Chris Lee & Partners Ltd

Taking Stock 29 August 2024

THERE will be many investors and a few fund managers who will be hoping that in the near future Kiwibank will raise more capital with an issue of shares, followed by an NZX listing.

The motive to do this will be the desire to see Kiwibank made sufficiently powerful that it will “disrupt” the dominance of the Australian banks, which collectively hold 80% of NZ’s banking market.

A recent Commerce Commission inquiry has recommended that Kiwibank be given the resources to shake up the Australian banks which dominate our market.

From a more emotional start point, some argue that allowing Kiwibank to beef up and disrupt banking will fulfil the vision of the late Jim Anderton, who advocated for the establishment of Kiwibank.

All of this makes for feel good headlines.

Sadly the logic and emotion are both based on piffle.

Kiwibank can no more disrupt the Australian dominance than the local grocer can disrupt our supermarket dominators.

And Anderton's vision, if you want to dignify his advocacy as a “vision”, was never to have Kiwibank be a credible member of the dominating banks.

If one were eulogising Anderton one would focus on his oratory, his ability to lead mediocre people, and his undoubted affinity with his electorate, for which he worked effectively.

If one were simply summarising the Christchurch politician one would acknowledge his plan to build a people’s bank, his persistence in winning fainthearted approval from Helen Clark's government, but one would balance this by acknowledging Anderton was a politician craving popularity and votes, not a worldly visionary with commercial experience, knowledge, or networks.

Anderton did run a corner dairy for some years and did manage his brother’s supermarket trolley assembly plant for a short period, but he spent nearly all his career being paid by a political movement, or by taxpayers when he reached parliament.

In my infrequent contact with him he left me with an impression that, like Muldoon, he had an element of the Dunning Kruger syndrome, not appreciating that advocacy is most effective if it is backed by deep knowledge.

What Anderton wanted was a people's bank, largely to replicate the old Post Office Savings Bank that had been sold to the ANZ.

For many years NZ had banks that were miserably unprofitable but did not prioritise profits.

There was the Post Office Savings Bank, and there were many local savings banks (Wellington, Taranaki, Eastern and Central, Auckland, Canterbury etc) many amalgamated into Trust Bank.

The ASB was sold to the Australian bank CBA, the Taranaki bank remained independent as the TSB, but when Westpac bought Trust Bank, NZ had precious little ownership of our banking.

The savings banks did attract some sincere and competent people but one must qualify this by saying that all sorts of no-hopers sought election to the various savings bank boards, which were appointed by savings bank clients, few of whom had any insight into the sector, or into governance.

I am painting here a picture of an amateurish banking world, with lots of little “people’s banks” with neither the capital, the governance, the market share, the networks, the systems or the credibility to “disrupt” any bank.

When all the “people’s banks” disappeared, and after a real bank (BNZ) was sold to the Australians, Anderton, who had minimal expertise in financial markets, advocated the need for a people's bank.

Eventually, around 2002, Kiwibank was formed with pitifully little capital, banished to serve clients from a side desk in our various Post Offices, and with a sociable and enthusiastic banker in charge, set about building a people's bank.

Immediately Kiwibank won hundreds of thousands of retail clients, many being those with little sums to deposit, many of the new clients having been somewhat disdainfully regarded by what I would describe as the commercial banks.

Kiwibank from the outset faced the cost of administering very small sums for many small investors. Largely, this was a social service.

Operating from NZ Post branches customers received friendly and helpful support from the under-resourced local branches but Kiwibank was never likely to threaten the commercial banks.

Nor did Anderton imagine that Kiwibank could “disrupt” the Aussie banks. He was better advised than that. 

Kiwibank could not, cannot, and will not, disrupt unless it were given decades to build the combination of capital, good governance by people not politically chosen, strong networks of major businesses, market credibility, and a brief that involves acceptance of risk.

Politicians do not deal in timeframes of “decades”.

The Commerce Commission is simply committing commercial popcorn by pretending that capital, even a public listing, could lead to Kiwibank becoming a major competitor with ANZ, BNZ, ASB or Westpac.

And the anti-Australian bank brigade is not well informed. How many would know that in 2008 during the GFC, The National Australia Bank wrote a billion-dollar cheque to bail out the BNZ from reneging on lending commitments?

The Kiwibank CEO is exhibiting knowledge and experience in warning that sudden extreme levels of capital might hinder rather than help Kiwibank develop its own niche, free of any macho “disruptive” objectives.

Kiwibank recently released its best-ever result, a nett profit of around $200 million.

The Australian banks combined have nett profits in NZ of several billion.

Kiwibank needs to develop its systems, carefully provide for the people the bigger banks sidestep, indulge in low-risk lending, retain its nett profits, and ensure that it continues to build competent staff and executives who can cope with recessions and do not require the sort of incentives listed companies can offer.

Its current focus on small business lending is high-margin, higher-risk lending. It seems Kiwibank is managing the risk competently. I hope so. Small business lending is not comparable with mortgage lending.

Kiwibank’s CEO knows it would be idiotic to overcapitalise Kiwibank and urge it to grow and disrupt in an unsustainable way, surging into sectors where the risk is real.

The late Jim Anderton would be pleased that Kiwibank has provided for small retail depositors and built a mortgage book that is profitable. His “vision” stopped there.

The Anderton I met was sufficiently smart that he would have seen that a people's bank can be useful and sustainable but would never “disrupt” the banks with multiple billions of capital and many decades of experience in building relationships.

Let us restore realism to this conversation about what Kiwibank can achieve. If it does list, do not expect dividends of any significance.

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NZ INVESTORS who have had their savings chiselled by incompetent governors and executives will have been delighted to hear that the process of gaining compensation is to get easier.

The NZ Court of Appeal this week has declared that all who lose through illegal or negligent corporate behaviour will share any award made by the High Court unless they choose to opt out of the case.

Hitherto, all victims have had to opt in to participate.

What that meant was that the victims needed to understand the process and elect to be part of it. Most investors were intimidated by the process. Now they will be included unless they deliberately exclude themselves.

A group that included me sought to gain compensation for the dreadful losses cynically ignored by politicians during the South Canterbury Finance destruction and subsequent bonfire of Crown money.

Our attempt to obtain funding for a class action failed because of three main reasons.

The first reason was the cunning delay in considering the case, under the ruse of another case brought by the Crown having priority. That prior case was conducted with very little energy. It caused delays that ultimately left us defeated by the Limitation Act, which time bars delayed actions.

The second reason was the hiding of a Crown error that took years to emerge. That delay was cynical in my view.

