Market News 29 April 2024

Johnny Lee writes:

During a quiet period of New Zealand market activity, BHP’s announcement last week - that it would look to acquire copper giant Anglo American plc - shined a spotlight on a problem faced by stock exchanges around the globe.

The deal’s implied value of $39 billion USD would mark it as one of the largest seen this year so far, and indeed may end up being the largest of 2024. The deal is non-binding, with a firm offer expected in the coming weeks.

BHP is planning to fund the acquisition entirely with new shares, with no ‘’cash’’ paid. The indicative offer is priced at 0.7097 BHP shares per Anglo American share, plus a distribution of those assets BHP does not wish to acquire, including Anglo Platinum.

Predictably, the share price of Anglo soared, and the price of BHP fell sharply following the announcement, with BHP down around 5%. 

The acquisition would combine the worlds second and ninth largest producers of copper, and follows the consolidation of Newcrest Mining and Newmont Corporation in the gold sector late last year.

While shareholders and regulators debate the value of the takeover and large scale consolidation of key commodity producers, the news also set off alarm bells regarding the health of the London Stock Exchange.

The LSE is amongst the world’s largest but has suffered some recent setbacks that may sound familiar to investors in the much smaller New Zealand Stock Exchange.

Anglo American’s potential departure from LSE also followed comments from Shell CEO Wael Sawan that he believed Shell’s share price was inherently undervalued, as local investors in the UK were not pricing oil and gas stocks correctly. Shell is the largest company on the London Stock Exchange. Sawan believed a shift to a New York Stock Exchange home listing would see the share price better reflect the company’s value.

Such a move from Shell would risk a further exodus of major companies, especially if his view on improving shareholder value proved correct. Listed companies seeking to maximise shareholder value would find such a move far simpler and quicker than most strategies.l company’s employ.

Coupled with a sharp decline in new listings – only 23 last year on the LSE – there are now rising concerns that this trend will prove irreversible and lead to larger, but fewer, regional stock exchanges.

Xero’s departure from the NZX for the ASX in 2017 spurred similar debate on our own shores.

Indeed, the struggle to attract new listings has been mirrored by our own stock exchange, which continues its search for quality new listings for investors to consider.

New listings in New Zealand have been rare, and those that have recently made the jump into capital markets have been, frankly, abysmal. 

Many have almost immediately required further capital injections, diluting the new shareholders. Most attract almost no institutional investor support, and struggle to get serious consideration from the financial advisory community. Retail investors have largely been left to pick up the slack.

Between the various takeovers and delistings reported over the last few years, perhaps the most optimistic view of this is that a number of new companies have entered the NZ50 index, giving them access to those managed funds that consider only the constituents of that index.

The exchange operator, being a listed entity itself, is keenly aware that listing revenue will not be stellar at this point of the economic cycle. Indeed the exchange’s focus on diversifying its revenue streams - including its Smartshares and dairy futures arms - suggests the NZX is aware of the risks of focusing solely on revenue from listings.

The NZX will be hoping many of those companies currently engaged with Venture Capital funds and Private Equity funds will be actively considering a listed future on our exchange, while also looking to tempt ASX listings with strong New Zealand ties back to our shores.

The truth may be that the benefits of listing on the NZX, compared to the significantly larger ASX, are few and far between. The Government asset sales from 2013 were a huge shot in the arm for our exchange, and now form a core part of many people’s portfolios, as well as many KiwiSaver funds. 

Major names like 2Degrees and Vodafone (now One NZ) have not yet followed the same path, nor the likes of Kiwibank and the ports. 

BHP’s acquisition, should it proceed, will wipe billions of value from the listed capital of the London Stock Exchange. We have similar issues on our own shores, with companies like MHM Automation and Pushpay disappearing to foreign owners. 

While shareholders have been rewarded by these takeovers, the company’s coming through to replace them on our exchange have so far been lacking in both quantity and quality. 

Both the NZX and capital market participants will need to take a role in reversing this trend.

Fortunately for the NZX, the lack of larger shareholder scrutiny on our newer companies has meant the debacles associated with some of our small capitalisation stocks have largely gone unnoticed.

Blackwell Global is the latest company to introduce headaches, with the company announcing that it had just discovered one of its directors had been in jail in the Philippines for the last three months.

Blackwell Global’s independent directors then moved to demand his resignation, and that of another associated director. They both resigned days later, and the company applied to the NZX for a change of name to distance itself from the situation. Blackwell Global’s new name will be RTO Group.

The company is now urgently seeking a reverse listing transaction, meaning that Blackwell is looking for an unrelated company to effectively buy its NZX listing. Listing fees are expensive, and shareholder support will need to sustain these costs until a buyer emerges.

These reverse listing vehicles have seen some use over the last few years, with companies like Being AI and WasteCo both emerging from this avenue. Certainly, the shell companies continue to attract investor interest from those with a higher tolerance for risk.

For Blackwell Global shareholders, last week was not its finest hour, and the company will now be hoping for a buyer to take over and put the entire affair behind it.

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While our newer companies have been struggling, some of our more established growth stocks have been experiencing a mixed bag of performance so far in 2024.

Fisher and Paykel Healthcare’s recent jump has it sitting up 15% for the year, while Infratil is up 5% since January 1.

Ryman is down 30%, EBOS is down 5% and Mainfreight is flat.

With the exception of EBOS, these companies are due to publish their financial results in May.

Expectations will not be sky high. Most of our growth stocks are reporting a difficult short term environment, and are more focused on plotting the long term picture.

Share prices do not tend to respond to long term progress and long term outlooks - investors will look at profit, dividends and short term outlook first. 

Reporting season is often volatile, and shareholders of these particular companies can anticipate some interesting reading in the weeks ahead.

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New bond issue

Auckland Airport has announced its intention to issue a new 6-year senior bond next week. Details are still to be provided, but based on current market conditions, we anticipate an interest rate around 5.60% with brokerage being charged.

If you are interested in this opportunity, please contact us to provisionally register your interest. We will update those on the list with more information as it becomes available, allowing potential investors to either confirm or withdraw their interest.

Travel

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

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