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Market News 26 February 2024

Johnny Lee writes:

Reporting season continues and Contact Energy’s result is in, with profit rebounding almost exactly following last year’s decline. 

The dividend has been maintained at 14 cents per share, with a clear path to dividend growth as the company’s new generation assets come online, and other opportunities for revenue upgrades become more certain. Contact remains a favourite amongst analysts, despite this dividend remaining static while its peers look to lift distributions.

A key part of Contact’s future will be the long-term plan for the aluminium smelter at Tiwai Point. Expectations are rising that there will be a solution forthcoming in this space, perhaps at a materially higher level. 

Contact remains vigilant around its credit ratings, which in turn influences ease and cost of raising debt. This requires Contact to ensure its net debt does not exceed three times its earnings (EBITDAF) over a sustained period. With net debt climbing from $1,383 million to $1,584 million, Contact will be keen to ensure its full year earnings can keep pace. 

Tauhara, the geothermal development near Taupo, is nearing completion, with the third quarter of this calendar year the current expectation. This will be helpful to the aforementioned debt constraints, as the costly project will finally be contributing to earnings.

It has a few tools in its toolkit to utilise should further delays emerge, including incentivising its dividend reinvestment plan, issuing more capital bonds and raising more capital via a rights issue. With a number of projects in its pipeline, the company will not want to be hamstrung unnecessarily. 

This year may also see progress on its Kowhai Park (solar) and Glenbrook (battery) developments, with both expecting a final decision this year. 

On the retail side, the company is expanding its mobile phone offering (Contact Mobile) and is seeing some growth in Broadband. Mobile revenue has not yet reached meaningful levels, but Contact’s service offering is expanding, which may help reduce churn as customers opt for simpler, ‘’all-in-one’’ offerings. Contact did note that bad debts are rising, although these remain immaterial for now.

With Tauhara almost complete, the next step will be finalising a decision around investing across its development pipeline. The company is carefully managing its debt ceilings, with various options on the table if further delays occur. Once certainty is known around Tiwai Point, the challenge will be to gradually increase shareholder returns alongside its capital expenditure programme.

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Contact Energy’s peer, Genesis Energy, also reported to market, giving shareholders some clues as to what the company may look like going forward.

Readers may recall Genesis announced a significant shift in strategy last November, pivoting from its high dividend strategy to a growth strategy, investing funds into renewable energy and moving away from its historical assets. The company aspires to move from 40% renewable generation to 95% over the next ten years.

Last week’s result marked the first formal result since that announcement.

The dividend declared has fallen from 8.8 cents per share to 7 cents. Capital expenditure has tripled, and profit is down 74%.

The Huntly station remains the puzzle to be solved. Genesis is rolling out new products to the market shortly, while continuing its pursuit of a biomass or gas centred solution. While there seems to be agreement that the Huntly station is necessary for a secure grid in dry years, there are also voices advocating for its disestablishment. For Genesis, as the current owner of the asset, it is a matter of finding a solution which is financially viable.

Its short-term focus is now: improving its customer-facing business, beginning construction of the Lauriston Solar Farm, completing the feasibility study of the biomass market and reaching a final decision on its Huntly battery investment.

The Kupe gas field in Taranaki is currently undergoing assessment, both in terms of performance testing and reserves. Genesis expects the results of these assessments to be released in the second half of this year.

Much like Contact, Genesis is focused on the future and ensuring it can meet the nation’s electricity demand going forward. At the same time, it is focused on ‘’greening’’ its portfolio, with a particular ambition on growing its solar portfolio. 

In a world of ESG funds and increasingly environmentally focused investors coming through, the strategic pivot brings Genesis in line with its peers. Shareholders should not be surprised by the lower dividend - this was flagged months ago. However, shareholders now have some concrete figures around guidance (capital expenditure to rise from $78 million in 2022 and $81 million in 2023, to forecast of $145 million in 2024) and will now have an idea of the magnitude of the transformation Genesis plans to undertake.

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The Warehouse has ripped the band-aid off, and announced it has sold retail brand Torpedo7 to Tahua Partners Limited for $1.

The Torpedo7 brand sold bikes, camping gear and water sports equipment, amongst other items, and was initially purchased to broaden The Warehouse’s offering as part of its multi-channel strategy. Torpedo7’s bikes range in price from hundreds of dollars, to near $10,000 per bike. Torpedo7 also offered financing options through various buy now, pay later schemes, to help those who could not afford such a cost.