The third reason was that potential funders of a class action could not be certain of how many investors would opt in to the action.

The Court of Appeal has ensured that henceforth investors will be a part of the claim unless they opt out.

This has the practical effect of raising the quantum of the claim. The higher the potential of the claim, the easier it is to find a litigation funder.

To bring an even greater degree of fairness to our system, a court would have to decree that the Limitation Act is not to be applied when a defendant, in SCF’s case the Crown, deliberately delays the case.

A further refinement of the process would come when a court rules that a person guilty of causing loss is liable to reimburse the victim from all his funds, however structured. In other words, the hiding of assets in trust could be penetrated if a court so ruled.

If the people whose greed, negligence or stupidity has caused losses are personally liable to compensate, watch out for a change in behaviour!

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THERE is wisdom in the Government's decision to remove ministerial adjudication on applications for developments under the proposed Fast Track legislation.

The politicians should not be in a position to overrule a panel of advisers. To do so would have invited endless legal and social debate.

Only a court should have the power to overrule a chosen panel.

A project like the Bendigo gold mine should be assessed by a competent panel. The Government's role should be in the selection of the panel.

Santana Minerals will hope to prove the economic value of its Bendigo project, and its commitment to mitigate any environmental concerns. A panel should assess that evidence.

Note that last week I wrote that the slurry produced from the extraction process detoxifies naturally.

A reader notes that the detoxification process involves a chemical treatment, during the process that releases the slurry into a dam, or protected pond.

Every mine, worldwide, must process slurry in this way.

The dreadful abuses in dumping untreated slurry into waterways ended many decades ago.

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ONE of the best retirement village operators, Summerset, has sent a chilling message to government, warning that hospitals may soon be forced to cater for geriatric patients.

The sum that the Government pays the retirement village/care providers to accept government referrals is well below cost.

The retirement villages are hardly likely to provide more beds if to do so would generate losses.

Those who need care might one day find no beds available, meaning the hospitals would be required to provide care.

The obvious answer is for Health NZ to increase the funding to match the cost of care.

The goofs who were falsely alleging that the village operators were profiteering might now grow up and undertake real research, taking up a new campaign to fully fund the sector for referrals. We could do without goofs.

Footnote: Kevin Hickman, a founder with John Ryder of Ryman Healthcare, died last week. Ryman set the standard for the private sector villages. Hickman and Ryder can rightly be seen as two people who drove the retirement village sector to global recognition, as world class providers. 

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New Issues

Westpac (WBC) has announced it is considering an offer of perpetual preference shares (PPS).

A WBC PPS would constitute additional tier 1 capital to meet the bank’s regulatory capital requirements and would be expected to obtain a credit rating of BBB+.

The initial 5-year distribution rate has not been established but a rate in the vicinity of 7.0%pa would be in line with recent comparable issues adjusted for underlying interest rate fluctuations.

Clients will not be charged brokerage if they obtain an allocation of the WBC PPS.

Full details will be released when the proposed offer is expected to open on 2 September, subject to market conditions.

Please let us know if you would like to be added to our list of investors interested in the Westpac Perpetual Preference Shares.

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Spark (SPK) noted in its results summary that the company signalled that there is potential for a hybrid capital notes issue.

Please let us know if you would like to be added to our list of investors interested in the potential new issue from Spark NZ.

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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

Chris Lee and Partners Limited

Taking Stock 22 August 2024

WHEN the appointment panel soon considers the application from Santana Minerals to exercise its gold mining licence in Central Otago, the panel will naturally examine all meaningful environmental issues.

I have no doubt the panel will be impressed by the thorough process Santana has undertaken to be respectful to all legitimate concerns.

Ultimately, the panel weights up the economic benefits and relates them to any unsolvable environmental outcomes.  For example, the scar left by a mine is inescapable, even if careful remediation of the land is undertaken.

I was reminded of the modern focus on remediation when I visited this month what was once the world’s largest copper mine at Britannia, north-west Vancouver, Canada, an hour from downtown Vancouver.

The mine opened in 1904, when mining was a most hazardous occupation, and closed in 1974, when its owner, Anaconda, one of the world’s largest miners, decided the copper price did not justify the cost of adapting to better mining practices, and cleaning up its mess.

Britannia is near Squamish, an indigenous settlement on the way to Whistler, Canada’s fabulous ski resort.

The copper ore had been discovered in the late 19th century and ultimately led to 240 miles of tunnels being created inside a mountain, using the most labour-intensive mechanisms, picks, shovels, hand drills and dynamite.  Ultimately, 1.3 billion pounds of copper were extracted, along with the by-products of gold and silver.

The first mill built to crush the rock and release copper was replaced by a second built into a hillside, exploiting gravity. Sadly, the second, made of timber, burnt down.

The third mill, made of concrete and steel, is a huge structure, wonderfully preserved and now a national heritage site, attracting visitors like me, my wife and our hosts. One clambers onto tiny rail carriages and is driven through dark, damp tunnels to be taken to a tunnel where the various slowly-improved, mining techniques are demonstrated.

The original miners used a flickering candle for light, were issued with a spade and a 350-pound wooden drill, and risked lung disease from the silicone dust that the drilling created. Dynamite opened up rock where drilling had discovered a seam of copper. Drillers were paid a few pounds a week for their very physical contribution.

And all the slurry and toxic by-products were – gulp – tipped into the sea at the base of the hill.

It has taken 50 years to fully cleanse the environment, a remediation only just completed.

The engineers were brilliant in the use of ancient equipment, which crushed the rock to shingle and ultimately extracted copper. But the mine owners were, by today’s standards, vandals, slave-drivers and environmental criminals.

I am pleased to observe that today’s mines – whether tunnelled or in open pits – must meet high standards to gain a mining consent. Today, the slurry (tailings) is treated and confined to dams which allow nature to detoxify the natural elements like arsenic and cyanide, which are trapped in the rock and used to leach the mineral from the rock.

At Britannia, the workers in the mine, totalling a thousand or more, built their huts at the top of the mountain. They lived out their lives there. They built snooker saloons, grocery shops, a swimming pool, a church, a school and various bakery shops. Families lived there for decades.

The remnants are barely visible today.

My parting thought is that modern life requires us to have metals like copper. We live by growing things or mining things.

The visit to Britannia, which I strongly commend as a useful activity for tourists, highlights the dramatic change in how we control mining today to improve safety and to demonstrate respect for the environment.

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WHILE Canada may once have been the centre of the world’s mining activities, it is today a leader in developing nuclear energy.

Its plant in south Ontario is, or certainly was, until very recently, the world’s largest nuclear plant. Canadian technology continues to be a leader in this field.

