Market News 22 April 2024

A REASONABLY quiet week for major company announcements last week allowed several smaller listed companies to gain attention including Tower Limited (dual listed New Zealand insurer) which provided earnings guidance for the year ending 30 September 2024.

Tower (TWR) expects full year underlying NPAT to be greater than $35m, which exceeded previous advice of expected underlying NPAT to be near the top end of a $22million to $27million range.

The updated guidance assumes full utilisation of the FY24 large events allowance which is conservatively set at $45million with TWR recording no large events in the financial year to date.

Higher than expected gross written premiums, favourable retention, and lower than usual claims costs are the basis for the company’s expectations. In essence the company enjoyed a period of time without any major disasters.

TWR shareholders will be pleased with the positive guidance update and the shares are currently trading above 80c (up 35% for the year to date) after several years of the shares largely trading between 60c and 70c, and perhaps TWR is in a position to pay a dividend after failing to pay a dividend since February 2023.

The company will be hoping for a continuation of relative calm following large-scale events such as the flooding and cyclones seen in recent years.

The insurance industry has talked up the need for higher premiums since the industry began - it is incentivised to manifest fear in its customers.

The guidance from TWR based on a period of relative stability for its customers is perhaps evidence that insurance customers more broadly may not be as susceptible to the dangers its insurance products hedge them against, or at least collectively they might be paying a little too much for the protection provided.

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TradeWindow (TWL) was founded in December 2018 and listed in late 2021 with the goal of delivering a digital platform for exporters, importers, freight forwarders, and customs brokers intended to add efficiency to global supply chains.

Trade Window (TWL) describes itself as a global trade software company and has a relatively small market capitalisation of about $20 million.

On Wednesday the company announced that its $2.2 million capital raise offering shareholders new shares at $0.175 per new share had become unconditional as it had reached the $1 million minimum threshold following financial commitments from the CEO and founder AJ Smith and another cornerstone shareholder.

Subject to shareholder approval, the CEO will contribute between $300,000 and $500,000 depending on shareholder participation in the capital raising. This suggests shareholders have only participated to a level in the vicinity of $500,000 of the $2.2million sought, somewhat betraying the CEO’s obvious firm commitment to the company.Shareholder approval will be required to allow for the large allocation to the CEO and to allow delayed settlement for his subscription to the offer which is to be aligned with the company’s cashflow requirements.

The Board of TradeWindow considers the CEO’s proposed allocation as is in the best interests of the company given its forecast capital needs.  It has announced a meeting will be held for shareholders to vote on the matter.Smith's commitment will be undertaken as part of the placement at the offer price of $0.175 per share, which was seeking up to $2 million in total commitments – the further $200,000 was sought from eligible TWL shareholders through a share purchase plan which opened on 8 April and closed on 19 April.

The minimum subscription condition was met in an unusual manner and allows TWL to commence settlement of the other subscriptions received to date in the share placement.

TWL released an investor update on Thursday to encourage shareholders to support the company, including Smith boldly stating that the company “has demonstrated – beyond doubt – that its digital trade solutions deliver enormous value to global trading networks and the exporters, importers and shippers who sit at its heart”.The Australasian dairy, meat, seafood, and horticulture sectors were provided as examples of shipping needs that can be met by TWL’s software.

Revenue growth for the business included a record result in the fourth quarter of the year ending 31 March 2024 with $1.6million in trading revenues delivering at the top end of TWL’s most recent guidance of $6.0 million to $6.2 million for the full year.

The company has a goal of achieving $7.3 million to $8.3 million for FY25 (1 April 2024 to 31 March 2025) 

TWL continues to work on improving gross margins as the business scales up by focusing on reducing the cost of goods sold with initiatives such as prompt customer onboarding.

TWL has looked to reduce costs and last year’s restructure resulted in the company

allowing team members to work remotely and a move to smaller (presumably less expensive) premises in each of its hubs in Australia, New Zealand, and the Philippines.

The company is targeting monthly EBITDA break-even during March 2025 with profitability targeted beyond.

Reference was made to an offer from an alternative debt lender to match its funding once it reached the $1.5million to $2million range suggesting the company is considering taking on debt funding.

TWL continues to court potential investors for the placement and the final subscription levels will be announced on 22 April with allotment of the SPP shares expected to be on 26 April 2024.

