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Market News 27 May 2024

Johnny Lee writes:

Infratil’s full year result is in, showing a large increase in earnings, a modest increase in dividend and a significant commitment towards two sectors within its portfolio.

Earnings rose 63%, above previous guidance, at a time when many companies are reporting difficult conditions.

The increase in earnings was shared by virtually every sector within Infratil - data centres, renewable energy, Wellington Airport, diagnostic imaging, One NZ and RetireAustralia all reported increases in earnings.

The dividend rose 0.50 cents per share, marking another annual increase of 0.75 cents per share in total.

Looking forward, it is clear Infratil has its eye on two targets this year.

The first is a further expansion in the data centre space.

Despite the phenomenal success of the data centre industry so far, Infratil plans to commit another $2.5 billion into this sector over the next twelve months alone. 

CDC - Infratil’s data centre operator in Australasia - now has multiple new data centres planned this year, as the company highlights the relentless demand for server capacity. For now, CDC believes its land bank is sufficient to accommodate short-term demand.

It is clear that the data centre sector is not yet matching supply with demand, with the rapid growth in Artificial Intelligence technology exacerbating this imbalance. 

Those predicting this wave of investment into AI to be short-lived have so far been proven incorrect. The likes of Amazon, Microsoft, Google, Facebook and Apple continue to pour billions into the sector. Time will tell as to whether this enthusiasm is maintained.

For now, Infratil is simply riding the wave, while mitigating its risks with its other hand.

A major cost of running a data centre is electricity. 

Infratil’s other major focus has been in the renewable energy space, specifically in the United States through its Longroad Energy investment.

Longroad is ambitious, with a large pipeline of work to add capacity over the next three years, which will see electricity generation increase fivefold.

Such a pipeline is expensive, and will mean more billions invested by Infratil. These billions will come from debt and retained earnings - or at least the earnings not paid out as dividends.

Infratil notes that its strategy of focusing on US-made solar panels will help mitigate the impact of the recent tariffs announced by the US Government. 

Infratil also makes the point that a major political event (the upcoming presidential election) may create some uncertainty for the renewable sector. This is simply a risk Infratil and Infratil shareholders must accept at this stage.

At the same time as its financial results, Infratil announced it is planning a new seven and a half year bond issue, with a minimum interest rate of 6.75% p.a. The offer is open now and closes at 9am on Thursday. If you would like an allocation of this bond please contact us urgently.

The offer will also include an exchange offer for holders of the IFT230 bonds. Bondholders who elect to accept the exchange offer will receive the new bonds.

This trend towards longer dated bonds is both a positive and a negative.

For some, longer dated bonds represent an opportunity to further spread their investment risk. 2031 is a relatively light maturity year for retail bond investors so far, and locking in a higher long term rate may prove attractive to those with ample maturing money in the interim years, especially those anticipating an easing of interest rates over the period.

For others, December 2031 may seem beyond their acceptable investment horizon. To alleviate this concern the bonds will be listed on the stock exchange which enables investors to sell the bonds before maturity.

Certainly, Infratil has built a significant amount of trust with investors - both shareholders and bondholders - over many years. These results both reinforce that and give a clear outline for how the company intends to grow the company moving forward. 

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David Colman writes:

The RBNZ (Reserve Bank of New Zealand) surprised almost no one last week as the committee delivered a decisive statement that it had reached consensus to keep the Official Cash Rate (OCR) at 5.50%.

The OCR has now remained at 5.50% for an entire year.

RBNZ commentary included:

- annual consumer price inflation (CPI), which the bank watches with great intensity, is expected to return to within the 1 to 3 percent range it targets by the end of the year.

- the decline in inflation reflects lower inflation for imported goods and services but has been slow to decline from 30-year highs.

- New Zealand labour market pressures have eased with businesses’ cautious approach to hiring in line with weak economic activity. More people are available to work due to high net inward migration.

- Wage growth and domestic spending are easing

- Inflation is higher for rent, insurance, rates, and other domestic services

They noted that their economic projections include officially available information regarding government intentions to date, but they do not include any impacts that the yet to be released government budget may have on their outlook.

