer, including a presentation, can be found on our website here:

https://www.chrislee.co.nz/uploads//currentinvestments/CEN090.pdf

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Travel

27 September - New Plymouth – David Colman

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

04 October – Wairarapa – Fraser Hunter

7 October – Christchurch – Chris Lee

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

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

Chris Lee and Partners Limited

Market News 16 September 2024

Johnny Lee writes:

Contact Energy is proposing to buy Manawa Energy.

The offer, expected to conclude in the first half of 2025, is for the entirety of Manawa and will see Manawa delist from our exchange.

Manawa, formerly known as Trustpower, is majority controlled by Infratil and TECT – the Tauranga Energy Consumer Trust. Both entities have already committed their aggregated 78% shareholding to accept the scheme of arrangement.

The acquisition will be settled by a combination of shares and cash. Manawa shareholders will receive $1.16 per share, plus 0.5719 Contact shares per Manawa share held. With Contact trading at around $8.15 per share, this equates to a value of around $5.80 a share. This dollar amount does include a large asterisk, however.

This figure will fluctuate. Not only will Contact Energy’s share price change, but both the cash component will change – based on any dividends Manawa pays – and the Contact Energy ratio will change – based on any dividends Contact pays.

If the deal does indeed conclude in the middle of next year, this will include the normal dividend payout month of both companies. In Manawa’s case, it may include two payments.

The transaction is subject to a number of approvals, and these are not a forgone conclusion. Electricity prices are a sensitive issue at the moment, and the New Zealand Commerce Commission would need to be convinced that such a merger of assets would not result in Contact having undue power in the electricity generation sector. Manawa sold its retail customer facing unit in 2022 to Mercury after similar scrutiny from the NZCC.

The announcement of this proposed takeover has several implications to consider for investors.

For Manawa shareholders, the current pricing represents a two-year high, and the offer includes shares in a larger company.

This offer may represent a good opportunity to exit for its two largest shareholders. While Manawa has always had reasonable liquidity, 10% of Contact Energy is significantly easier to trade than 51% of Manawa.

Ironically, four years ago, Infratil was approached by AustralianSuper with an indicative offer to buy the company for $4.69 per share. However, the one asset AustralianSuper did not include in the proposal was Manawa, instead offering an in-specie distribution to Infratil shareholders. Obviously, this did not come to pass, and Infratil now trades above $12 a share.

For Manawa bondholders, this transaction will very much depend on the terms of the deal, and one’s view on interest rates. All bondholders – Manawa’s listed bonds are MNW170 (2029), MNW180 (2026) and MNW190 (2027) - will be repaid immediately by Contact once the deal concludes next year.

The Scheme Arrangement Booklet, expected to be sent to shareholders in early 2025, will include details around this repayment. Presumably, the bonds will be repaid at the higher of par or the prevailing market price. The three listed bonds total about $375,000,000 of outstanding value, if price at par. Contact has stated it intends to fund this from existing facilities.

Combined with the $363 million in cash value, this would represent about $740 million returned to investors across the two asset classes. The balance, perhaps around $1.5 billion, would be issued in Contact shares or repaid to Manawa’s bankers.

For Contact shareholders, the transaction represents an opportunity to diversify its assets immediately and into the future. Manawa’s pipeline of potential assets gives Contact additional options, and also gives the Contact a more diverse generation profile, with Manawa’s assets being located in different areas. 

The number of Contact shares on issue will increase, which does have a dilutionary impact. Some control will also be ceded, with Manawa shareholders (mostly Infratil and TECT) taking an 18% stake in Contact once allotted. 

Contact’s leadership has not been shy about disclosing its view that the offer is great value for Contact shareholders. Manawa shareholders will have read these opinions. Whether they inspire a second bidder to emerge remains to be seen. 

For Infratil shareholders, the transaction represents about $300 million in value that has been added immediately courtesy of the increased Manawa share price. However, the question will be what Infratil intends to do longer term. The transaction will leave Infratil owning about 10% of Contact Energy.

Infratil’s announcement stated that the company was looking forward to the potential for higher dividends and increased flexibility across its portfolio. However, Infratil is not typically in the business of owning small minority stakes in companies. As this offer progresses, Infratil will likely put forward its case for either holding Contact long-term, or moving on to another opportunity.

For those observing from the sidelines, the announcement would represent yet another departure from our exchange. Barring a regulatory intervention, Manawa will find itself added to the long list of companies that have left our exchange.