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WHILE the TWL capital raising is struggling, Heartland Group (HGH on the NZX and ASX) has a capital raising that will successfully conclude today.

Heartland’s capital raising is underwritten, which ensures the company will raise over $210million for the acquisition of Challenger Bank from Challenger Limited (CGF.ASX) after receiving indicative regulatory approval from the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of New Zealand (RBNZ) for the acquisition.

The initial institutional component of the offer was successfully completed, with $131million raised at $1.00 per share from existing and new institutional investors. Eligible institutional shareholders took up 98% of their entitlements and were allotted their shares on 15 April.

The second part of the offer is the $105million retail entitlement which closes at 5pm today (22 April) (unless extended).

Eligible shareholders are entitled to 1 new share for every 6.5 shares held since before the capital raise was announced and can apply for additional shares up to the number of shares they are entitled to.

HGH eligible shareholders who have waited before taking up the entitlement have seen the share price on market fall from $1.22 on Friday 5 April (the day of the capital raising announcement) to close at $1.03 on Friday 19 April (has traded between $1.03 and $1.05 this morning).

I suspect the HGH share price trading at levels just above $1.00 may be influenced by traders that participated in the institutional offer and were allocated new shares on the 15 April selling at any price above what they paid to make a quick profit.

It seems that taking up the entitlement at $1.00 will still provide a brokerage-free way to buy shares at a slight discount (depending on trading today) and avoid dilution perhaps tending to suit an investor looking to support HGH longer term that is supportive of HGH’s plans for its Australian assets.

HGH’s acquisition of Challenger Bank is intended to lower the cost of funds (enables the group to offer term deposits in Australia) that can then be lent out through the group’s Australian businesses concentrating on reverse mortgages and livestock lending to start with. 

Advisory clients who are HGH eligible shareholders are welcome to contact us regarding their entitlement.

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PGG Wrightson shareholders may have been left confused by recent announcements involving proposed director changes.

A request for a special meeting in March of this year made by major Singapore based shareholder, Agria Pte Ltd, in an attempt to bolster the board with directors appointed by them, was withdrawn.

The New Zealand Shareholders Association’s (NZSA) vehement opposition to the request and proposal to add additional resolutions to the special meeting seems to be an influencing factor in Agria backing down.

Since the withdrawal Garry Moore, who was elected independent chair in February of PGW, publicly addressed (in a Business Desk article) NZSA’s assertion that Meng Foon is seen as an Agria representative rather than the independent director he is described as in PGW’s reports.

Garry Moore stated that he and some other directors agreed with the NZSA’s views that Meng Foon is viewed as an Agria representative requiring clarification to the NZX that his comments in the media did not reflect a formal determination of Meng Foon’s independence. The clarification announcement did include that Meng Foon’s independent status will be formally reconsidered in the near future.

On Thursday, in a departure from rearranging seats around the boardroom, Moore provided comments in a PGW guidance update including that since releasing its half-year results in February, trading conditions have deteriorated because of market conditions that are impacting the whole of the agricultural sector.

PGW announced a revision to its Operating EBITDA to be around $43 million (from $50 million) for the financial year to 30 June 2024.

Restrained spending was noted as being influenced by:

- Drought conditions with soil moisture deficits against historic averages across much of the East Coast, Tasman and Northland over the first quarter of 2024.- Weak demand for sheep meat from China and increased supply culminating in lower returns for farmers.- Interest rates and input costs remain elevated, impacting on-farm and on-orchard profitability with clients looking to reduce debt and defer spending.- Time lag before farmers and growers see the financial benefits from harvests.

The harvest season was described as broadly positive and the company noted a slight uptick in farmer and grower confidence in recent months off a low base but sentiment in the sector was described as subdued with reduced investment by farms and orchards expected.

PGW’s outlook for the remainder of the financial year remains cautious.

Some PGW clients were noted as delaying spending where they can and holding off on discretionary items.

PGW remains positive about the prospects for the rural sector over the medium to longer term, beyond difficult market conditions seen currently, and I expect should be in a better position once the distracting governance issues have been addressed.

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Travel

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

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

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 04 2961023.

Chris Lee

Chris Lee & Partners Limited