The RBNZ provides a summary of its decision making which included references to slower global economic growth and that many economies are seeing weak domestic demand.

Internationally, it is common to observe inflation easing faster for goods, energy and food than it has for services which have declined less than was anticipated at the start of the year.

New Zealand’s current low rate of productivity was discussed in terms of whether it is a temporary or a more persistent issue with the former seemingly considered more likely.

Expectations of a relatively neutral budget (neither inflationary nor deflationary in aggregate) were shared.

Commodity prices, specifically oil, which can be influenced by events in exporting regions such as the Middle East, has not risen sharply despite conflict in the region.

Raising the OCR was discussed as there are near-term inflation risks, but the RBNZ ruled out a hike based on confidence that inflation will ease in the medium-term.

The committee agreed that interest rates may have to remain at a restrictive level for longer than previously anticipated.

For now the RBNZ is acting in its largely robotic way and keeping the OCR unchanged as the annual CPI figure of 4% in the March quarter is still above its 3.00% range.

Annual headline CPI is expected to fall within the target band in the December quarter of this year with that data released in January 2025.

I have written before that many people are hoping for a lower OCR which might nudge borrowing costs lower but the latest RBNZ commentary indicates that those people will likely have to be prepared to wait until the new year for such a change.

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My Food Bag (MFB) delivered welcome news to shareholders with the resumption of dividends despite a fall in full year revenue, EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation) and NPAT (Net Profit).

In the full year revenue was $162.2 million, down 7.7% compared to FY23

EBITDA was $16.0 million, compared to $18.2 million in FY23NPAT of $6.0 million, compared to $7.9 million in FY23

The second half of the full year showed improvement with NPAT of $3.5 million which compared favourably to $2.0 million in the same period the year before.The company noted that they had achieved successful implementation of automatic pick technology with an average of 99% accuracy in the second half of the full year 2024.

Net debt reduced by $3.5m to $11.8mThe dividend will be a fully imputed final dividend of 0.5 cent per share, payable on 20 June.

The average order value was $129.54 across the year, marginally down from $130.11 in FY23. This was largely driven by an upswing in Bargain Box customers. Bargain Box deliveries were up 19.5% for the year.

Mark Winter, CEP, and Tony Carter, Chairman, shared statements including that steps taken in early 2023 to realign the business to reflect trading conditions, capitalise on market opportunities and add value for our customers are working.

He noted that in a difficult macro-economic environment, MFB had transformed its operations, and the second half of the year demonstrated that it has stabilised and reset the business and expects to continue to grow profit.

Active customer numbers were down marginally to 56,800 at the end of FY24 from 57,500 the year before.

Gross margin was stable at 48.5%, compared to 48.4% during FY23.

Outlook included that market conditions remain challenging, but the company believes it is well-positioned to further strengthen its brand, improve convenience, build a seamless customer experience, and supply unique ready-made solutions with ambitions of increasing customer numbers.

The first 8 weeks of full year 2025 trading showed overall net sales and active customers (59,009) broadly in line with the prior year and its partnership with the New Zealand Olympic Team has been successfully launched.

MFB forecasts continuing to pay dividends in full year 2025.

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Positive news was also rolled out by EROAD (ERD) last week with the release of its financial results for the 12 months ended 31 March 2024.

Financial Highlights included:

- Achieved positive Free Cash Flow (to the firm) of $1.3m in FY24 compared to negative free cash flow (to the firm) of $29.9m in FY23. This improvement is the result of growth in units, price increases and cost control.- Revenue increased to $182.0m for FY24 from reported revenue of $174.9m in FY23 and normalised revenue of $165.3m in FY23. This represents a 10.1% increase against normalised revenue for the prior comparable period, normalising for the one-off acquisition accounting adjustment of $9.6m in FY23 relating to the Coretex merger. Growth in revenue was delivered across all markets.- Annualised Monthly Recurring Revenue increased by $24.1m (15.7%) to $177.8m in FY24 from $153.7m in FY23, reflecting growth across all markets and support by favourable foreign exchange.- EBIT of $0.8m in FY24 compared to $1.7m in FY23. Normalised EBIT increased to $4.4m in FY24 up from $(4.5)m in FY23. Normalised for 4G hardware upgrade costs of $3.6m in FY24 and integration costs of $3.4m and one-off acquisition revenue of $9.6m in FY23.