The possibility of such regulatory interference is always a risk. While Manawa no longer holds its retail customer facing unit, Contact will face questions around its market power in the generation market. Manawa is not a major electricity generator when compared to the likes of Meridian and Contact. However, much of our generation is already tied up to the top four generators: Meridian, Contact, Genesis and Mercury.

One could argue that Manawa’s pipeline of development for new generation would be accelerated by Contact’s financial grunt. The same person could also argue that by removing duplications in back-office functions, Contact and Manawa would be more efficient as a combined entity.

The delisting of Manawa – which is absolutely not a forgone conclusion - would usher in a new company to join the NZX50. The most recent change to the indices occurred in December 2023, when Gentrack and Turner Automotive entered the index and Pacific Edge and Synlait were removed. The next change, most likely, will be the removal of Arvida later this year.

The next steps for Manawa shareholders will include the Independent Adviser’s Report, which should provide shareholders some guidance on the update to date value of Manawa’s assets. 

The takeover approach for Manawa by Contact would represent one of the largest takeovers between listed companies in NZX history. A number of hurdles remain, and judging by the share price – up 35%, but currently at a steep discount to the implied value of the takeover – there remains much to prove before this offer concludes.

_ _ _ _ _ _ _ _ _ _

Briscoes has updated the market with its half year results.

While net profit fell 22%, much of this was attributed to adjust for the recent tax changes. Excluding these one-off items, Briscoes reported a 5% decrease in net profit.

A dividend of 12.5 cents per share was declared, which represents no change from last year.

While revenue did climb, the increased pressure on margins led to the headline result. Passing on cost increases is becoming more difficult, as consumers continue to find their wallets stretched.

Briscoes investment into KMD Brands (formerly Kathmandu) dragged the result down further. Kathmandu shares are down 30% this year and have not paid a dividend so far this year.

Briscoes remains significantly cash rich, with $130 million sitting in the bank, but did warn shareholders that its new automated distribution centre would demand at least $100 million over the three-year period. 

While Briscoes cautioned that trading conditions are worsening, hope remains that lower cash rates will return some optimism to consumers. A number of sectors are expressing similar sentiments.

Overall, Briscoes is profitable, paying dividends, has plenty in the bank, and has a strategy in place to move the company forward. However, retail conditions remain difficult, and a return of consumer confidence – perhaps spurred by falling interest rates – would be welcomed. 

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Travel

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny Lee

16 October – Albany - Edward Lee

18 October – Ellerslie – 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 9 September 2024

Johnny Lee writes:

Over the course of 2024, several trends have been driving global markets, and have been impacting equity markets in particular, both here and around the world. 

Interest rates remain one such key driver for asset pricing. This is particularly true in the United States, where the Federal Reserve is now expected to cut rates as early as the September 17 meeting. Indeed, some have been calling for a 50 basis point (0.5%) cut, with market pricing suggesting a distinct possibility of this outcome.

In New Zealand, the expectation remains that the Reserve Bank will cut rates in October, with most economists anticipating either a 25 or 50 basis point cut. 

Further cuts are expected over the years ahead, with the Reserve Bank anticipating rates to stabilise around 3-4%.

When interest rates enter a cutting cycle, it is normal to see investors seek out longer dated securities, hoping to lock in rates at favourable levels before rate cuts take place. The popularity of the recent BNZ and Westpac issues highlight this.

On the other side of the ledger, mortgage holders and other borrowers often pivot to short-dated debt, hoping to re-borrow at lower rates once the term expires.

As these events play out, markets will respond as uncertainty is either added or removed. After almost two years of plateaued rates, we have seen interest rates rise very quickly to current levels. Now, an era of moderation may be underway.

Another trend continuing to play out is the Artificial Intelligence boom, and its potential to solve some problems (and create a few!)

The sudden popularity of these technologies has also led to almost extreme growth in associated industries, with the semi-conductor sector, the construction sector, and the renewable energy sector being notable beneficiaries of this trend.

Nvidia has been a well publicised beneficiary of the boom, although investor expectations may have reached unachievable levels. After reporting a 122% year on year increase in revenue last month, NVIDIA’s market value fell by the equivalent of nearly a trillion New Zealand dollars.

Some sectors will almost certainly see disruption should this AI technology continue to improve. The CEO of international ‘’buy now, pay later’’ firm Klarna recently stated that the company’s investment into AI would eventually replace thousands of its workers. 

