Market News 15 July 2024

David Colman writes:

Xero (XRO.ASX), headquartered in Wellington, recently announced the US$2.5billion acquisition of US-Israeli bill paying company, Melio.

Funding the acquisition involves a capital raising including an already successfully completed A$1.85 billion Institutional Placement, with approximately 10.5 million new shares issued at A$176 per share, and a Share Purchase Plan allowing eligible shareholders to apply for up to A$30,000 worth of new shares at the lower of the same price as the placement (A$176) or a 2% discount to the 5 day volume weighted average price (VWAP) of Xero shares up to and including the closing date (currently scheduled for Monday, 21 July).

Xero provided its strategic rationale for the acquisition with the following points:

- Solves Critical Customer Need – Accounting and payments are critical for US Small to Medium Businesses (SMBs) which is a large and growing total addressable market. 

- Strategic Fit – Xero is targeting growth with a ‘3x3 strategy’ which includes 3 key markets (Australia, UK, and the USA) and 3 core products (accounting, payroll, and payments). The strategy aims to deliver integrated solutions for the needs of small businesses in those regions. Melio extends Xero’s USA payments business as part of its broader US growth strategy.

- Melio’s Team and Platform have achieved consistent growth, are well regarded by customers and the industry, and extend reach to millions of US SMBs.

- Synergies include that the Melio platform is highly complementary to Xero’s and improves prospects for US investment seeking scale and long-term global growth. 

The closing date for applications is 21 July but New Zealand based shareholders that choose to participate may wish to apply earlier to limit the risk of missing out due to any complications or delays they might experience with the application process.

The purchase of Melio joins a lengthy line of acquisitions the company has completed in recent years as the company pursues growth opportunities and greater market share.

Xero has been an exceptionally successful New Zealand originated company which initially listed on the NZX in June 2007 at NZ$1.00 per share to raise $15 million and is now traded exclusively on the ASX after delisting from the NZX in 2018 and now has a market capitalisation of close to A$29 billion (NZ$31.5 billion).

XRO shares traded on Friday 11 July at below A$176 which was the price for the placement raising the possibility that the 2% discount to VWAP calculation may apply for the Share Purchase Plan if the shares continue to trade similarly.

Clients with XRO.ASX shares are welcome to contact us to discuss the Share Purchase Plan. 

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On July 4, USA’s Independence Day, the US House of Representatives voted for the One Big Beautiful Bill Act (OBBBA) to be implemented.The OBBBA is a budget reconciliation law determining US federal tax and spending policies.

The bill is controversial and was only narrowly voted for with concerns that it will result in accelerating US national debt increases which would likely incur higher interest costs.

So far New Zealand companies have been reasonably quiet in regard to how the OBBBA may affect them with Infratil (IFT) being an exception.

Infratil was following the changes to US tax policy, federal spending priorities, including changes to tax incentives for renewable energy projects closely due to potential issues its US based Longroad Energy company would need to cater for.

Infratil noted that while the legislation scales back incentives introduced under the Inflation Reduction Act of 2022 and concluded that the amended legislation is more favourable for Longroad than expected at the time of its annual results in May which referenced the original House version.

Infratil’s announcement included a table that highlighted certain OBBBA provisions and their effect on Longroad compared to the original house version.

Provision: Tax Credit Eligibility (ITC / PTC)

Original House Version: Projects must have started construction within 60 days of enactment and be placed-in-service (PIS) by 31 December 2028.

Final Version: Projects that have started construction within 12 months of enactment maintain full eligibility to tax credits and have four years to be PIS. Projects starting after the 12 months must be PIS by 31 December 2027.

Provision: Transferability of Tax Credits

Original House Version: Eliminated for projects not PIS by 31 December 2028.

Final Version: Transferability preserved for most credits.

Provision: Foreign Entity of Concern (“FEOC”) Rules

Original House Version: FEOC restrictions begin 1 January 2026. Projects using components from FEOCs (e.g., China, Russia, North Korea, and Iran) are ineligible to claim tax credits.

Final Version: Applies to projects that have started construction after 31 December 2025. Eligibility is subject to defined material assistance thresholds (starting at 40% for solar and 55% for BESS and increasing from 2026 onwards).

Provision: Wind / Solar Excise Tax

Senate Version: Up to 50% excise tax for wind and up to 30% for solar for violating FEOC material assistance rules.

Final Version: No excise tax. In summary, projects now have longer to safe harbour (12 months vs. 60 days) and longer to build (4 - 5 years vs. ~2.5 years), tax credit transferability remains intact, and FEOC requirements are more navigable with the ability to safe harbour to provide more time to transition alongside local efforts to increase U.S. manufacturing capacity.

Infratil expects more clarity on implementation following an executive order signed on 7 July 2025 which directs the U.S. Treasury to issue updated guidance within 45 days to ensure construction-start rules are not circumvented through artificial acceleration or manipulation.

The guidance may involve a narrower interpretation of safe harbour provisions though any changes are expected to be prospective in line with past practice.

The executive order reaffirms the US Treasury’s mandate to implement FEOC restrictions which apply to projects that begin construction after 31 December 2025.

FEOC rules will need to be navigated carefully for battery storage projects given reliance on Chinese imports (for projects that have not already started construction by the end of 2025).

Longroad’s strong relationship with First Solar and its American-made solar technology were noted as allowing it to more-easily navigate FEOC rules for solar projects and the company was described as well positioned to navigate the changes, viewing the legislation as a strategic opportunity rather than a setback.

Longroad has over 30GW (for context: New Zealand’s total electricity generation is about 40GW) of utility-scale wind, solar, and storage projects in its development pipeline, and has confirmed a focus on leveraging the Bill’s safe harbour provisions by meeting key construction and in-service deadlines to preserve eligibility for federal tax incentives across a significant portion of its portfolio, supporting ongoing development.