Indeed, as I write, the Canadian company Candu Energy is seeking partnership with the Canadian government to develop new smarter plant.  It wants to design, build and export technology and spends nearly $100m a year on engineering and research, in planning 1000 megawatt plants.

As is the case in many sophisticated countries, nuclear energy is seen in Canada as the only credible way forward in meeting targets to reduce carbon.

The developers want to design and install four Candu Monark reactors and expand the Bruce plant in Ontaria. They expect the project would generate C$40 billion in GDP, create 20,000 construction jobs and 5500 operating jobs.

Accordingly, it argues that government help of $300m over fours years, in exchange for the intellectual property, would be an investment, rather than a grant, from the government.

There is one interesting aspect of Candu that provides intrigue in a world where brown paper bags are in short supply, given the level of graft and political chicanery.

In 2019, Candu, then operating under the name of AtkinsRealis, paid a C$280m fine after pleading guilty to having paid $48m in bribes to Gaddifi’s son in Libya to secure energy contracts.

Extreme global debt creates stress. Stress opens many doors to graft and corruption.

In Malta, Britain, Germany and Canada, and no doubt in New Zealand (reference the Christchurch rebuild), one hears those words almost every day.

How does one turn back stress levels?

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CAR theft in Canada and Germany is so common that in both countries many use elaborate systems to make theft harder.

Stolen cars are transported in containers by ships or trucks to other countries which seem willing to accept the stolen assets.

In Germany, the vehicles head to Russia, from Canada they are shipped to Africa.

Insurance thus becomes hellishly expensive.

In Germany, to reduce one of the components of the insurance cost (from accidents), many now accept a “tracker” in their vehicle.  This monitors the speedometer. If a driver installs a tracker and restricts speed to a reasonable level, their insurance premium might fall by thousands of euros. (A 30,000 euro vehicle in a city might cost around 7000 euro per annum to insure (NZ$13,000.)

Part of the insurance cost relates to the unrepairable structure of modern cars.

Cars are stolen. So is cash.

Germany’s use of cash is still widespread, so its ATM machines contain large sums, whereas in the Netherlands, cash is a rarity so ATMs carry small sums.

Inevitably, when thieves found banks had better security, attention turned to ATMs.

In Germany in the past year, eight ATMs were blasted from their walls and stolen EVERY WEEK.

The result is that ATMs, designed to be available 24/7 in handy, accessible places, are now behind closed doors.

Many have introduced purple dye to machines which soaks the cash, thus invalidating it, should the machine be attacked. The Central Bank replaces purple money, but only to ATM owners, largely the banks.

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CANADA has a sensible solution for the small number of electric scooters in cities like Vancouver.

The scooters, rarely seen, must be returned to approved holding pens. The scooter is activated by a credit card. The scooter keeps charging, per minute, until the scooter is returned correctly.

Abandoned scooters are no longer a problem.

(We rarely saw rental bikes and never saw anyone hurtling along the streets or footpaths on a skateboard.)

One imagines the investors in Vancouver in electric scooters have a much smaller write-off fund, and thus can charge less, yet still gain a return.

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NEW Zealand has learned much from Canada, often sharing the successful initiatives of a like-country (with social welfare, free healthcare and free education).

The huge, underpopulated country has many problems similar to our own, including under-investment in infrastructure, absurd housing costs, a distressed and poorly-led news media sector, and much work to be done to restore goodwill with its indigenous people.

In one respect, it is light years ahead of NZ. It makes fabulous use of its waterways and harbours. When will Wellington discover that small ferries (from Miramar to Jervois Quay, for example) are a cost-effective way of addressing traffic congestion?

_ _ _ _ _ _ _ _ _ _ _ _

THE Bright Dairy/ATM proposed solution for Synlait Milk recognises that Synlait’s assets and business model have real value, well in excess of debt.

It recognises that Bright and a2 Milk are the relevant long-term beneficiaries of the business model and that Synlait’s survival must be underwritten by the two beneficiaries.  The solution ensures the bond holders are repaid, and must be repaid prematurely, if the proposed solution wins shareholder voting support.

And the solution provides the motivation for all shareholders to regard Synlait in the future as being the equivalent of a private company, run for the benefit of the major shareholders.

My plan, were I an owner of SML securities, would be:

If the proposed restructure means survival, it would mean farmers would retain access to pricing tension when selling their milk production, Fonterra an obvious choice.

And it would mean Synlait’s nett revenue could be split up by Bright and a2 Milk, possibly with a structure that suits Bright and China, as well as a2 Milk.

The prospect of the nett surplus being created to share amongst thousands of external shareholders would seem to me to be unlikely.

I am in total disagreement with the NZ Shareholders Association.  I know no retail investor who would want to participate in a rights issue in the hope of being treated equally in the future.

Sell, and start again, would seem a logical step.

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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

Chris Lee plans to be in Christchurch and Auckland next month, dates to be confirmed.

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

Chris Lee

Chris Lee and Partners Limited

Taking Stock 15 August 2024

WHEN Simon Power entered NZ politics two decades ago, he seemed destined to be a much wiser politician that NZ had become inured too, bright and a real action man in his roles in justice and commerce.

He seemed likely to be a much better Prime Minister when Key eventually became bored or lost his media fan club.

To the country's great advantage, Power tackled what the Clark government had so disgracefully ignored - the pillaging of retail investors.

Where Clark and her Commerce Minister Dalziel had cynically under-resourced the regulators and ignored the need to detoxify the advice industry, Power charged ahead, bringing in the Financial Advisers Act and creating the Financial Markets Authority to replace the Securities Commission.

Out of the swamp went 18,000 so-called financial advisers whose shingles above their business doors were about as authentic as the cannon balls placed above doors in Bratislava 230 years ago, when Napoleon was blitzing the homes that were outside the city walls.

At that time houses that had been damaged were exempted from a tax collector visit if the owners placed a cannon ball above the door.

As you can imagine, many undamaged houses bought cannon balls to stave off tax visits.

The shingles of grasping financial commission agents in the years between 1990 and 2011, when Power’s creations became effective, were even easier to acquire than old cannon balls, but just as deceitful.

Power cleansed and then re-energised the sector that had been defiled by the likes of Money Managers, Vestar, Broadbase, and Reeves Moses Hudig, mostly filled with vacuous salesmen with zero knowledge or relevant financial market experience.

Those around him saw in Power a future Prime Minister, Power legally trained and the son of an impressive figure in the luxury car business, the late Ross Power.