There has also been increasing focus on the impact AI is having on the call centre and outsourcing industry. 

In the Philippines, home of 15% of the world's outsourcing market, concerns are being raised that the improving competency of AI will lead to a societal shift away from these services, particularly in the call centre industry. AI does not have wait times, nor does it complain or require ongoing training and development.

Even in New Zealand, some of our newer fast-food restaurants are trialling Artificial Intelligence as a solution to staffing shortages.

The sheer speed of growth in this industry has led to many warnings that AI is accelerating too quickly, and risks becoming a bubble for investors. Certainly, billions are being invested by some of the largest companies in the world. The next step will be generating the substantial revenues needed to justify this investment.

The societal costs of these innovations should not be overlooked either. For example, the data centre industry is expanding rapidly, and with it, comes a need for additional electricity generation. Even in New Zealand, this impact is being felt. Genesis Energy and Spark’s power price agreement is a recent example of this.

There is also the human cost. Jobs once performed by humans may be displaced by this technology, with very few industries immune. Creative roles - illustrators, writers, filmmakers - have been particularly vocal in highlighting the threat of these new tools. 

Another threat from these technologies is the broader issue of misinformation. The upcoming US election has brought this issue to the fore, with fake images of both presidential candidates circulating the internet. The role of the fourth estate will be crucial as we navigate this particular challenge.

The trend towards artificial intelligence is unlikely to stop, bubble or not. Every country will need thoughtful and proactive leadership to maximise the benefits and minimise the harm of this nascent technology.

One last trend worth noting is the continued uncertainty surrounding global demographics, leading to investment uncertainty for many industries.

July saw the release of the biannual World Population Prospects report from the United Nations, updating its estimates and projections for the trajectory of the human population.

The United Nations now believes that many of the world’s most populous countries – including China, Germany, Japan and Russia – may have peaked in population. Global population growth would be seen primarily from the African continent, with the UN highlighting the growth in Angola, Somalia and the Democratic Republic of Congo.

Countries with low fertility rates - particularly those that are resistant to immigration - would likely see population decline. 

Different demographics spend and consume differently. Markets like alcohol, cinema, technology and tourism will see an evolving consumer, and will need to respond alongside these changes.

Changing demographics have implications for investors, particularly in sectors that have a particular demographic bias. A2 Milk, for example, has been vocal about how it is positioning itself in the face of these changes. 

It also has implications for infrastructure needs. Fewer children being born will lead to ramifications for the education sector. In China, kindergarten closures are said to be surging, as preschool enrolment numbers fall back to 2014 levels, leading to job losses across the sector.

Governments globally are trying to respond to this trend. Between ‘’baby bonuses’’, reducing the working week, investment into childcare services and extensions of parental leave, many different approaches are taking place. So far, a solution is proving elusive.

_ _ _ _ _ _ _ _ _ _

Hallenstein Glasson has issued a brief, positive update to market, advising a 6.3% increase in sales and a significant lift in gross margin.

The share price rose 4% following the announcement.

The announcement included a guidance update, with the company now expecting a 14% lift from last year's net profit.

Hallenstein has been remarkably resilient over the last few years, with its share price still above pre-COVID levels while the company continues to pay one of the highest dividend yields on the market.

While investor sentiment for retail stocks has been depressed following the underperformance of some of Hallenstein’s peers, the company has avoided the trap of excessive debt and looks set to reap the benefits of cautious investment.

The company has a significant net cash position, is profitable, and is focused on providing shareholders with a consistent return for their risk.

The long term picture - with rising unemployment and increasing pressure on discretionary spending - may deter the risk-averse. However, last week's announcement should provide comfort to shareholders that the company is well positioned in the short term.

 _ _ _ _ _ _ _ _ _ _ 

Dr John Penno’s complaint regarding Synlait Milk has been dismissed.

Both NZ RegCo (the regulator of the NZX) and the Takeovers Panel have dismissed the complaint, clearing the path for shareholders to vote on the proposed rights issue.

The share price and bond price of Synlait recovered following the announcement. The bonds are now trading close to par – 97 cents - suggesting repayment is now considered a forgone conclusion.

There is still the matter of the shareholder vote. With both a2 and Bright Dairy cleared to approve the other's resolution, the two proposals will need only modest support from remaining shareholders to cross the line.