Approximately 2.6GW of projects are safe harboured (up from 1.8GW at the time of IFT’s annual results), with additional safe harbouring by the end of the year targeted to enable it to meet its target of 1.5 GW on average per year of new project starts across 2025 to 2027 with potential that the safe harbour mechanism will be available to qualify a further 1.5GW per year up to 2029/2030.

Tax credits have been highly beneficial for Longroad, and the final legislation provides more time than expected for the industry to transition.

Longroad’s long-term aspirations are underpinned by commercial demand, combined with expected growth in U.S. electricity consumption driven by electrification, data centre expansion, and domestic manufacturing. 

Longroad’s team are expected to provide further updates as part of Infratil’s annual Investor Day in September.

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Retirement sector companies Summerset and Ryman released announcements last week which indicated a modicum of improvement for a sector that has mostly struggled since values last peaked in 2021.

On Tuesday 8 July Summerset Group (SUM) which houses over 8,500 residents in its 37 villages reported 402 sales for the quarter ending 30 June 2025, comprising 222 new sales and 180 resales.

CEO Scott Scoullar noted continued high demand for its retirement living offering but described the sales environment as not easy.

It was the company’s highest ever first half total sales with 692, up 18% on 1H24.

SUM’s diverse landbank was described as an advantage with over 46% of sales coming from outside Auckland, Wellington and Christchurch.

130 (new and resales) more villas and apartments were contracted in the past six months than in 1H24.

Sales at the company’s flagship St Johns village include 50% of the apartments, and almost 60% of the memory care apartments and care suites at St Johns either under contract or occupied ahead of internal budgeting noting the size of the village.

SUM remains on track to deliver its FY25 forecast of 650 to 730 homes, including the delivery of village centre buildings at Cambridge, Waikato, and Cranbourne North, Australia as well as the first villas at its Chirnside Park village.

SUM will release its Half Year 2025 results on 28 August 2025.

On Friday 11 July Ryman Healthcare (RYM), which houses over 15,000 residents in its 49 villages, provided a first quarter update.

RYM reported 337 sales of occupation right agreements (ORAs) for the quarter ending 30 June 2025 which included 73 new sales and 264 resales.

The sales figures reflect retirement village units only and exclude refundable accommodation deposits (RADs) and ORAs on aged care accommodation.

Total sales were 11% below the same period last year - resales were down 5% and performed better than new sales which were down 28%.

Total sales were up 12% on Q4 FY25 seemingly buoyed by targeted promotions and sales incentives, price optimisation, and continued investment in front-line development.

CEO Naomi James commented that RYM has continued to improve contracting and sales levels through the quarter across most regions, including in Auckland which has experienced more challenging property market conditions recently.

Occupancy in RYMs mature aged care centres was at 96.2% in Q1 FY26, up slightly compared to 96.0% in Q4 FY25.

The main building at Kevin Hickman opened and welcomed its first care residents in early July.

Full Year 2026 sales of ORAs were described as currently tracking towards the upper end of the previously guided 1,100 to 1,300 (Full Year 2025: 1,523).

The RYM update was received positively with an increase in its share price following the update with the share price as high as $2.59 on Friday but is still down 41% year to date.

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PGG Wrightson (PGW) provided a lift to Market Guidance on Friday.

PGW updated operating EBITDA2 guidance for the financial year ending 30 June 2025 to around $54 million (up from $51 million).

This forecast reflects stronger-than-anticipated performance across several businesses and continued resilience in New Zealand’s agricultural sector.

Chair, Garry Moore commented that the agricultural sector has rebounded and has built momentum as the financial year has progressed in contrast to other parts of the economy with improved farmer confidence, favourable growing conditions, and solid commodity prices contributing to a more positive operating environment.

PGW provided the following key driver:

- Livestock and Real Estate:

Agency businesses delivered a strong turnaround from FY24.

Livestock earnings are up, driven by elevated commodity prices particularly sheep values, which rose approximately 26% pre-Christmas and have remained steady.

Real Estate activity increased, supported by improved confidence in dairy and the red meat sectors, alongside recent interest rate reductions.

- Commodity Strength:

Dairy and beef prices remained robust throughout the year, supporting farmgate returns.

Lamb prices held at elevated levels, providing welcome cashflows. Horticulture returns, particularly for kiwifruit and apples, have also been positive, with kiwifruit exports on track for a record year.

- Sentiment:

Full Year 2024 appears to have marked the bottom of the cycle.

Improved economic signals, including lower inflation and interest rates, are supporting renewed optimism.

Rural real estate enquiries have strengthened, particularly for dairy, beef, sheep and select horticultural properties.

While the overall outlook is positive, we remain mindful of ongoing challenges in the wool, viticulture, and arable sectors.

Retail & Water business performance is broadly in line with FY24.

More information on PGW Group's performance will be expected beyond the revised guidance which remains subject to audit with PGW scheduled to issue its full year results on 12 August.

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Transpower Bond Offer

Government-owned Transpower has announced its intention to launch a new senior bond offer to retail investors.

The bond is expected to offer a fixed interest rate of approximately 4.20 - 4.30% per annum, with a 5-year term.

Please note that Transpower will not be covering transaction costs for this offer, so brokerage will apply.

If you would like to be pencilled in for an allocation, pending further details, please let us know.

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Travel

Our advisors will be in the following locations on the dates below.  Please contact us if you wish to make an appointment:

23 July – Christchurch – Fraser Hunter

24 July – Auckland – Edward Lee

25 July – Auckland – Edward Lee

David Colman

Chris Lee & Partners Limited