Market News 1 September

Johnny Lee writes:

Spark has published its financial results to market, confirming the long-anticipated dividend reset as the company “returns to core”.

This “core” will be largely centred around the provision of mobile and broadband services. With the data centres business now a minority stake and the physical towers business mostly divested, Spark is refocusing on becoming a much smaller, leaner business, with considerably less debt to its name.

In terms of financial results, reported revenue fell 2%, earnings fell 7% and net profit fell 17%. The dividend of 12.5 cents, effectively confirmed earlier in the year, was upheld.

Cost control was a keen focus for the business this year. Significant FTE Reduction (meaning job layoffs) were made, with further savings expected next year. 

The data centre announcement from earlier in August was confirmed, with the net proceeds – some $580 million expected – to be used to retire debt. 

Perhaps the biggest item of note in the results announcement, however, was the dividend reset.

Spark now intends to tie its dividends to free cash flow, with the company anticipating the 2026 dividends to equate to 100% of free cash flow. Helpfully, the company also published its guidance for 2026 free cash flow – with a midpoint of $310 million – which might equate to near 16 cents per share. At $2.50 per share, this might be closer to 8% P.A than 14%, depending on imputation credits.

This trend towards tying dividends to cashflow is not unique to Spark. Many listed companies are now being asked by shareholders to more formally tie their distributions to actual cash profits, rather than relying on debt to fund the company’s payout during bad years. Meridian Energy’s recent result saw a payout ratio of 230%, with the company electing to see through “rare weather events” and borrow to fund its distribution to shareholders.

For Spark, this may mean less predictable dividends. Hopefully, this unpredictability will be due to the growing nature of the dividends, but shareholders accustomed to consistent dividends will need to adjust their expectations.

Spark’s share price rose modestly after the announcement.

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Heartland Group has reported its results to the market, as the company continues to pursue its ambitious medium goals.

Net profit landed above guidance, with Heartland reporting a $46.9 million profit. This compares to last year’s figure of $102.7 million, and follows the company’s announcement from February outlining a significant impairment expense.

Pleasingly, net interest margin rose, with a particularly strong end of the reporting period. This implies that the next result, due February, may be stronger still. 

Across the business, Reverse Mortgages continues to see strong performance, while Livestock Finance has returned to growth. Motor Finance and Asset Finance remain challenging.

The dividend was reduced from 3 cents to 2 cents, in line with the deterioration in profit. The company expects, however, that this will be temporary.

After meeting its guidance, the company has provided outlook for next year, with profit expected to rise from $46.9 million to $85 million. With the company’s stated policy of paying at least 50% of profit in the form of dividends, dividends should see a commensurate increase.

The market liked the result, with the share price rallying back above 90 cents following the result. It remains well off its highs.

All shareholders should make a note in their diaries – Heartland has declared its annual meeting for the 13th of November and intend to present its new 5 year plan on this date. The company hopes this strategy will produce “significant” increases in profit, as Heartland’s recent investments begin to bear fruit.

Heartland’s result beat guidance, and now the company has set a new watermark for 2026. If this is met, dividends will climb, shareholder confidence will rise and further recovery in the share price should follow. 

The annual meeting on November 13 should provide greater clarity as to the long-term strategy of the company.

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Fonterra Group has finally confirmed the sale of its Consumer division, Mainland Group, to French giant Lactalis for a return of up to $4.22 billion, depending on licensing agreements. Mainland owns brands such as Kapiti and Anchor. 

The sale is subject to farmer vote, expected in late October or early November. If the resolution passes, settlement of the sale is expected in the first half of next year.

If the sale is approved, shareholders would vote again as to the use of the proceeds. Fonterra is proposing a $2 per share return of capital to shareholders, with more details to follow.

The divestment follows an extensive process from the board. Ultimately, the decision to exit the business via a trade sale was motivated by price and a desire to settle the matter quickly. Like many listed companies, Fonterra has conducted a strategic review and concluded by selling assets and “focusing on what we do best”. 