From there, bondholders will be able to request early repayment, scheduled for November. Meanwhile, those remaining shareholders will begin their journey - alongside Bright Dairy and a2 - to recover the value lost over the last five years.

_ _ _ _ _ _ _ _ _ _

Travel

18 September – Lower Hutt – David Colman

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman02 October – Tauranga – Johnny Lee

04 October – Hamilton – Johnny 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 2 September 2024

Johnny Lee writes:

Reporting season is now over, as the final company reports trickle through for investors to mull over.

Heartland, Chorus and Vector were three of the larger movers this reporting season, as each company reported profits and dividends for shareholders.

Chorus reported record revenue and earnings, as the wind-down of the fibre rollout – and the associated capital expenditure – continues.

The steep decline in capital expenditure was accompanied by a modest increase in dividend. The dividend declared of 28.5 cents is a 3 cent increase from last year.

Importantly, the forecast dividend for next year represents another leap, moving from 47.5 cents per share to a forecast 55.5 cents per share. Both this dividend, and the forecast payment next year, are unimputed.

Connection numbers continue to grow at both ends of the spectrum, with high speed and the more affordable options seeing connection growth. With unemployment forecasted to rise and families looking to cut costs, it will be an interesting metric to observe in the years ahead.

Older copper connections continue to be phased out, with the company having a stated goal of being a ‘’single technology, all-fibre business’’ as part of its 2030 plan. This decline in copper usage has also led to a reduction in electricity consumption, a trend Chorus hopes to continue.

Chorus also highlights its Crown financing due over the next decade. The Crown has a combination of equity (non-voting but dividend earning) and non-interest bearing debt with Chorus. Chorus, eventually, will need to repay these facilities. Next year may see the first of these repaid.

The Chorus announcement saw the share price jump 8%, as shareholders look forward to a stronger dividend and a possible further increase next year.

Vector’s result saw a modest increase in underlying revenue, with revenue up 5% on a continuing operations basis.

This basis strips out the one-off gains seen by the company exiting some of its metering and natural gas operations. 

While new electricity connections grew slightly from last year, overall new connections growth fell on the back of declining new gas numbers. The company is forecasting a further decline of new connections in the year ahead, both in electricity and gas. 

The dividend of 14.75 cents per share – without imputation, as usual – is broken into a special dividend, and a regular final dividend. This division also occurred last year.

This year, the dividend is split as a 13 cent final dividend, and a 1.75 cent special dividend.

Companies often use special dividends to distribute profit on a one-off basis, with final dividends used to help guide investors regarding future returns. In Vector’s case, the company highlights that it is expecting a review of its dividend policy towards the end of this year, which should provide clarity to shareholders longer-term.

Vector’s share price rose 5% following the announcement.

Heartland’s result was more of a mixed bag, as the company continues to pursue its renewed Australian strategy.

Net profit declined to $74.5 million, from last year’s record of $95.9 million. The company notes that one-off or non-cash technical items reduced NPAT by $28.2 million.

This $28.2 million is largely made up of increasing provisioning and one-off costs regarding its acquisitions in Australia. 

Receivables continued to grow strongly, with much of the growth seen in New Zealand and Australian Reverse Mortgages. Livestock lending in Australia declined. 

A dividend of 3 cents per share was declared, representing 55% of underlying net profit. The board provided guidance that the company expects this ratio to remain above 50% next year, but will adjust as opportunities present themselves. 

The company is still positive towards its longer-term ambition of $200 million profit by 2028. Heartland did not provide any NPAT guidance, citing high levels of uncertainty.

Overall, the result came in below previous guidance, impacted by the increases provisions. The share price fell about 10% following the announcement.

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The Synlait story continues to twist and turn, ahead of the critical shareholder meeting, currently scheduled for the 18th of September.

Company founder and 2.3% shareholder John Penno has lodged a complaint with the various regulators ahead of the meeting, regarding the recent announcement proposing to recapitalise Synlait.

To recap, the two largest shareholders of Synlait – Bright Dairy and a2 Milk Company – have agreed to inject capital into Synlait by way of purchasing newly issued shares. A2 will buy approximately 76 million new shares at 43 cents per share, while Bright Dairy will buy roughly 308 million new shares at 60 cents per share.

This will leave Bright Dairy controlling the company with 65.25% of Synlait, a2 retaining its 19.83% ownership, and the remaining shareholders massively diluted.

