Chris Lee & Partners Ltd

Taking Stock 25 April 2024

NEW ZEALAND’S balance sheet, and that of our councils, have been so damaged by the responses to Covid, and I would argue by incompetent leadership, that there must now be a risk of quick-fix solutions.

Selling off the commercial assets of councils and government is a standard quick-fix response.

That has been illustrated by local government, recently.

Auckland’s council sold some of its Auckland Airport shares. Wellington’s council, or at least some of them, want to sell down its airport shares.

Christchurch’s council considered selling down the holding company that has shares in several public assets, including its airport and lines company.

Of course, former foreign exchange trader and Prime Minister Key sold down electricity company shares in 2012, and David Lange’s government sold a number of Crown assets.

Asset sales are a conventional way of addressing excessive debt and are commonly a response of a new government happy to emphasise the failings of its predecessors that caused the excessive debt.

If this strategy is being discussed I do hope our current thought leaders have a memory and are observing the outcome of the British decision 20 years ago to allow key national assets to be sold.

At that time Britain agreed to a £5.1 billion sale of Thames Water (TW) to the Australian fund manager/investment bank, Macquarie. The Australian company borrowed 2.8 billion to pay for TW and funded the remainder with its investors’ money.

Ofwat, Britain’s water regulator, was supposed to manage the behaviour of Macquarie, as the new owner of Britain’s biggest water supplier.

One of Ofwat’s conditions was that the Macquarie debt (£2.8b) was to be ring-fenced within Macquarie and was not be transferred into TW, which would have left the debt to be repaid by profits from the water-selling prices – that is, repaid by water consumers.

Hmmm.

This is a long story. Bear with me.

The US investment giant Goldman Sachs is often referred to as a giant squid, sucking up other people’s money through its giant tentacles.

Macquarie is the Australian equivalent, variously referred to as the octopus that sucks up so much of other people’s money that it can grossly over-reward mediocre executives, leading to its nickname of “the millionaire’s factory”. Thousands of such mediocre past and present executives now live like earls.

The Thames Water saga supports Macquarie’s sobriquet.

Most New Zealander’s will know Macquarie as the investment bank here which, for example, won a few million from Key’s privatisation of the electricity firms. It was paid millions to help with one of the three sales.

Some New Zealand investors might also be familiar with its private wealth managers, who largely promoted all the various Macquarie pods around the world – “Macquarie airports”, “Macquarie toll roads”, “Macquarie sewerage plants” etc.

I hope some will recall the Macquarie fund that raised $96 million in New Zealand for a tiny (1%) holding in Thames Water, that the fund bought from Macquarie. This atrocity should be remembered. It was an issue that favoured Macquarie and Christchurch asset trader George Kerr.

Marketed as EPIC (Equity Partners Investments), fronted by Kerr (Pyne Gould Guiness), EPIC promised to pay 9.1% in annual interest.

In addition, Kerr promoted the possibility of capital gains through his management focus on “responsible and sustainable growth allied with the financial expertise of the Macquarie Group”.

The $1 shares in EPIC were all sold, and for a brief period of a year or two, the fund produced income at 9.1% as promised.

It then faltered. The shares collapsed to a value of around 10c, at which point Kerr/PGC sought to buy out the shareholders for 30 cents each.

The bid failed. 

A bright New Zealand business leader found a British buyer who would pay twice as much. That bid succeeded. The new buyer soon repaired the company, increasing its value to well above the EPIC list price.

Kerr had not only promoted the original EPIC issue. He also owned the management rights through EPAM (Equity Partners Asset Management) to manage EPIC’s assets, a task that was richly rewarded and appeared to have demanded very little time or skill.

Before TW’s value headed south Kerr sold EPAM to PGC, in which he was a major shareholder, for $18 million; a nice reward, one might say. PGC shareholders had little to celebrate. There is little evidence that indicates PGC has been advantaged by this $18m deal.

Investors in EPIC were furious with the outcome. They had lost at least a third of their capital and had received very little interest.

A meeting in the Pulman Hotel in Auckland in around 2012 was run by a Macquarie buffoon who came over from Australia to tell the group of seething EPIC shareholders that they were privileged to be working with the “world-class advisers” in Macquarie.

Someone stood up and told him that if he had vomited on the stage the audience would be less disgusted by his presentation.

I know this to be true. I know well the fellow who spoke out.

So New Zealanders were well and truly rorted by EPIC and EPAM.

The only comforting news is that the Macquarie buffoon was soon after released by Macquarie to ply his skills elsewhere.

Meanwhile, Macquarie was destroying Thames Water in London. It had funded its £5.1 billion purchase with investor money and the £2.8 billion loan.

It soon transferred the loan to TW, so that consumers of TW services were required to service that loan, a loan that did not exist before Macquarie arrived to buy Britain’s biggest water supplier.

Macquarie then extracted far more than £1 billion in dividends, effectively funded by debt.

Water prices rose beyond belief and now need to rise dramatically again as Thames Water (not Macquarie) is heading for liquidation, previously fined a record-breaking £20 million for pouring untreated sewage into the Thames and other rivers. (The company provided water AND sewerage systems.)

The regulator Ofwat did nothing when Macquarie transferred the debt into TW, breaching the specific conditions of the purchase.