Concluding the sale will obviously mean a significant write-down of Torpedo7’s value on the balance sheet. The Warehouse is currently estimating a write-down of around $60 million.

It is difficult to frame this as anything other than a disaster from a strategic standpoint. Clearly, the retail environment has evolved to the point where the asset is regarded as a negative for shareholders, and that time was unlikely to restore this lost value. Following this logic, giving it away for $1 would be the best from a list of bad options.

The post-COVID environment for the bike market, which has previously made up about a third of Torpedo7’s sales, was highlighted as a particular concern. Bike sales surged during the COVID pandemic, but it seems the momentum may be fading in the higher-interest rate environment that followed, while the used bike market grows.

The Warehouse’s justification given for quitting its ownership after five years was to focus on its other assets, and give Torpedo7 to ‘’an owner who can focus more attention to its turnaround.’’ For the staff’s sake, one must hope Tahua Partners can achieve this.

The Warehouse has further refined its strategy going forward, stating it intends to focus on reducing its cost base and ‘’rebalancing’’ its capital expenditure. 

Torpedo7 was always a relatively small component of The Warehouse’s overall sales and its divestment is unlikely to materially impact earnings. However, it will shine a spotlight on future acquisitions – if any – The Warehouse chooses to make. Its record has been mixed when pursuing new markets, often returning to square one with lighter pockets than when it began.

The share price immediately began trading at fresh lows, and the company’s financial result on the 20th of March will see considerable pressure placed on its 15% dividend yield. 

The Warehouse news capped a poor week for the retailers, with The Warehouse update following a brief guidance update from clothing and outdoors supplies retailer Kathmandu. 

Sales are expected to be sharply down this year, with weak consumer confidence and an unusually warm winter blamed for the fall. 

Kathmandu’s own dividend yield – currently 11% - will also see pressure. The question may be whether dividends are reduced or suspended altogether.

Kathmandu now moves to focus on controlling costs, as it waits for economic conditions to improve.

Kathmandu will release its formal results on the 19th of March.

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Comvita, the Manuka honey producer and marketer, has received a takeover bid from a third party to purchase all of the shares in the company. The identity of the third party was not disclosed.

The share price rose nearly 50% following the announcement.

The bid is non-binding and indicative only. There is no information regarding a price, with Comvita simply stating it represents a ‘’substantial premium’’. A rival bidder, if one exists, will not yet know what price it is competing with. 

Comvita is inviting the bidder to conduct due diligence. If it progresses further, shareholders will be formally notified and asked to vote.

For those keeping track, this is at least the eighth company said to have had takeover interest over the last year. Pushpay and MHM Automation have both concluded takeover offers successfully, while Sky Television, Arvida, Rakon, E-ROAD and Metro Performance Glass all engaged in discussions that did not lead to a formal takeover.

The board of Comvita intends to make an announcement in due course, regardless of outcome.

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An important note for unitholders of TCL shares – The City of London fund, listed on the NZX.

The company is intending to delist from the NZX, retaining only its LSE (London Stock Exchange) listing.

This may make it very difficult for shareholders to sell. Shareholders intending to retain their ownership of TCL should ensure they have some capacity to sell their shares on the London Stock Exchange.

The final day of trading on the NZX is slated for the 19th of March.


Summerset Group Holdings Bonds

Summerset (SUM) has announced that it plans to issue a new 6-year senior bond and expects to release full details of the bond offer this week.

Summerset is one of the leading retirement village operators in New Zealand, with 38 villages either completed or in development.

The initial interest rate has not been announced, but based on current market conditions we are expecting a rate of above 6.25%.

At this stage it is likely SUM will be paying the transactions costs for this offer, so it is likely that clients will not be charged brokerage. This will be confirmed this week.

The bonds will likely be listed on the NZX.

If you would like to be pencilled on the list for these bonds, please contact us promptly with an amount and the CSN you wish to use.

We will be sending a follow-up email next week to anyone who has been pencilled on our list once the interest rate and terms have been confirmed.


Travel Dates

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

29 February – Kerikeri – David Colman

1 March – Whangarei – David Colman

5 March – Lower Hutt – David Colman

20 March – Christchurch – Johnny Lee

21 March – Napier – Edward Lee

22 March – Napier – Edward Lee

25 March – Palmerston North – David Colman

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