The issue of new shares is subject to shareholder approval. As is required by the NZX Listing Rules, both Bright Dairy and a2 Milk must abstain from voting on their own resolutions. However, Bright Dairy and a2 Milk have both publicly declared their intention to vote for the others agreement, greatly improving the chance of success.

Penno’s complaint asserts that Bright Dairy and a2 Milk should each abstain from both votes. Certainly, any hopes to defeat the proposal will be greatly aided by the largest shareholders combined absence.

If the proposal is defeated, Synlait has indicated that the company may be insolvent, and that receivership may be inevitable. Bondholders would re-enter limbo, and shareholders would be totally reliant on the ability of the receivers to recoup value from Synlait’s underlying assets. 

Whether this challenge has any (legal) merit should be answered soon. Market pricing seems to be suggesting continued confidence in the bond repayment. Synlait has agreed to abide by NZX Listing Rules, and if its actions are permitted, it is likely that the vote will proceed as expected. Such a conclusion would be welcomed by the SML010 bondholders.

The argument on whether two large shareholders should be allowed to vote on giving the other huge numbers of new shares in a company may require greater debate. It is undoubtedly true that small shareholders should always consider the objectives of the larger shareholders of their company, especially when the power imbalance is significant. 

The next few weeks will be critical for Synlait share and bond holders. If the proposal to recapitalise the company proceeds, the Synlait bond repayment website is expected to go live on 1 October, with repayment (for those who demand early repayment) expected on 13 November. These dates are subject to change.

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Santana Minerals has made an announcement to market, proposing the company issue new shares via a stock split.

The proposed split is subject to shareholders approval and is proposed as a 1:3 split. For clarity, this means a shareholder of 10,000 Santana shares today would become a shareholder of 30,000 Santana shares post-split.

The price, logically, should fall to a third of its previous value. The physical assets behind the company have not changed and no cash is being raised. In practice, this does not always occur, as price is determined by supply and demand. Markets are not always logical.

Stock splits are rare, but most long-term share investors would have some experience with the concept. Port of Tauranga, for example, had a one for five split in 2016. Reverse splits, or share consolidations, also occur. Sky Network Television is a recent example of this, where shares were consolidated 10 for 1.

Santana’s justification for the stock split is to improve liquidity and improve affordability for new investors.

The liquidity aspect is self-explanatory. The number of shares on issue will triple, and the reduced price will undoubtedly have a psychological effect on potential investors. Some investors prefer buying three shares at 60 cents, rather than a single share at $1.80. 

The affordability issue may be relevant to very small investors. 

It will be important for investors to note the outcome of this event. Share splits can cause confusion for those ‘’out of the loop’’, as these shareholders wake up to a share price significantly lower than the day prior. 

For Santana, the company has another problem that will need to be addressed: the matter of the upcoming bonus issue will need a solution. Presumably, either the option will provide three shares instead of one, or the issue price will need to be reduced from 108 Australian cents to 36 cents.

The shareholder vote on this matter is expected to be called soon.

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Westpac Bank – Perpetual Preference Share Offer

Westpac (WBC) has announced its offer of perpetual preference shares (PPS).

The initial distribution rate will be approximately 7.00% per annum, fixed for a five-year term, with quarterly distributions. The final rate will be determined on Friday, but if the rate were set today, it would likely be around 7.25% per annum. 

This investment is perpetual, with a likely redemption date in five years. It is worth noting that our expectation is that it will be repaid at that time.

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

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

The PPS will constitute additional Tier 1 capital for Westpac’s regulatory capital requirements and will have an investment-grade credit rating of BBB+. Westpac Bank itself has a strong credit rating of AA-.

As interest rates are falling quickly, this could be one of the last opportunities to invest in a security with a rate of around 7.00% per annum.

If you would like a FIRM allocation, please contact us with your CSN and an amount no later than 10am Friday, 6 September and we will add you to our list.

Payment would be due no later than Wednesday, 11 September 2024.

Full details of the offer can be found on our website.

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Travel

4 September – Palmerston North – David Colman

12 September – Auckland (Albany) – Edward Lee

13 September – Auckland (Ellerslie) – Edward Lee

18 September – Lower Hutt – David Colman

18 September – Nelson – Edward Lee

19 September – Blenheim – Edward Lee

20 September – Christchurch – Fraser Hunter

27 September - New Plymouth – David Colman

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

Chris Lee and Partners Limited