Operational Highlights included:- Customer Retention of Contracted Units remains high at 94.8% in FY24 (NZ 95%; AU 96%; NA 95%), same as last year.- Key enterprise customer wins and expansions during the period. Programmed in Australia (+3k connections), renewed and expanded Boral (+1.3k connections) and SkyBitz (+1.5k) in Australia and Kinetic (owner of NZ Bus +1k connections) in New Zealand, and expanded US Foods (+1.3k connections) in North America. 68% of new enterprise units were expansions from existing customers, demonstrating strong customer value from EROAD.- 250,000 units milestone passed. Globally, EROAD has now hit the 250,000 unit milestone, driving operating scale.

Chair Susan Paterson noted that the FY24 result met or exceeded all of the guidance metrics set at the start of the year with cash consistently generated in the latter part of calendar year 2024 a result of a disciplined approach.

She believes ERD has the right skills, capital structure, cost-base, product-set and customer focus to capitalise on growth opportunities ahead to decarbonise transport as governments look to sustainable revenue streams.

Co-CEO's Mark Heine and David Kenneson were pleased with the progress EROAD is making again noting a disciplined approach was needed which included increased focus on customers, removing non-essential costs, and positioning it to take advantage of growth opportunities (such as in North America).

Global revenue of $182m was ahead of guidance with top line growth seen in all 3 markets the company is in.

ERD provided outlook and guidance that it will be focused on fiscal and operational discipline, with considered investment in growth, with potential expansion within key markets and plans to deepen engagement with existing customers and may partner (with other firms) where appropriate to meet the evolving needs of the market.

ERD’s FY25 guidance noted that it had turned the corner on costs and productivity and is now accelerating its new product introductions and go-to-market strategies in all markets. This is well underway, and expectations are that it will be in-place in mid-to-late Q2.

FY25 Revenue guidance was forecast to be $190m to $195m with EBIT guidance of $5m to $10m (normalised for the 4G hardware upgrade program).

EROAD expects to be free cash flow positive in FY25.

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Infratil Limited – 7.5-Year Senior Bond

Infratil has announced its plans to issue a new 7.5-year senior bond. Full details of the offer can be found on our website.

Infratil is an infrastructure investment company with significant holdings in Digital Assets, Renewable Energy, Healthcare, and other infrastructure assets. It anticipates earnings for FY2025 to be approximately one billion dollars.

The bond will have an interest rate of at least 6.75% per annum, with interest paid quarterly.

Infratil will cover the transaction costs for this offer, accordingly clients will not be charged any brokerage fees. 

The offer will comprise two separate parts:

The firm offer is open now and closes at 11am on 30 May 2024, with payment due 13 June.Exchange offer opens on 31 May 2024 (following the Firm Offer). Under this offer, all New Zealand resident holders of the IFT230 bonds maturing on 15 June 2024 will have the opportunity to exchange some or all their maturing bonds into these new bonds.

If you are interested in a FIRM allocation for these bonds, please contact us promptly with the desired amount and the CSN you wish to use.

If you are an existing IFT230 bondholder and would like to exchange your bonds into this offer, please inform us at the time of your request.

Travel

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

29 May – Wellington – Edward Lee

30 May – Levin – David Colman 

5 June – Nelson (FULL) – Chris Lee

6 June – Blenheim – Chris Lee

11 June – Tauranga – Chris Lee

13 June – Auckland (Ellerslie) – Edward Lee

19 June – Lower Hutt – David Colman

25 June – Napier – Chris Lee

Please contact us to arrange a meeting office@chrislee.co.nz 

Chris Lee & Partners Limited

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