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Market News 27 November 2023

Johnny Lee writes:

MyFoodBag’s results are out of the bag, with virtually every metric missing the mark as the realities of this economic environment take their toll.

Revenue is down, profit is down, and the dividend has been cancelled. Fortunately, net debt also fell from $15.3 million to $14.1 million, with further decreases expected as the company reprioritises this.

The company’s focus on debt reduction and ‘’rightsizing’’ the business suggests that the company is firmly focused on survival, reducing costs by consolidating facilities and investing in implementing technology to assist with the packaging process. This approach to management has become increasingly common in this higher interest rate environment.

In practical terms, this has meant delisting from the Australian Exchange, pausing the distribution of shares to staff and maintaining previous levels of marketing expense despite general cost inflation. With a profit of only $2.5 million, such expenses can make the difference between a profit and a loss.

Marketing of products has also changed, as the company focuses further on pitching its affordability, with its lower-end Bargain Box product seeing increased volumes. A number of recent marketing efforts have attempted to draw comparisons between the Bargain Box pricing and general supermarket pricing.

The company faces something of a tightrope in this regard, proffering its value without diminishing its perception of higher quality product. MyFoodBag’s competitor HelloFresh remains hot on its heels in this regard, as it tunes its own strategy.

The company continues to trial new ideas, with several new products launching. The company is trailing large-scale meat packages, as well as one-off ‘’Summer BBQ’’ deals. If nothing else, these deals will indicate any public interest in such offerings. The wealth of data that the company has collected over time will also help tailor future offerings, targeting specific cuisines or social trends.

The company is also pushing a new ‘’convenience’’ strategy, targeting those customers with limited spare time. Again, the company will be using its own data around customer needs to try to target former customers with offerings that meet those needs.

The question shareholders are asking themselves now is: will this company see growth once economic conditions improve, or are these conditions reflecting a new normal? 

The share price reaction seems to imply the latter. The price continues to struggle, despite the already low value. Meanwhile, a number of publicly disclosed shareholder declarations show that the institutional shareholders are gradually winding down their exposure to the company. 

Trading for its shares remains very active, but in very small individual parcel volumes, perhaps indicating the type of investor currently buying into the company. Institutional buyers do not tend to buy in $100 lots.

The company hopes to pay a dividend next year, consistent with its comments from May this year at its 2023 full year result. The language did change however, noting that any such payment would be ‘’subject to the net debt position and financial performance’’ of the company. Suffice to say, expectations should now be even lower.

Overall, the company remains profitable – just – and is hopeful that declining inflation around the globe will see its fortunes improve. The company is taking steps to reduce its overheads and adapt to an environment where discretionary spending is declining. While debt levels are lighter than before, overall value of the company is declining more quickly. 

The full year result, due May, will be crucial. 

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As the year nears its end, one of the tasks financial advisors look forward to is meeting with economists, industry leaders and business owners to help form views around the direction of our economy and the impact this may have on investments over the following twelve months.

One common theme emerging is the enormous sums being invested into our infrastructure, and the even larger sums still required to be raised as these projects increase in urgency.

Councils, for example, will no doubt be forced to make difficult decisions and face the challenging task of persuading voters as to why their ‘’nice to haves’’ must wait. Some projects will simply move from short-term to long-term, ceding priority for those projects that must be actioned. The relative value of council projects – whether cycleways, water security, affordable housing or building projects – will need to be weighed carefully. 

The electricity sector is another expected to be busy, as the reality of our push towards more renewable energy hits home. These projects will total into the billions, as our generators ensure sufficient supply to meet our long-term needs.

Some of this money will simply not be raised from our shores. This is partly due to our level of investible wealth, but also due to our preference for shorter-term investments. Readers will recall Ryman’s recent experience with long-term debt, but the desire from businesses to borrow and invest longer-term remains strong. Several recent occurrences of New Zealand firms raising money from Australia suggests that these large-scale investments will happen with or without the financial support of New Zealand investors. 

For our bond investors, this may translate to a number of new investment options in the first half of next year as a way of testing appetite. While these new investments will be one driver of this, there will also be continued flow from maturing investments, as well as existing issuers looking to raise capital to meet regulatory requirements. Some of these new offerings may cause investors to re-consider their investment horizons, as some issuers push for longer-term debt.

For equity investors, however, pickings may remain slim. Very few companies appear to be aggressively pursuing growth, and the usual candidates for capital raisings have been deterred by market pricing, or in more recent history, a lack of shareholder support. Hopefully, market expectations of a more dovish Central Bank translates to renewed business confidence, and a willingness to approach shareholders with long-term plans (and long-term returns!).

On the regulatory front, we now have a Government and formal policy objectives are now public. In particular, the agreement between the National Party and the ACT Party includes a goal of removing the ‘’dual mandate’’ (inflation and employment) of our Reserve Bank and altering the goal of ‘’medium-term’’ - in relation to inflation targets - to a more specific target around timeframe. Whether or not this has any practical impact remains to be seen, but all investors should be hoping that we do not simply see a constant back-and-forth as political parties exchange power, instead seeing a best practice determined and established. Time will tell. 

Insurance costs remain an issue for households and businesses alike. Unfortunately, this issue seems to be heading in the wrong direction, leading some to underinsure or even withdraw from insuring altogether. KPMG’s recent report into the insurance industry suggests that between floods, cyclones and earthquakes, the new risks emerging to insurers is going to require better data and better co-ordination with the Government.

The main fear from economists remains the threat of rising unemployment. The next formal datapoint from Statistics New Zealand for unemployment is scheduled for the 7th of February. Between increasing immigration and more challenging market conditions for many of our major industries, it seems earlier forecasts for rising unemployment are likely to come to pass. The Reserve Bank, for example, does not expect unemployment to stop rising until 2025.

With major elections, ongoing wars and a Chinese economy continuing to ‘’normalise’’, 2024 will no doubt face its share of global challenges for investors to navigate to.

The holiday period is typically a quiet one for capital markets, and gives us all an opportunity to take stock of economic conditions and look to the future. Market participants are anticipating a busy 2024, with opportunities for investors to consider as a number of our sectors face challenges.

Chris Lee & Partners Ltd

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