Regrettably, Power undid his good work in 2010, lazily failing to interrogate some utterly implausible accusations made by his officials against the late Allan Hubbard of Timaru.

The false allegations, as the High Court later heard, resulted in Hubbard being falsely accused of fraud, stigmatised and denied the opportunity to sell his empire.

Had the Treasury-supported plan to facilitate a restoration of that empire, and a sale to a credible offshore buyer, there would have been no bonfire of a billion and more of tax-payer funds.

Perhaps too busy, perhaps not experienced enough, perhaps not wise enough, Power, then a young man, undid his accomplishments and left politics, his route to political leadership cratered.

After several false starts, including a stint with Westpac Bank, Power today has settled into a new role, heading up the empire built by Carmel Fisher, known as Fisher Funds, our second largest KiwiSaver provider, behind the ANZ.

In the 1980s young Carmel Fisher had progressed quickly at Prudential Insurance, without the mentoring she would receive today, possibly as the trailblazing young female breaking through glass ceilings.

She progressed like a sprinter, creating her own empire that ultimately delivered to her extreme riches.

My observation was that Fisher Funds fees and returns did not provide adequate returns for investors but one had to admire her energy and her selling skills.

To me, funds management is more like a marathon than a sprint, the truly valuable operators discovered only after their strategies and decision making have survived the toughest years of cyclical change.

Fisher, through the 80s and 90s, would have noticed the apparent successes of Doug Edgar at Money Managers and followed many of his initiatives, including mass marketing, and glossed up media presentations, exploiting the access to news columns that come with commitments of large advertising spending.

Fisher Funds often built very short-term gains by buying large holdings in small, listed companies, like Pumpkin Patch and Rakon.

In stocks with low liquidity a determined buyer can easily create inflated share prices during the buying spree.

If you buy a million stock at $1.00, another two million at $2.00, another two million at $4.00, you will have five million of stock with an apparent value of $20 million, suggesting you have a “profit” of $7 million.

But when you need to sell, for example when the company performs badly, you might find that you were always the only buyer, so cashing up will lead to ugly losses.

Fisher’s empire was built on strategies I regarded as short term, and on excessive fees, for example from her creations, Kingfish, Barramundi and Marlin, all of which have “performance” fees earned from questionable settings. (Those fees have recently been abolished for some of its other managed funds, but are still applicable for Kingfish, Barramundi and Marlin.)

At surface level Fisher Funds was a valuable empire, having achieved scale, helped by an unquestioning sector, some of whose people were apparently nervous about a future famine, squirrelling away mountains of kernels.

Fisher was smart. She recognised her creation had reached a scale that required a refresh, a new level of commitment to achieve the expectations of the market.

She sold, collected her $100 million (plus) and now lives in a nice seaside house on Auckland’s coast, not too far from Doug Edgar’s retirement residence.

Fisher Funds was sold and is now mostly owned by the community trust that also owns TSB Bank, the rest owned by the aggressive American financial services player, TA. 

Community trusts rarely, if ever, attract those with the energy and knowledge to ignite a fund manager so TA, though the minority owner, calls the shots and quite possibly would sell out if any other financial market participant would buy at a decent price into a structure controlled by community trust-elected people.

If I were a buyer, I would want all, or nothing.

Fisher Funds had found a Chief Executive, Bruce McLachlan, to take over. He had been a mid-level Westpac banker and later the CEO of The Cooperative Bank, well suited to a tiny bank with no ability to grow, given its absence of shareholders.

McLachlan led Fisher Funds when it bought from Kiwibank its Wealth and KiwiSaver business, a large transaction based on what was once Gareth Morgan Investments.

Morgan, an excellent New Zealander with an imaginative and high octane focus on change, had sold his business for a large sum and reverted to philanthropy.

Fisher Funds under McLachlan had paid $312 million to Kiwibank, a sum it borrowed at high interest rates, to become a behemoth in the KiwiSaver sector.

With that growth, Fisher Funds now finds it is much harder to achieve the sort of returns and industry expectations that it had been as Carmel Fisher’s adventure.

Fisher Funds is now an elephant where once it was a wasp.

It needs a CEO with good political contacts, with a commitment to sector leadership standards, with access to capital, and with very long-term investment strategies, not unlike those of the ACC and the NZ Government Super Fund.

So, in comes Simon Power. Soon after he employs solid, slow moving, cautious people who are certainly not financial market stars.

Whether or not his new managers can become investment sages will be seen in coming years.

The likes of his new appointment, David Boyle, will be skilled in areas like public education, having had a career in that area with the distinctly unimpressive Retirement Commission. But Boyle is not an investment strategist.

In daily contact now with highly focussed, ambitious analysts and traders, Boyle may develop useful knowledge.

He will be in charge of a room full of personally ambitious individuals, with multiple opportunities to switch to faster moving organisations, should they become bored with manuals and processes.

For the sake of those NZ investors who, one way or another, find their savings in the hands of Fisher Funds, I hope Power is smart enough to engage with the Americans either to lift Fisher Funds, or to find a way to push the community trust into a sale.

The result, either way, must be an organisation with access to capital, a commitment to industry leadership, and a much less opaque formula for achieving low-cost, high returns for those who have ended up with their savings in Fisher Funds.

Fisher funds is no longer one person’s empire.

Carmel Fisher recognised that she had achieved admirably her goals but had reached a size where she needed shareholders with big hats.

Power has the job of proving that Fisher Funds not only has the big Texan hat, but also has a herd of healthy cattle; all hat, no cattle would be a Money Managers-like outcome.

I hope Power has the wisdom, mana, energy, patience and political capital to achieve long term success.

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EUROPE frets about many of the issues that worry New Zealanders, with immigration high on its list, as is the expense of its policies to reduce pollution and carbon.

Remarkably, there seems to be mass support for a tolerance of coal as an energy source, as demonstrated by the refusal of Glencore shareholders to support a sale of its coal assets last week.

In particular, the German auto industry wants to defer any regulations about building electric cars, not able to match the low prices of Chinese electric cars.

The target date for quotas is likely to be moved well into the 2030s.

Hybrids, not electric cars, seems to be the current compromise.

European financial markets share two concerns I have, both relevant to NZ investors.

Europe worries about the lack of transparency and liquidity of private equity funds into which a growing sum is being invested, in Europe and New Zealand.

The fund managers switch to private equity (PE) is all about higher returns and, especially, higher fees, at the cost of transparency and liquidity.

And Europe worries about the absurdity of performance bonuses, wanting to restrict the amount syphoned away from investors and shareholders into the hands of the very well-paid executives of the fund managers.

Europe rules that bonuses must not exceed twice the salary of any such beneficiary.