When the company was dragged into court the judge noted that “there had been inadequate investment, diabolical maintenance, and poor management”. He added that these failings were “borderline deliberate”.

Thames Water serves 8 million water consumers. A further 13 million use its sewerage treatment.

These people today must pay the cost of the new debt, the fines, the vulgar dividends extracted, and the “borderline deliberate” under-investment. New owners will raise prices, of course. Consumers will pay even higher prices.

Macquarie had sold out (in 2017), having had an abundant return on its foray into UK water and sewerage ownership. Its return had been between “15 and 19%” per annum.

There are many lessons in this ugly recount of the UK attempt to sell assets to fix up balance sheets.

A cynic might start with the issue of which investor you allow to buy the asset. In my parlance, Macquarie would be a “never again” in Britain.

Others might focus on the regulatory failure to oversee the conditions of the sale.

Others might ponder the stripping of dividends paid for by debt and might recall the NZ era of Brierley.

My view is that there are many conflicts in the debate of fixing a bad government balance sheet by selling essential assets.

Any selling certainly must be done well and should be guided by non-conflicted private sector people, perhaps in conjunction with any good people in Treasury.

Some of the process might take heed of these thoughts: -

1. Any sale must be managed well. A bad sale (like NZ Steel, sold to Equiticorp, BNZ part sold to Brierley Fay Richwhite, NZ Rail to Fay Richwhite) would be worse than no sale at all.

2. The regulators must be empowered to control the new owners. In Britain a handy condition of the sale might have included the clause that the Crown could REPOSSESS the asset if the new owner breached its promises (as Macquarie did).

3. The new buyer must be subjected to due diligence enquiries by competent people. Thankfully Brierley, Equiticorp, and Fay Richwhite are not contenders. The buyer should comprise fit and proper people. Never let an asset fall into the hands of incompetent people, who “borderline deliberately” create illusory profits by slashing costs and degrading proper processes, enabling absurd dividends.

A real cynic might add that New Zealand should be careful about welcoming in all the rich, bonus-fed, overseas investment bankers whose flight from their home base often leads them to the South Pacific, where they reinvent history, and walk around in blue suede shoes pretending commercial skills not demonstrated by their career achievements.

The Thames Water saga should be included in the curriculum of every commerce facility at our academic facilities and recounted to every apprentice in the financial markets.

_ _ _ _ _ _ _ _ _ _

CLEARLY, there is a gap between what the overseas investors think about New Zealand’s interest rates and what our financial commentators are opining.

In recent days New Zealand’s 10-year Government Stock rate has risen from around 4.45% to 4.93%, signalling that if foreign investors are going to fund our fiscal deficits and our planned infrastructural spending, they want more return.

This may reflect their view of the trajectory of our currency’s price.

Foreign investors who observe fiscal deficits and a need for funds to repair infrastructure, and to address weather-related damage, will see risk, and will demand more return to recognise that risk.

If they are also observing consistent, current account deficits (importing more than we export), they will want even more return for risk. They will fear currency devaluation.

Their strength will be the certainty that we need the savings of other countries, but those savers do not need us.

Eight years ago they would listen to the presentations of the likes of Bill English and our best financial market leaders.

Foreign investors approved of our financial management and our plans.

Those attitudes have reversed in recent years, coinciding with the degradation of our country’s balance sheet.

Our investors can choose for themselves whether the cause of the degradation was Covid or poor management of the economy.

Whatever the cause, foreign savings are not favouring NZ.

The last government stock tender was 62% funded by New Zealand-based investors and did not attract surplus enthusiasm.

Not many years ago our tenders were well over-subscribed because of foreign investors.

From all of this I infer that the chance of significantly lower interest rates in the next year or two must be low, in contrast to recent reports from various brokers forecasting imminent rate falls.

Perhaps the OCR might fall a little, but of more interest will be the long-term bond rates, whose pricing discloses the view of overseas investors.

Long-term corporate bond rates must be at a nice premium over long-term government stock rates.

Those real estate people currently forecasting a large drop in mortgage rates may be displaying extreme optimism.

I expect bank funding rates, and bond rates, to fall slowly and only incrementally.

Our sharemarkets may not like sticky inflation and high interest rates, at a time of falling household disposable income, rising unemployment and a likely prolonged recession.

Especially, those, like Ryman, and Synlait Milk, which will surely raise capital in the near future, may find the pricing of capital is not likely to favour the issuer.

_ _ _ _ _ _ _ _ _ _

Travel

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

1 May (pm) – Ashburton – Chris Lee

2 May – Timaru - Chris Lee

3 May (am) – Timaru – Chris Lee

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

Seminars

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

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

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

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

Chris Lee

Chris Lee & Partners Limited

Taking Stock 18 April 2024

AS a sector, the mainstream media is about as unattractive as artificial meat, or electric rental cars. The public says so.

To put that comment in perspective, from our few thousand clients in recent years we have not one request to provide research on any of these sectors or sub-sectors.

Those promoting artificial meat, Sunfed a recent New Zealand example, had a burst of support years ago but gradually have closed down, discovering the world preferred to eat vegetables as vegetables, not meat flavoured stuff, and meat as meat.