Across the Fonterra portfolio, the Consumer brands were a relatively small component of the overall business. About 16% of the company’s revenue is generated by the Consumer business, with the other arms – Ingredients and Foodservice making up the difference. Consumer also produced the lowest return on capital, a metric that remains a focus for the company. 

News of the divestment sent the shares significantly higher. Fonterra units are now among the best performing asset on the NZX this year. Indeed, in a year where the market index is almost completely flat, the primary sector has been particularly strong. A2 Milk is up 60%, Scales is up 30%, Seeka is up 30% and even Synlait is up 80%. Some of these are rebounding from historic lows, but shareholders will be pleased to see outperformance, nonetheless.

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Comvita Group, the publicly listed honey company, has confirmed it has received a bid to purchase the company. This is, at least, the sixth takeover offer received for an NZX-listed company this year.

The bid comes from Florenz, a subsidiary of Masthead Limited. Masthead owns various brands, including Wedderspoon, Harker Herbals and Xtend-Life.

Florenz currently holds 18.3% of the company already, following an arrangement with existing major shareholders. Comvita’s board separately advised that other major shareholders have privately expressed support for the offer. 

The price of 80 cents will not represent a successful exit for long-term shareholders. Comvita had traded for years at around $3 a share, paying dividends and producing revenues in the hundreds of millions.

But recent years have not been kind to the honey industry. Comvita views the industry as oversupplied, fragmented and fiercely competitive. The board anticipated a heavy loss this year, and would require a significant injection of shareholder capital. Accepting the offer at 80 cents was judged to be the best pathway forward for shareholders.

A shareholder meeting is expected to be called in November. If shareholders vote in favour of the scheme, implementation is expected in December, and yet another New Zealand company would leave our exchange. 

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Vulcan Steel has announced a capital raising, with the steel distributor announcing the purchase of Roofing Industries for $88 million. 

Roofing Industries, as the name implies, sells steel roofing products, as well as offering cladding and fencing solutions. It operates 15 locations across the country.

Vulcan views the acquisition as expanding the product offering within the company, at a relatively low cost (4.5 times earnings). Vulcan has been eyeing roofing as a possible market for over a decade, and views the current environment as the right time to begin consolidation.

The $88 million will be funded by an accelerated rights issue. 

Shareholders will be entitled to buy additional shares at $5.95 AUD (approximately $6.60 NZD) at a ratio of 1 new share for each 9 shares currently held. A shareholder of 1000 shares would be entitled to 112 new shares.

The offer closes on 11 September. A shortfall bookbuild will take place after close, meaning that shareholders who elect not to participate will receive a payment if their entitlement is subsequently sold.

The style of activity – listed companies raising capital to buy smaller, unlisted companies – should be expected to continue, particularly in sectors which are fragmented and undercapitalised. One of the core advantages of an NZX listing is the access to capital, allowing companies like Vulcan to raise money quickly and pounce on opportunities it feels are accretive long-term.

The rights issue is currently open.

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New Issue

Meridian Energy (MEL) has announced that it plans to issue a new 6.5-year senior green bond.

A minimum interest rate has been set at 4.35%.

MEL will not be paying the transaction costs for this offer. Accordingly, clients will be charged brokerage.

We have uploaded the investment statement to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/mel080.pdf

If you would like a FIRM allocation, please contact us promptly, with an amount and the CSN you wish to use no later than 10am, Thursday 4 September.

Payment will be due no later than Wednesday, 10 September.

Please note that scaling is highly likely.

Travel

Our advisers will be in the following locations on the dates below. 

3 September – Wellington – Edward Lee

11 September – Ellerslie – Edward Lee

12 September – Albany – Edward Lee

24 September – Lower Hutt – Fraser Hunter

24 September – Napier – Edward Lee

30 September – Taupo – Johnny Lee

1 October – Hamilton – Johnny Lee

3 October – Tauranga – Johnny Lee

7 October – Palmerston North – David Colman

8 October – Christchurch – Johnny Lee

Chris Lee and Partners Limited