Britain has just decided to abandon that standard, in the hopes of fuelling highly-paid financial market activity.

But Europe insists that high returns, leading to silly bonuses and performance fees, stem from high risk. Investors, not managers, are taking the high risk. Why would the managers deserve any part of the higher return, the argument goes.

In NZ, as fund managers with few exceptions chase instant personal, extreme wealth, the fast track is to direct investor money into the PE sector.

The industry speaks with one voice in asserting that future PE returns will far exceed returns from listed securities, mostly because PE faces little regulatory interference, and not much accountability in the short-term. Its costs are therefore lower.

The truth is that it will often be many years before those private selections for future winners can be seen to be wise or even remotely successful.

The fund managers argue that the average KiwiSaver is 39, has decades as his investment horizon, lacks liquidity needs, and therefore should accept the opacity.

This might seem logical, but I argue that the hundreds of thousands of savers nearing retirement will wisely exit KiwiSaver at 65 or as soon as the employer subsidy and tiny tax break end.

Surely the managers should highlight the risk for ageing KiwiSavers and initiate a process that demands discussion with an independent adviser before any switch to more PE risk.

There should also be a discussion about the guesswork that is central to “valuations” while a PE investment is percolating.

Quarterly and annual valuations might produce fees and bonuses that would not be refunded if the valuations prove spurious.

Fund managers in Europe and Britain do flush investor money into the hidden pipes of private equity but do discuss details rather more than we see in NZ.

I do note that here the fund manager which is probably our best and purest, Harbour Asset Management, is not guilty. Most of its funds have no performance fees, let alone fees based on the imagined gains implied in a valuation.

In NZ our most seasoned, and probably most respected business reporter is the Scotsman, Tim Hunter, who seems to have worked for every news outlet bar The Peoples Voice.

Recently he analysed the extreme performance fees of Milford Asset Management, which, along with Harbour Asset Management, is generally viewed as NZ’s best fund manager.

Hunter concluded the high fees were related to high risk and were highly questionable. He is no oracle, but his conclusion is hard to disregard.

Fund managers are over-rewarded by their hefty fees let alone when fees are joined by performance bonuses.

Who will forget their revolting fee structure at NZ Funds an offshoot of Money Managers which survived the collapse of First Step and now is a small fund manager used, I suspect, by former Money Manager investors.

NZ Funds has a fund that punted on cryptocurrencies and one year it bought into a neap tide, producing in a small fund a 100% plus return. Of course, subsequently those returns fell away.

But NZ Funds collected life-changing “performance” fees for its punt. Those fees were not returned when the cycle turned.

Soon to hit the NZ courts will be an FMA case brought against Booster (formerly Grosvenor) which will be centred on its PE investments in vineyards. 

The evidence offered in that case should be instructional.

Perhaps the right conclusion is that every pension manager should be examined by independent financial advisers before any investor signs up to the fund manager.

Choosing a fund manager may be even more important than calculating a suitable asset allocation after checking on risk tolerance.

NZ might lead the world if capital and commitment can be combined to cleanse the financial market sector, resulting in value for money and an end to rewarding those who take more money from the process than the value they add.

In a world facing austerity, value for money may as a chant rise in volume from the little humming noise I now notice, to a strident full voiced bellow.

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Travel

21 August – Christchurch – Johnny Lee

12 September – Auckland (Albany) – Edward Lee

13 September – Auckland (Ellerslie) – Edward Lee

20 September – Christchurch – Fraser Hunter

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

Chris Lee and Partners Limited

Taking Stock 8 August 2024

Fraser Hunter writes:

AUGUST is a key month for NZ share investors, with 28 of our top 50 companies reporting their results, most of which are full-year results. Full-year results are audited and generally more comprehensive and impactful than half-year results, providing a better picture of a company's performance and outlook. 

This reporting period includes seven of our ten largest companies by market capitalisation, meaning the results are likely to have a big impact on our share portfolio returns.

This reporting season also comes at a time when the broader economic environment is challenging, dampened by efforts to control inflation. Global economic conditions remain subdued, and in recent weeks, we also have seen interest rate expectations drop materially.

Although the share market and the economy are different beasts, management commentary and guidance will be closely scrutinised for risks and opportunities.

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THE US reporting season concluded last month, with 75% of S&P 500 companies reporting results. Of those, 78% exceeded earnings expectations, and 59% surpassed revenue forecasts, reflecting a highly positive performance.

Overall market growth was strong, with earnings up +11.5% year-on-year, driven by technology, communications and financials. Growth is expected to continue for the remainder of the year, but levels of growth were lowered slightly on the back of cautious guidance.

Since its highs in mid-July, the S&P 500 has fallen 7.5%, including a sharp decline this week triggered by weak employment data, which has sparked fears of a US recession. Markets have stabilised since, but they are expected to remain volatile with valuations high, global conflicts ongoing, an upcoming US election, and tight monetary conditions.

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THERE are several ways to look at the market. Larger markets like the US and even Australia have the size and breadth to be broken into sectors (Tech, Healthcare, Financials etc), which makes it easy to spot trends, measure performance or even invest via sector ETFs.

The NZ market doesn’t have that luxury, but an easier way to look at it is by the style or appeal of investment. It’s not perfect, but below I’ve split some of the key reporting companies into the categories of Income, Growth and Deep Value. I’ve also separated property, as that is a distinct sector in NZ, but that could easily be included in the income category. 

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Income – Dividend opportunities and defensiveness

New Zealand is a relatively defensive market, characterised by a high dividend yield, high payout ratio, and lower growth and volatility. This, combined with imputation credits for local investors, makes the NZX an attractive option for income investors. 

However, a high advertised yield doesn’t necessarily equate to a good dividend investment. High yield can often be a result of poor share price performance or reflect a dividend at risk of being cut. 

The big four - Contact, Genesis, Meridian, Mercury 

The electricity sector in New Zealand is the main focal point for income investors. The sector welcomed a resolution of the Tiwai Point aluminium smelter contract earlier in the year, which provides stability in demand. 

Dividend policies will be crucial, especially following Genesis's (GNE) recent cut to its dividend outlook, while there is optimism that others may signal an increase in future dividends. The sector's capacity to sustain or enhance dividends will need to be weighed against the capital expenditure required to support the expanding pipeline of renewable projects.