The Tesla comparison may surprise the many enthusiasts who have been early adopters of electric cars (as opposed to hybrids).

Providing the support for the comment that electric car rentals have declining popular appeal is the giant American car rental company, Hertz. It was bankrupted during Covid four years ago.

Merchant bankers bought the brand from the liquidator and, as so often happens, people with too much access to borrowed money (free at the time) made “Hollywood” decisions – rip, hit or bust.

The men who bought Hertz decided electric cars would reduce maintenance and fuel costs, would be a point of difference for those who need to rent cars, and believed there would be a green tick of approval for their adventure.

They ordered 100,000 Teslas in 2022.

Elon Musk announced this. Tesla's share price soared.

Whereas electric cars were far outselling hybrid cars just seven months ago, today in America hybrids sell four times the numbers that electric cars are achieving.

Sadly, Hertz’s customers did not want electric cars. They disliked the battery range, the time spent recharging, and they were unfamiliar with the instant acceleration, many crashing their cars even before they left Hertz’s depot.

So recently Hertz, having made awful losses, put their second-hand Teslas on the market, undermining the prices.

The market had its opinion on electric cars, just as it has an opinion on “plant chicken”.

To defy the market’s collective wisdom is hideously unwise.

I compare other subsets of sectors to that of the NZ media because none of the three currently look sustainable to investors and none have much chance of winning back support, unless they change radically or unless the public changes its verdict.

In the case of the NZ media the market and sector speak together in acknowledging that the current model is kaput.

For years, classified advertising, coupled with shotgun marketing from booze retailers, car salesmen, real estate agents, employment consultants, corporates and government departments had fed money to media outlets.

Things have changed; the media was seduced by its easy money 30 years ago, yet still behaves as though it has a queue of suitors.

For many years classified advertising provided such ample cash flow that Wellington's Evening Post, when I was young, had a front page solely comprising classified advertisements.

During consumer boom years in the 1980s, the media was fed so much advertising revenue that a new mindset was born.

Whereas the Bill Tofts, Dougal Stephensons and Philip Sherrys had been media servants, professionally delivering news without soiling the content with their irrelevant opinions, the later generations developed excesses that seemed childish then, but now seem nonsensical.

Gradually the likes of Wilson and Horton, INL, then Fairfax, and both TV1 and TV3 and women’s magazines (and newspaper inserts) so believed that their people were “stars” or “celebrities” that the bidding wars for talent became ludicrous.

Newsreaders were paid more than the Attorney General. I am not joking.

John Hawkesby shifted his news-reading from TV3 and worked for a few days at TV1, did not enjoy the atmosphere, and won so many millions in compensation from TV1 that he retired, bought a vineyard on Waiheke Island, and has lived thereafter, if not as a king, certainly as a prince that was previously a frog.

All sorts of television and radio journalists, having a curriculum vitae that displayed no particular bank of knowledge, social contribution or wisdom, became “deputy” or “heads” of imaginary departments and strutted around in their environment as VIPs.

I recall one insider describing these people as having won second prize in a village sack race, leading to their belief they were entitled to opine on Olympians, and dispense their views to the whole village on any matter that crossed their mind.

Wages became extreme because revenue allowed it.

Egos became laughable because the media collectively postulated that their “sack race stars” were thought leaders.

Newspaper reporters became columnists, somehow convinced that their inability to change a tyre, or their instant judgements on real leaders, would be of interest to an adult audience wanting news.

As news became soiled with the opinions of those employed to gather news, readership and audiences signalled their response. Circulation and audiences slumped.

People stopped watching, stopped reading, and stopped listening.

Advertisers, looking for target audiences, switched to the digital news forces that were exploiting the growing cynicism of the previous era.

For the people spouting their views, trustworthiness evaporated.

Recent surveys suggest 75% of New Zealanders so distrust news presentations that they avoid them.

Roughly half of survey respondents distrust the media’s objectivity.

More than a quarter believe the media has been captured by those wanting to promote left wing agendas.

Roughly one eighth believe media is captured by those with a right-wing agenda.

If surveyed, most would probably have noticed that the regular lampooning of the likes of Luxon, Peters, and Seymour, and the extreme overweighting of left wing so-called “thought leaders”. Many would wonder why Asian ethnicity and culture is so subordinated behind the people, or cultures, of the South Pacific, yet Asians in number almost equate with indigenous and Pasifika people.

Business news has been trashed by the second biggest newspaper chain (Stuff), business and commerce often conflated with social or political issues. Small wonder so many business leaders do not read NZ papers, watch local television or engage with journalists.

All of these trends have left the media with a cost base that is not met by subscriber payments or by advertisers.

So the media now calls for government action to address the “problem”.

Presumably there is a thought that either the Crown can instruct people to buy what they have indicated they do not want, instruct business to advertise more often, or worst case, can purloin taxpayer money to subsidise the media.

I assume those who seek this subsidy (tax relief, grants etc) believe that the cost would have value because “democracy needs a fourth estate”.

I find that curious. At best democracy is enhanced by sage media, not by today's NZ example of media.

If our people strongly reject the “celebrity” nonsense, see no value in self-appointed “thought leaders”, identify political bias, and are not inclined to believe reporters who mix the facts with their meaningless political opinions, then a democratic process is already occurring.

If investors are not willing to subsidise such a weak business model, then why would taxpayers?

In distant decades the likes of the Blundells and the Riddifords and the Hortons were prepared to take the risk of providing a product that people wanted. The papers sold. Readers read. Advertisers advertised.

There were no foreign digital platforms for the dwindling number of advertisers.

Today we observe NZME, a public-listed company with aspirations to be modestly profitable.

Its CEO, no doubt a hardworking, competent fellow, was amongst the highest paid CEOs in the country last year, according to the NZ Herald.

I repeat - audiences are tuning out; advertisers do not choose television, radio and newspapers to sell their wares; readers distrust the news presentations, and are not interested in colouring the facts with personal opinions.

Would it not be sane to cut back salaries and recalibrate news presentations, actually asking the remaining audience what they want to consume, and prove to business that their customers might be accessible in a new look, sanitised approach?

To seek subsidies or sympathy while still presenting the guff that their audience does not want would be a fairly stupid solution.

I disclose that I have several journalists, or former journalists, amongst my friends.

I obtain my news feeds from overseas organisations but buy both the NZ Herald and The Post, daily.

Increasingly, I clench my fingers rather than write to editors. My subscriptions are not to be regarded as permanent.

Our media has to change to survive. It must separate journalism from comment. It must forget about trying to create “celebrities” and “stars”. Leave that to magazines.

Subsidies would be absurd. Pay cuts are essential. Newsreaders do not have anything like the value of the Attorney General.

The media simply MUST focus on those presentations for which an audience will pay.

Childish columns and articles slanted by the meritless surely would be banished if the media was a real, sustainable business model, of interest to investors and customers. Surveys rarely produce lies.

_ _ _ _ _ _ _ _ _ _

IF today's fumbling media owners really do want to find an appreciative audience by publishing worthwhile journalism, they need look no further than at an article published a fortnight ago on the National Business Review digital site.

A journalist named William Mace, who I have never met, wrote an outstanding, informative article on Indevin, a Marlborough-based wine maker and exporter which is transforming the wine industry.

Mace reported how Indevin has innovated, using technology to improve productivity, using science to underpin the art of wine making, and in impressive detail exploring how Indevin has become New Zealand’s biggest and most successful wine exporter.

His long article explained technology, science, and strategic analysis in words that non-business people would have read with interest.

I was so pleased to see real journalism that I wrote to him, congratulating him.

Why do so many NZ business owners and executives subscribe to the Financial Times, or The Australian, or the news feeds like Bloomberg?

I guess the answer is that these organisations provide informative, unopinionated news.

When they do publish opinion, it is credible and relevant opinion from genuinely successful people, not childlike magazine style guff, written by the mediocre or low achievers.

Mace deserves attention. If he can do it once, he can do it often.

Media heads should pay attention.

Real journalism is worth buying if you can find it.

_ _ _ _ _ _ _ _ _ _

Travel

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

19 April – Hamilton – Johnny Lee

19 April – Christchurch – Edward Lee (FULL)

1 May – Ashburton – Chris Lee

2 May – Timaru - Chris Lee

3 May (am) – Timaru – Chris Lee

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

Seminars

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

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

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

In all cases numbers are confined to the limits of the venue provider.

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 04 2961023.

Chris Lee

Chris Lee & Partners Limited

Taking Stock 11 April 2024

IF THERE are still people who can find the odd TV1 programme that is not focussed on renovating housing, cooking, marrying strangers, or youngsters having “fun” on a desert island, then those people might have come across an excellent recent ITV presentation that should evoke shameful memories of our politicians of recent times.

ITV (Britain) dramatised the appalling British story that led to post office managers in England committing suicide, being jailed, and being bankrupted because of a government agency error.

Britain’s Post Offices Agency had installed new, but deeply faulty, software in every little post office in the 1990s.

The software, named Horizon, delivered false accounting reports.

The woman running the British Postal Service arranged to prosecute more than Three Thousand humble post office “managers”, alleging fraud. The accounting errors were the result of flawed software. But prosecutions proceeded. People were jailed for fraud they did not commit.

These people running village post offices were definitely not corporate chiefs; they were not wealthy; they were not likely to be colluding with each other systematically to pilfer Crown money. They were people with the most humble of clerical skills.

They were modestly paid, homely chief-clerks.

Yet the British Postal Service charged them with fraud and succeeded in obtaining guilty verdicts, humiliating them, and bankrupting them (thanks to legal bills). Post Office executives earned bonuses in huge numbers for pursuing “ghost” thefts.

Only in recent years, to the credit of a one of the post masters, a diligent member of Britain’s parliament, and the editors of a small computer magazine, have the courts and the Post Office accepted that the false accounting was due to faulty software, producing faulty figures, not fraud or theft.

The Crown, nearly three decades later, accepts that it now owes more than a hundred million pounds in compensation.

A government agency had reached faulty conclusions, successive governments had failed to investigate the highly improbable story and literally thousands of people had been humiliated, many jailed, lives ruined.

Some were so humiliated and bamboozled they had pleaded guilty rather than face impossible legal defence bills.