With lake levels low and wholesale prices high, outlook statements for the individual companies will hold importance, but the sector is facing scrutiny on several fronts including frequently high wholesale prices, higher risk of power cuts, gas supply shortages and the ongoing debate about coal's role in future supply, _ _ _ _ _ _ _ _ 

Telecoms - Spark, Chorus

Spark’s (SPK) result has been largely pre-guided following its downgrade in May. The downgrade was due to lower public and private sector spending on IT and professional services. The key focus will be on the outlook and dividend guidance for next year. Following the downgrade, Spark’s share price fell more than 20%, getting below $4 for the first time since 2020. It has since recovered some of that fall, but currently trades on a gross yield of 8.7% based on its dividend guidance.

Chorus's (CNU) dividend continues to grow, underpinned by strong free cash flow as its broadband network nears maturity. The company’s capital management strategy remains a key focus, with a commitment to maintaining a stable and growing dividend. Chorus appeals as a stable dividend provider with some upside, expected to benefit from declining interest rates. The company offers a yield of 6% based on this year's expected dividend, with potential for further upside from dividend growth and the reintroduction of imputation credits.

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Other Income Providers of note – Channel Infrastructure, Vector, Port of Tauranga

Channel Infrastructure (CHI) has gained market confidence as a stable dividend provider following its transition to an import terminal, offering a 7% yield with potential upside.

Vector (VCT) remains viable due to its strategic investments in renewable energy and smart grid technology, supported by a stable payout from its regulated utility business. 

Port of Tauranga (POT) has disappointed for most of the year but had a bounce in July. Focus will be on trade volumes and prices achieved, especially given the economic backdrop. 

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Growth Opportunities – Ebos, a2, Summerset, Freightways and Skellerup

This reporting season doesn’t include the three largest growth stocks (Fisher & Paykel Healthcare, Mainfreight, and Infratil), but there are still results of interest. Most of the companies reporting have a heavy domestic focus, so the commentary and outlook should include broader implications for the market. 

EBOS Group (EBO) will probably be the most interesting growth stock to watch this month. This period marks the final inclusion of Chemist Warehouse's contribution to revenue. EBOS has historically been quiet with guidance, but any commentary on the remaining businesses or potential future acquisitions will be important. 

The impact of the Chemist Warehouse contract has been priced in long ago, but hopefully the result will give some indication of the growth path forward and how any freed-up capacity and capital can be utilised. 

EBOS has been one of our premier growth companies, thanks to strategic acquisitions and robust performance across its business segments. The focus will be on how EBOS plans to sustain its growth trajectory without Chemist Warehouse.

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Despite the ongoing Synlait (SML) drama dominating press coverage, a2 Milk's (ATM) financial performance has improved, delivering a strong first-half performance and upgraded guidance. The company continues to grow its cash position, providing strategic flexibility.  

Post-Covid, a2 Milk refreshed its growth strategy with a five-year target to return annual revenue to $2 billion. Now three years into the plan, a2 appears to be on track to achieve this. Following recent strong performance, a2 Milk's share price valuation reflects decent growth prospects. The company will need to deliver in results and outlook to justify this premium.

Summerset (SUM) is the only retirement village reporting this month but will provide a timely update on a sector revived by the recent takeover bid for Arvida. With quarterly sales already announced and guidance indicating profits will be flat on last year, the focus will be on sales margins, development progress, and debt levels. Since its capital raise, Ryman has made significant steps toward greater transparency with its information and metrics. Hopefully Summerset will follow suit.

Freightways (FRW) is often viewed as a bellwether for the New Zealand economy, giving its results more importance than its market cap may warrant. The company rallied 19% in July on no company update and against deteriorating economic activity. The main news of note was the findings of a review of NZ Post's capital structure, which appeared to give the green light for the SOE to increase prices. Management response commentary on competition and pricing will be worth following.

Skellerup (SKL) had a mixed half-year result, guiding towards full-year profit in line with last year and the share price weakened before a rally last month. The company is typically quiet in between results, so expectations remain for a flat result. 

Long-time CEO David Mair retired in March, so any changes to outlook, strategy, or even communication style with the market will be closely watched. SKL has been a steady and consistent grower in terms of revenue and earnings over the past decade, so the current expectation is for a return to growth

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Value Stocks – With disappointment comes deep value

THE next group of companies to look out for are the deep value opportunities or potential turnaround stories. These companies have often disappointed the market due to mistakes of their own making (e.g., Fletcher Building (FBU), SkyCity (SKC)) or by factors largely out of their control. 

The problems with Fletcher Building and SkyCity have been well covered by the market and media and share prices have been punished accordingly. This attracts value investors who see intrinsic value in the underlying business and, if correct, can reap strong returns on a successful turnaround and timing it correctly. 

Australian fund manager Allan Gray employs this strategy better than most and has built decent positions in both Fletchers (14%) and SkyCity (13%). This is a high-risk strategy, and they can often be too early or be completely wrong (AMP is one such example), but the strategy can deliver above-market returns by being right more than wrong.

Fletcher Building's result has been signalled in its earnings guidance, expecting earnings before interest and tax, excluding significant items, to be between $500m to $530m. The financials are expected to be messy, largely due to those significant items, which are likely to cloud profit figures.

Of key interest will be activity outlook, debt levels, ongoing legal battles (and impairments), and governance changes. The communication around these has been reasonably frequent and the market has lowered expectations accordingly. Any sign that things are improving could prompt a change in investor sentiment.

The NZ market is small enough that a switch from dog to market darling can be swift. FBU’s high debt levels and slow activity levels continue to stoke speculation of a potential capital raise, so risks are on both sides. 

The SkyCity result has also been well signalled, and the company has already made the move to halt dividends. The focus will be on the new CEO and CFO who are now just weeks into the job. 

This result will likely be a bit early, but such a change in management allows the on-off opportunity to throw out the trash; bringing forward or even overplaying any bad news in the early days so it can’t tarnish your time in charge.

Investor confidence in SkyCity has been tested by multiple profit downgrades, regulatory and legal issues, and an upcoming temporary suspension of its licence (5-days).

The share price has fallen 25% from its half-year high and is down nearly 60% from its post-Covid highs. 

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Tourism troubles: Air NZ & THL 

Air New Zealand (AIR) has been challenged on multiple fronts. Demand, both domestically and internationally, hasn't fully recovered, and competition has persisted. Rising costs have forced higher fares, largely on domestic passengers, which at a time of government and household belt-tightening, has discouraged travel and irked customers. The expectation is for a second-half loss, a gloomy outlook commentary for 2025, and potentially a pause in dividends.

Tourism Holdings (THL) has faced headwinds for several years now, so focus goes on its capital and cost management, as well as the outlook ahead. The company recently slashed its earnings forecast by about a third, blaming weaker economic conditions. The full-year profit is now likely to be between $50m and $53m, compared to its earlier guidance of around $75 million.