Why is this so relevant to New Zealand?

Think back to 2010 and think of Allan and Jean Hubbard of South Canterbury Finance.

Think of the thousands of investors who collectively had contributed $120 million to SCF and had the prospect of being repaid after an international financier offered to wind down SCF, repay the government most (or maybe all) of the money the government might be owed by SCF, and restore life to the troubled company, principally owned by the Hubbards.

The government, you see, had guaranteed some SCF investors but not others.

Before a wise recovery of funds could begin a group of people from the Crown agency (the Securities Commission) and a private sector auditor had visited SCF in Timaru and reached totally false conclusions, as a result of flimsy procedures. The errors were so basic as to defy reason.

Whereas Hubbard had injected assets into a subsidiary to honour his promise that he would stand behind investors, the Crown investigating group concluded, completely falsely, that Hubbard was actually fraudulently extracting money for his own benefit. It took a High Court trial to spot the errors, helped by a diligent Timaru accountant, Duncan Brand.

The Teflon King, John Key, was overseas watching soccer but his cabinet, without ever interrogating the evidence of the principal people (Hubbard and his directors), announced within one weekend that the Hubbards had committed fraud.

The politicians committed the Hubbards to statutory management, meaning three things:

1. The Hubbards would be judged as fraudsters.

2. All of the many government errors would be in closed files.

3. The very real prospect of a satisfactory conclusion to SCF led by an international asset manager was ended, resulting in an amateurish, politically-controlled, liquidation, costing the NZ tax-payers far more than a billion dollars, because of the succession of errors.

Oh yes, and the investors who were to be underwritten by the international fund manager were dudded. They received back nothing; humiliated and robbed.

In Britain’s Post Office case, a small and determined group of ordinary people has led the search for justice for all those village postmasters.

One cannot reverse suicides, bankruptcies, broken marriages, children made dysfunctional by bullying, or adults made bitter by public humiliation – all the result of rotten corporate and political behaviour – but one can at least display integrity, albeit decades too late.

In Britain the cost of compensation for thousands of people might eventually be measured in billions of pounds. Three thousand times 400,000 pounds would be 1.2 billion pounds.

In New Zealand’s case ministers of both Key’s and Ardern’s governments were made fully aware of the facts, as were these two media-adored Prime Ministers.

The politicians hid. Even when Justice Cull established the facts in 2018 in the High Court nobody owned up.

The politicians were like naughty little children. Leadership was not evident.

Unlike Britain, NZ’s politicians included no brave person who would accept the uncomfortable task of conceding that the Crown had made egregious errors, causing losses for investors, requiring an adult, honest response including $120 million of compensation and an apology.

Key once stupidly said $100 million was “chump change”; not for retail investors is $100 million ever “chump change”.

Perhaps ITV or the BBC will send their reporters down here, some time.

The SCF debacle may be but one of the last memories of Key and Ardern’s reign, but for many their response defined them.

Let us watch what evolves in Britain.

_ _ _ _ _ _ _ _ _ _

WHEN Synlait Milk was listed on the NZX by its founder John Penno, the listing followed Fonterra’s by less than a year.

Fonterra listed in 2012, Synlait in mid-2013.

Synlait’s listing would have occurred earlier, but its future looked so promising that the American sharebrokers Goldman Sachs, then a small player in NZ, fought the listing, planned to occur just before Christmas.

GS had enough clout then to demand that it be involved in the fee-earning process. It succeeded in delaying the process, while the organising group was widened.

This was to be one of those rare occasions when the Synlait board actually accepted investment banking advice, albeit from an American self-interested “squid”.

Yet for years after the listing Synlait thrived, and deservedly so.

Its point of difference from Fonterra was that it did not require its dairy farmer suppliers to buy shares in return for picking up milk. This was important to its rapidly-increasing dairy farmer suppliers.

Instead Synlait cherry-picked dairy farmers whose accessibility was easy, paid the same as Fonterra paid, but cleverly sought a marketing advantage by imposing conditions on the farmers, excluding any provider whose water tables and farming practices were not up to a particular standard. Synlait, for a short while, held the high environmental status.

Until very recent times its shareholders were enriched by a rising share price but never a dividend. Indeed in 2017 it hit $5 and by late 2018 the price had reached a ridiculous $14, hovering around $10 for two years.

One wonders whether this anomaly gave Synlait’s director the sense of infallibility that so often leads to foolish expansion, based on debt, made temporarily credible by the unwise banking behaviour when corporate loans and capital were priced at unsustainably low levels (think Pumpkin Patch, also childishly governed, in its case to extinction).

The rapid share price rise had been driven by the modern empty-headed index fund manager commitments to buy shares, whatever the price.

In 2018 Synlait Milk had reached a market capitalisation level that saw it admitted to various indexes.

Some of our least admired KiwiSaver funds and various exchange traded funds produce written covenants that compel them to buy shares in particular indexes, however nonsensical the price of buying.

The long-tooths in the real investment world – the likes of the late Brian Gaynor – would read the documents and regularly game these robotic buyers. They would buy up stock before the index funds had to buy, soaking up all the liquid available stock, driving up the price before the simpleton buyers begin bidding, then hold the forced buyer to ransom, ratcheting the share price.

NZ’s best analysts published reports in 2018 noting there was no conventional model (such as reducing future cash flows to a present-day value) that could value Synlait at more than $6.00 (approx).

Yet some KiwiSaver funds, with hands-off, no brain engagement, bought millions of shares at prices that were ludicrous. Their clients bore the multi-million loss, hidden by composite figures.

Later this was to happen when a USA index fund drove Meridian’s share price, and Contact Energy’s, to absurd levels they were similarly gamed.

In Synlait’s case this unsustainable share price raised several questions, the most obvious being how such index funds can ever look at their investors face-to-face, pretending their methods have any value.

Another question was how this high share price reflected Synlait Milk’s directors.

When every seasoned market observer could see the outcome, a third question was why Synlait did not arrange a capital placement at, say, $10, and invite those robotic managers to fill their portfolios, while Synlait increased equity rather than debt.

The demise of Synlait has been in an inverse relationship with Fonterra.

Whereas in the mid-2010s, Fonterra had a vainglorious CEO, excessively paid by a board that on its good days was mediocre, Synlait at that time was a market darling.

Today, largely thanks to its chairman, its CEO and one or two highly effective directors, Fonterra has divested its dopiest acquisitions, has increased its real profitability and is increasing dividends, focusing on its core purpose – to serve dairy farmers.

Synlait, after its day in the sun, has displayed almost Monty Pythonesque governance, grossly over-borrowing to expand its products well ahead of its ability to sell the products.

It had head-butted its biggest client and second-biggest shareholders (a2 Milk) and put fear into its farmers, meaning around 20% of its roughly 300 farmer suppliers are now threatening to take their raw milk to Fonterra.

Its major shareholder, Bright Dairy (of China), is its most likely source of survival.

Synlait’s banks are mostly Chinese banks.

It seems at least possible that China will end up controlling, if not owning, Synlait Milk, putting ever deeper footprints into its interests in rural New Zealand.

Too much debt, dreadful governance, over-confident acquisitions, dopey behaviour towards its biggest client – these are not traits that you want to observe in a country which is highly dependent on a thriving productive rural sector.

Will Bright Dairy be motivated to restore the financial strength of Synlait Milk, with a mix of a capital raise and sale of unproductive assets?

Will Bright Dairy seek to buy for a price that supports the brand, or for a price that exploits all the poor decisions made by Synlait Milk directors?

Will the former politician Ruth Richardson, a Synlait Milk director for a decade, set an example, hold her hands up, and leave the board to find a replacement director?

Whatever the outcome, much interest will focus on the $180 million of subordinated bonds due for repayment in December of this year.

Synlait’s assets would need to lose much more value before the company would have to surrender to a liquidator.

Perhaps Synlait should now be planning to reach an agreement with bond holders that allows a piecemeal repayment programme, or at least the right to extend the maturity date.

Default would be an appalling outcome for the Chinese bankers and shareholders, as well as the bond holders, and the sharemarket in general.

Risk takers must be tempted by the current 50% yields on those bonds, available from people willing to sell the bonds for 70 cents.

For all the idiocies of its governance, surely Synlait’s assets will exceed in value its roughly $600 million of bank and bond debt, even if Synlait’s market capitalisation implies just $130 million of headroom for investors.

Investors should watch this space.

The saga may take months to reach a conclusion.

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MY investment seminar in Cromwell is now confirmed for 7:15pm, Harvest Hotel Conference Room on Monday, May 6.

Earlier in the day, and for most of Tuesday, I should be available to meet with clients (by arrangement) at the Harvest Hotel.

The seminar will discuss the threats to investors of a stagnant economy, the opportunities for income investors, and will finish with a 40-minute discussion on the accelerating progress at Bendigo where a planned gold mine would be Cromwell’s biggest employer and a highly significant contributor to the Central Otago economy.

It may be a bright light in an era of glumness, boosted by the extraordinary and unpredicted  increase in the gold price, though gold prices can fall as well as rise.

Those planning to attend should email chris@chrislee.co.nz as attendance will be confirmed by our office (numbers are restricted).

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TRAVEL

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

12 April – Lower Hutt – Fraser Hunter

18 April – Tauranga – Johnny Lee (limited afternoon appointments available) 

19 April – Hamilton – Johnny Lee (limited afternoon appointments available) 

19 April – Christchurch – Edward Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

Chris Lee & Partners Ltd

Taking Stock 4 April 2024

THE CEO of the NZX, Mark Peterson, is nothing if not a pragmatist.

Faced with the reality of market resistance to NZX listing rules and regulations, the NZX has stagnated, with virtually no serious new equity listings in recent years.

Of course it continues to attract debt listings, for which its fees are modest, and it has done well to introduce its wide range of exchange traded funds, a useful option for NZ investors.

Peterson now is gaining market support for more index and derivative funds and is wooing the French bank BNP Paribas which (oddly) is keen to increase its involvement in NZ’s listed market.

The index derivatives will certainly drive new turnover.

Fund managers, forever focussed on short-term publishable results, can treat such instruments as the equivalent of red and black on the roulette table, punting in what is effectively a zero-based game, except that the house (NZX) must always win (it retains the equivalent of the zero on the roulette board).