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Agriculture: Delegats, PGG Wrightson and Scales

The performance of these stocks has been weak for the past few years, some still recovering from the North Island cyclones and their impact on production since then. Both Scales (SCL) and Delegats (DGL)have a solid long-term history but can be volatile from year to year due to seasonality and its impact on harvests, or global demand for their products.

The PGG Wrightson (PGW) price has more than halved over the past 12 months, with the company facing governance challenges from its major shareholder as well as worsening trading conditions. A positive update on either issue could be a positive catalyst. 

Others of note: Heartland, NZX, Steel & Tube Holdings & Vulcan Steel 

Since the completion of its Australian Bank acquisition and subsequent capital raise, Heartland (HGH) has been relatively quiet, and its share price has lingered around the issue price. 

While the timing of the acquisition won’t have much impact on the financial results, the result will give an update on the Australian opportunity, which is expected to underpin the prospect of future earnings and dividend growth. The performance of the NZ business will still be of importance, but any weakness will likely be overlooked if the Australian opportunity looks compelling. 

With the Australian banks’ share prices performing particularly well over the same period, Heartland trades at a significant discount and should offer far better growth prospects.

On a Price-to-earnings ratio of 20x (or about 20% higher than the average NZ-listed company), 

NZX (NZX) is hardly offering deep value except on a dividend basis (7% gross). 

NZX’s value comes from its future growth potential. This potential has been a long time coming, with profits and dividends flat for the last decade despite consistent revenue growth over that period. 

NZX’s half-year result will hopefully provide colour on its recent acquisitions and progress on its business areas of growth. Balance sheet, capex and spending are all in focus, as ultimately these will determine the company’s ability to maintain the high dividend. 

Vulcan Steel (VSL) and Steel & Tube (STU) are in a sector challenged by slowing demand and price cutting. Financial performance is expected to be weak, so focus will be on capital management, debt levels and outlook 

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Property

Of the property sector, only Precinct (PCT), Property for Industry (PFI) and Vital Healthcare (VHP) are due to report. The sector has rallied on softening interest rates, which reduce their cost of debt. With the sector trading at a discount to asset values, the end of the current rate hiking cycle could stabilise falling valuations and help close up the discount. Both PCT and VHP have significant development pipelines so an update on progress, valuations, cap rates and gearing positions are all of interest. 

Industrial property has outperformed most other property sectors, but is likely doing it tough in the current economic cycle. While PFI has a long WALT and quality tenants, vacancy and slowing demand across the sector could put downward pressure on rents and building values. This will provide some read-through for GMT and ARG who have major industrial exposure. 

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New Investment Opportunity

The BNZ bank will issue a new Perpetual Preference Share, with a likely rate of around 7.20% per annum, fixed for a six-year term, with distributions paid quarterly.

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

BNZ 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 BNZHB and should be relatively liquid, allowing investors to sell at any stage.

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

Payment would be due no later than Monday, 19 August 2024.

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

If you would like a firm allocation, please contact us no later than 9am, Friday 9 August.

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Travel

14 August – Auckland (Ellerslie) – Edward Lee

21 August – Christchurch – Johnny Lee

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

Chris Lee and Partners Limited

Taking Stock 1 August 2024

IF what follows were to happen in New Zealand could you imagine the effect on the voting public and the financial markets?

To put what follows into context, please accept that Malta, where I currently am resting, is a country for centuries dominated by the British and by the Roman Catholic Church. The ten commandments generally live on.

Social services are kinder and more available than ours in NZ, poverty is not visible, nor in the news, and personal honesty is implicit. Cars are often not locked.

Thieving is treated as a heinous crime, inevitably leading to severe sanctions.

But greed lives on, somehow thriving in all this godliness.

What follows is astonishing proof of that.

Four years ago the reforming Labour government in Malta, led by a clever energetic man in his 40s, Joseph Muscat, sold a group of public hospitals to a private equity group (Vitals). The new owner seemed to have no history in hospital ownership.

The sale was structured so that Vitals had ownership but annually the government contributed a fixed amount, inflation adjusted, effectively capping the cost to the government of the service.

Vitals undertook to improve services and to build a medical school to provide an ongoing supply of medical professionals.

Today, Vitals is accused of pocketing money, cutting services, not meeting its commitments, yet owning hospitals, effectively for free. The structure of the deal was by any standards “unorthodox”. It was designed and documented by politicians, some senior public sector officials, senior lawyers and somehow involved the governor of Malta’s Central Bank.

Not to be overlooked, the Prime Minister of the day, Muscat, now has a long term “consultancy” contract with Vitals, allegedly worth 15,000 euro a month.

Until recently the case of corruption, brought by the police, was against Muscat and various public sector officials.

They face serious criminal charges, the case yet to be heard.

Last week the High Court ruled that there was a case of similar gravity to be heard against the current deputy leader of the Labour Party, the Central Bank governor, and at least 11 senior lawyers.

The current Prime Minister (Abela) has sacked his deputy and will sack the Central Bank governor if he declines to resign.

The people of Malta have in recent years, during Malta’s blossoming economy, become accustomed to corruption but as you might imagine they are outraged that hundreds of millions have allegedly been given away to Vitals by their leaders.

A recent European survey, published last week, notes that 26% of Maltese people say they know of people involved in corruption, the second highest level in Europe, behind Greece (32%), just ahead of Lithuania (23%) and Latvia (22%). Ireland has 4%.

Just two years ago Malta’s surveyed response was not 26% but 13%.

Furthermore, Malta had the highest level for people who fear repercussions from politicians should they blow the whistle on what they see.

The newspapers I read as I prepared this newsletter naturally had pages of content on these remarkable accusations.

Recall that the previous Prime Minister, Muscat, who so energised Malta's economy, was entangled in the Panama Trust secret accounts, where brown paper bags were allegedly hidden, and he was allegedly, if never proven, in the shadows of the murder of a newspaper journalist, the victim of a car bombing at a time when she was allegedly setting up wealth for herself, but also threatening unknown politicians.

To the Maltese these events are a disgrace, a slur on a country which worships God, and displays little desire for wealth or materialism. This is especially true of those of my generation, where religiosity remains integral to their life.

That level of worship is also changing.

Twenty years ago, Malta led the world in church attendance, weekly (or more) attendance applying to more than 90% of the population.

Today that figure is barely above 30%.

Remarkably, next year (2025) will be the first year in Maltese history that no new priest will be ordained and the production line of nuns is now down to single digits.

For all the shame the political skullduggery has produced there are at least two aspects of this case that have my admiration.