Peterson, now in a renewed contract with the NZX, is level-headed, calm, experienced, socially adept, and has genuine EQ.

This makes him similar to his predecessor Tim Bennett, and the complete opposite of Bennett’s predecessor Mark Weldon, whose tantrums were allowed to reshape the NZX in what was a reign that had a significant factor in the 2008 market crash.

Yet for all Peterson’s pragmatism it must surely be lamented that the NZX has no obvious support from developing companies.

Private equity, which makes its own rules and is barely regulated, is providing the capital needed by growth companies, tapping the wealthy who are prepared to chase higher returns, accepting higher risks and not much regulatory support.

The NZ retail public is simply excluded from participating in the growth of such aspirational growth companies, unless they revert to the habit of betting on No.39 on the roulette wheel by sending off money to crowd funders.

Private equity does not usually seek retail investors. Nor is the NZX helped by recent developments of the only three large sharebroking firms with an NZ presence.

Craigs, Jarden and the Dunedin-based Forsyth Barr now collectively control (funds under management) around $100 billion.

Very little of this $100 billion is invested in NZX-listed companies.

All three now operate what are effectively vanilla model portfolios with large chunks of money siphoned off into Exchange Traded Funds, themselves invested in foreign markets and in different asset classes, some in such exotic assets as bitcoin.

If the “big three” control $100 billion, they equal in volume all the KiwiSaver funds, now also managing $100 billion, again with very little (maybe 15%) invested in the NZX companies. The competence of our small KiwiSaver funds is yet to be proven.

Thanks to rising interest rates, most NZX listings are enjoying sluggish growth (if any), and rising costs, meaning the shareholders are getting used to dividends at best stable, but some falling, and share prices that reflect low levels of buyer interest.

The KiwiSaver funds respond by increasing their offshore allocations. Some, I would say cynically, pursue alternative assets where there will be no visible pricing but ample opportunity to find valuation models that hydraulick the alleged value of these assets. These may be an accident yet to be attended.

Property development is an obvious example. A KiwiSaver fund diverting into property development can report monthly and quarterly gains based on valuations that might prove to be inflated by enthusiasm or by a need to pretend that profits will eventually flow from the developments.

So KiwiSaver and the big three control $200 billion, which is 25% more than the market cap of the NZX.

There are some $450 billion in bank deposits. Only a tiny percentage will be lent to business, and to the rural sector. This explains some of the country’s major problems – the difficulty in funding growth and productivity gains.

The housing market absorbs most of bank lending.

Does anyone wonder why the NZX sees such poor liquidity?

Of course foreign money does arrive into NZ to buy bonds, equities, property, land, farms, and forests.

The NZX sees much less of this foreign money than used to be the case.

The main reason for the absence of foreign investment will be our sluggish economy and the fear that our country, heavy on gross debt and certain to have large fiscal and current account deficits, will see its currency disrespected.

A foreign investor naturally wants to observe asset value gain AND be in a stable currency, better still a relatively strong currency. Foreign investors rarely are charmed or motivated by governments that want to redistribute, rather than grow, wealth.

So the NZX is now rather less supported by foreign money and our bond market, including sovereign bonds, attracts much less support than is desirable.

All of these explains why Peterson, an admirable man adept at making sensible decisions, wants to expand the product range of the NZX, to underpin its future profitability.

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AMONGST the growth products of the NZX is an expanding custodial service, now marketing itself to scoop up the last accounts of those investors who handle their own paperwork.

Most of our clients are in the category of people who prefer personal ownership of assets rather than the use of custodial services, where the likes of Forsyth Barr and Craigs house most of their client money.

Regulators, registries, and most sharebrokers revel in the use of custodial services.

The brokers charge 1% per annum, or thereabouts, and negotiate for much lower charges from the custodian, banking the hefty margin.

Personal wealth management is now a target for brokers as they are not seeing the corporate deals that fed their machines a decade ago.

In my career retail investors have been in and out of broker focus many times.

In the 1980s we had an absurd number of sharebroking firms.

Greville & Co, Morrow & Benjamin, Finch Webster, Renouf, Natpac, Sattherwaites, Fay Richwhite, Access, Buttle Wilson, Mackay Rheuman, Singletons, Greenslades, NZUC, Barclays, Fraters... and those are firms I recall just from my remaining memory cells.

In those 80s, retail investors piled into the shares of the 460 companies listed on the NZX. (Now nearer 160 companies). Billions were burnt on a pyre that was fueled by media obsequiousness, the adulation of “fast buck” ideas, and the demise of old-fashioned advisors.

In 1987 we discovered that “termites” had eaten most of the value of our equity market structures, insider trading and other forms of cheating so prevalent that our jails would have faced over-crowding if our regulatory system had been well-intentioned and properly staffed.

Into the retail advice sector strode all sorts of garden gnomes, with zero knowledge, many simply con artists feeding on the trust of others.  Names like Money Managers, Broadbase, Reeves Moses and Vestar seized the vacuum left by the collapsing brokers.

Into our vocabulary came “financial advisers” with no experience, no knowledge, no culture of client first and mostly no integrity. For nearly two decades retail investors were fed to knaves.

The sharebrokers headed for the corporate business, losing their focus on small investors.

So retail investors were largely serviced by ignorami, herded into quite dreadful investment structures, heavily loaded towards the get-rich ambitions of the “financial advisers”.

In the 2000s, the sharebrokers woke up. Retail investors were welcomed back by the big brokers, though not always treated with respect.

The Credit Sails fabricated product, when challenged by the regulators, uncovered an email referring to investors as “flies” around a honey pot.

Since then, the regulations and the behaviour has greatly improved, the National government, inspired by Simon Power, able to chase away nearly 90% of those who were offering “financial advice”, the biggest charlatans disappearing from those dreadful radio shows and newspaper advertorials.

Today, the sharebroking sector again is dominant.

It manages $100 billion or more if you add on the small players like our firm, and now has processes with heavily overseen audit trails and penalties that brutally disincentivise the sort of rubbish claims made on Radio Pacific in the 1990s and early 2000s.

With this comment I refer not only to the dreadful Money Managers radio detritus, but also to all those Radio Pacific patsy interviews with Australians trying to sell property in Queensland and rogue finance companies claiming to treat investor money with the same respect as they would treat their “mother’s money”, (while stuffing their appetite for wealth into family trusts).

Happily we are past most of this.

Very few of that era would meet my definition of a “fit and proper” person.

So my guess is that virtually all investors will have their money held in custodial services, perhaps within two or three years.

Investors would receive a statement of all the securities they own, every month. They would receive advice which would be carefully crafted, very aware of the need to prove knowledge, client-first focus and honest intent.  They would likely receive interest rates from the banks set at higher rates than individual deposits would ever receive.

For those who gain real joy from the financial equivalent of sailing the Cook Strait, the dominance of custodial services will be anathema, until such services are seamless.

For regulators and registries, the custodial dominance will be great news.

The great equalizer will be excellent software.

As always, some sharebroking groups will charge much less than others, attracting the support of those who insist that cost equates with added-value.

All of this may take time to evolve.

The NZX will be ensuring it remains a profitable company, even if its share trading platform is under-utilised.  It will also have a regulatory function, it will offer low-cost exchange traded funds, it will offer a custodial service to intermediaries, and it will continue to think of more products like index derivatives, to enable fund managers to pay the (nett) zero-added value of betting with each other on the future.

The days of share certificates, signed by the company secretary, are long gone, as are those of the 1980s when clients could settle transactions once a month, the share brokers using their settlement accounts to stay in credit, effectively using the money of some clients to cash flow the obligations of others.

Settlements now occur in two days. You can see there has been progress.

Natpac Corp, which went gruesomely broke thanks to its dreadful processes (at great cost to its investors) should never be reinvented.

Some progress is better than none.

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THE admired former Wallaby captain Nick Farr Jones is by qualification a lawyer but now is an executive of the multi-billion dollar Australian mining investor, Taurus, itself 50% owned by the mining share trading company Regal.

Regal has often been the biggest single investor in Santana Minerals, whose gold project at Bendigo, Centra Otago, is now a possible contender for the new fast-tracking that the coalition government is installing.

Farr Jones was out here to meet the government last month, noting that Taurus is keen to participate in NZ now that mining projects have government support.  His company Taurus describes itself as a lender, probably leaving equity investments to its major shareholder, Regal.  Yet the support of Taurus would be welcomed if it enabled Santana to issue some sort of security that allowed Taurus to supply a facility for use in the pre-mining phase.

The new sharp focus on wealth creation by the government is aimed at growing the tax base. 

There will be many other potentially exciting projects in the South Island that might be paying tax in the next few years.

That the Australians would choose to invest in NZ seems like a meaningful breakthrough.

Note: our client investor group which visited Bendigo last week probably ends this three-year programme, the site visits now likely to be claimed by large, institutional investors, mostly from Australia. Perhaps next year we will be given date for a future visit.

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New Issue

Christchurch International Airport (CIA) has announced details of a new 7-year, senior bond issue. The bonds will mature on 15 April 2031.

The interest rate has not been set, but based on current market conditions we expect the interest rate to be approximately 5.40%. These bonds have a strong credit rating of A-.

CIA is not expected to pay the transaction costs for this offer. Clients will be charged brokerage.

The bonds will be listed on the NZX debt exchange under the ticker code CHC030.

The investment presentation for the issue is available on our website here:

https://www.chrislee.co.nz/uploads//currentinvestments/CHC030.pdf

If you would like a firm allocation to these bonds, please contact us by 9:30am tomorrow, Friday 5 April, with an amount and the CSN you wish to use.

Payment will be required no later than Friday 12 April.

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Chris intends to hold an investment seminar in Cromwell in coming weeks, inviting all our clients, and the general public. The date and location will be advised.

Travel Dates

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

8 April – Wellington – Edward Lee

10 April – Auckland (Ellerslie) – Edward Lee (FULL)

11 April – Auckland (Albany) – Edward Lee

12 April – Auckland (CBD) – Edward Lee

12 April – Lower Hutt – Fraser Hunter

18 April – Tauranga – Johnny Lee

19 April – Hamilton – Johnny Lee

19 April – Christchurch – Edward Lee

Chris Lee

Chris Lee & Partners Ltd