Firstly, the police and the courts have not been persuaded to obfuscate. There are no politicians leaning on these essential independent pillars of democracy and justice.

We in New Zealand will have to hope that the handling of the likes of the Pike River governance atrocity, and the legalised mishandling of the South Canterbury Finance collapse were simply the result of dreadfully incompetent politicians, public servants, judges, investment bankers, lawyers, auditors, trust companies, statutory managers, receivers and company executives, with none, we must accept, guilty of self-interest.

We have to hope that our system would have been as clear cut as Malta’s, had there been evidence of contrived cover-ups.

For handling the case in a neutral way, Malta is due some credit.

The media is also worthy of applause.

When the court findings became publishable last week, the newspaper coverage was detailed, blunt, impartial and revealed none of the “gotcha” childishness that we regularly tolerate in our media in NZ.

The newspapers stuck to the facts and displayed no (irrelevant) personal bias.

The public was fully informed by articles well written.

There were no bylines of “senior” reporters. Malta does not have “celebrity” journalists.

Subsequent comment came from credible, qualified people.

The coverage made for riveting reading and took three pages of both local papers, the Times of Malta and The Independent.

After more pages of national news, there was comprehensive coverage of international affairs discussing in depth Gaza, the US presidential campaign, Ukraine, and the economic problems facing Argentina.

Definitely not least, but the last page of the international news was devoted to the frightful news from New Zealand.

A full page described the Royal Commission's findings over the mistreatment of young people supposedly being protected by the state or by churches, over a 50-year period.

Again, the Maltese coverage was balanced.

The article I read noted that many countries have failed to protect their most disadvantaged people and made reference to how Australia, Britain and Canada have all had to step well away from sanctimonious self-applause.

Having read the decisive, impartial and well-informed manner with which Malta is ensuring justice will be seen to be done, I could feel no satisfaction about the outcomes of the Pike River and SCF disasters.

Had we had a media that was experienced, competent, impartial and that understood the importance of the issues, it might have had an effective role in ensuring that all of us, including me, could feel certain that the ultimate closure of the issues left no questions unasked, or unanswered.

In a stressed world swamped in debt and balanced on a tightrope 100 metres above a lion’s den, democracy is threatened, undermining the coming generations. Leadership is tested.

Investors expect leadership.

It has failed in Malta. I am unsure about NZ in the years between 2008 and 2023. Elsewhere does not look flash, either.

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THE European media devoted lengthy analysis of the new US presidential candidate, Kamala Harris, and savaged some of the juvenile chatter about her selection.

Prime amongst the silliness they quoted was that she was chosen solely as a box ticking exercise to fulfil the DEI quota, DEI standing for diversity, equity, and inclusiveness.

That allegation reflected her skin colour and her gender, rather than acknowledge her accomplishments.

Yet in the USA, its business world, under stress, is being equally unwise about “wokeness” allegations.

Just a few years ago, responding to social pressures, almost all US large public companies adjusted their internally created rules. Many are now reversing those changes.

They brought in rules that required all executives to be judged on their commitment to social and environmental issues, before being granted their (vulgar) bonuses.

If the CEO of Goldman Sachs was to be granted his full US $30 million bonus, he had to have displayed at least a hat-tip towards these issues, which include diversity, equity and inclusiveness.

Times are changing.

The quality newspapers in Britain and Europe are now reporting that double figures of the top US public companies have reversed these rules, expunging them from the bonus-setting considerations.

One US CEO last week told the media the conditions were ridiculous, and quite irrelevant to the goals of excellence, and ensuring the best outcome for clients, staff and shareholders. His company reversed the “woke” rules, he advised.

He was instantly supported by a wide group of peers.

One infers from this that in times of stress, where all sorts of absurdities abound, companies facing shareholder pressure will take a zero-based approach to inflexible rules that are not easily shown to be good for the “bottom line”.

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IN last week’s Taking Stock I noted the view of credit rater Moody’s on commercial property.

It regards US commercial property as a sector at risk and advised that banks with exposure equal to twice their capital would be assessed, possibly for a downgrading of their credit rating.

Deutsche Bank, Germany’s most ambitious bank, confirms this risk.

In my view all investors should heed the warning, given how much investor money is herded into global property funds by robotic advisory models.

The German bank has just 3% of its total lending to US real estate but that lending made up more than 25% of Deutsche Bank’s bad debt provisioning.

_ _ _ _ _ _ _ _ _ _

EUROPE last week published mathematical predictions relating to falling global birth rates and growing longevity in Europe.

The forecasters calculate that, in 25 years, Spain and Italy will have less than one tax paying worker to support each citizen aged over 65.

Britain, Germany and the Netherlands are marginally less threatened.

The implication is that immigration must address the problem.

Who else will service the construction force, the healthcare sector, or serve tourists?

Malta’s inbound tourists rose 23% last year. Immigration rose by a similar amount.

The tourists stay an average of 10 days.

Tourism is critically important for its revenue.

Its domestic workforce, skilled and highly educated, look for high-salary jobs, especially in technology, engineering, and software development.

Does this problem resonate?

To keep the tourists flowing, Malta must lift the performance of its sole airport, Luqa, which accommodates high levels of landings and take offs.

Luqa is a great airport at which to arrive, with extremely efficient baggage clearance, an excellent pre-paid taxi service, and generally world class facilities.

Within five minutes of landing, one is in a taxi.

But it is a nightmare when you attempt to leave.

According to the government, 30% of outgoing flights are delayed by more than an hour.

Malta’s airline was bankrupted two years ago. It has been reborn, in partnership with Lufthansa.

Its airport is simply unable to handle all the outgoing flights.

The airport blames crew shortages, the volcanic explosions at Mt Etna in Catania Sicily (100 kilometres north) and even the drones that invade airspace.

Lufthansa and Malta Air (rebranded) expected delivery of new aircraft, which may reduce delays.

My message is: do not rely on timeliness to match connecting flights in Europe.

Tourists might bring in welcome wealth but they must be offered an acceptable infrastructure.

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New Investment Opportunity

BNZ - Perpetual Preference Shares Bank of New Zealand (BNZ) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for BNZ’s regulatory capital requirements and to have a credit rating of BBB.

This investment is perpetual, with an optional (and in our opinion likely) redemption date in six years’ time.

The initial six-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of around 6.90% per annum.

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

More details are expected on 5 August.

BNZ is one of the top four banks in New Zealand and a subsidiary of National Australia Bank. It has a strong credit rating of AA-.

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

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

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Travel

21 August – Christchurch – Johnny Lee

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

Chris Lee and Partners Limited