Market News 22 July 2024

Johnny Lee writes:

The rapid decline in interest rates over the last two weeks has spurred a burst of enthusiasm on our stock exchange, with our main index now approaching two-year highs, as we head into the next reporting season.

The decline in swap rates was also accompanied by a shift in rhetoric, with economists no longer debating whether interest rates are cut this year, but rather how many cuts will be needed to ensure inflation does not slow too quickly.

Equity markets were fairly swift in responding, with the likes of Mainfreight, Fisher and Paykel and Ryman Healthcare benefiting from the change in sentiment. At the same time, analyst reratings are occurring, pushing stocks further as confidence returns.

There was also some tentative optimism returning to the Listed Property Trusts, with Vital Healthcare, Argosy, Kiwi Property Group and Goodman Property Group all enjoying modest increases in both share prices and volumes.

Of course, this is not the first time we have seen enthusiasm regarding interest rate moderation in recent history. There have been a number of false starts both here and abroad. Nevertheless, the rebound of equity prices will be welcome news to beleaguered shareholders.

The bond market saw the inverse reaction, with both liquidity and yields waning. The recent Mercury bond – issued only weeks ago at 6.42% - is now seeing buyers at over $1.03 in the dollar. Mercury’s timing could not have been unluckier.

The term deposit market was also characteristically swift. The banks wasted no time in cutting their offerings, with lending rates following suit shortly afterwards.

The decline in swap rates was preceded by a number of data points, including both general inflation and food price inflation, which both suggested that the Reserve Bank was beginning to win the battle. More data points will emerge soon, with various confidence surveys and labour market statistics due over the next three weeks.

The next three Reserve Bank Monetary Policy Statements are due on the 14th of August, the 9th of October and the 27th of November. The August statement will be very closely scrutinised by investors, looking for clues as to the likely trajectory and timing of interest rate movements. 

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Sky City’s decision to voluntarily close its Auckland casino for five days this year – as part of a deal with the Department of Internal Affairs – will come at some cost to shareholders and may act as a ‘’final warning’’ for the company.

The DIA had received a complaint from a customer, relating to Sky City allegedly failing in its obligations to detect incidents of continuous play. The now former customer reportedly gambled at the casino for about four years before lodging the complaint in February 2022. After two and a half years, the matter is now concluded.

Regardless of one’s view of personal versus host responsibility, the fact is Sky City has accepted the compromise of a five-day closure, which will cost it (meaning its shareholders) about $5 million in lost earnings.

The company has since begun investing into a raft of new compliance measures, including enhancing its various facial recognition technologies and increasing its investments into training programmes for frontline staff. Staff will also monitor ATMs and increase its interactions with customers to assess for signs of problem gambling.

Sky City also intends to institute carded play to their casinos next year. This will give the company even greater control over customer gambling, allowing them to effectively cut off those customers who gamble for too long and manage to evade other protections in place.

Hopefully, the combination of these measures will mean those unable to prevent themselves from circumventing the rules will be forced to explore other options.

Ultimately, the $5 million loss of revenue may be less relevant than the desire to move on and begin work on proving itself again as a reputable operator focused on long-term shareholder returns.

For shareholders, the fear will be another compliance failure, which would almost certainly lead to a harsh response from the regulator. 

Sky City’s response to these failings has been significant, and this has been recognised by the regulator. This response will be costly, but was necessary within the regulatory framework the sector operates within.  

Investing into the gambling sector will always have this heightened regulatory risk, and investors of Sky City will have long since accepted this. With dividends suspended for some years yet, the rewards for this risk will have to wait, as Sky City finally put the long-running legal saga to bed.

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Contact Energy has provided an early indication for shareholders ahead of next months result, as the new Tauhara geothermal plant finalises construction and testing.

Contact now turns its attention to the Wairakei geothermal plant replacement, which is due for its final investment decision later this year. This pipeline of new development is part of its ‘’Contact26’’ strategy.

Helpfully, Contact has also provided guidance around its short-term dividend outlook. The dividend is expected to lift 4 cents in two increments of two cents over the next seven months, or around 11%. Further increases are unlikely while the Wairakei project is active, a project that is expected to take around two years to complete.

The new long-term deal with New Zealand Aluminium Smelters has provided the electricity sector with much needed certainty and has helped turn opportunities into decisions. These companies will be more confident in New Zealand’s growth profile for electricity demand, and can plot the needed supply of power without fear of a major user withdrawing from the market.

Next month’s reporting season will be an important one for shareholders of this sector, as each company outlines both its capital needs for the years ahead, and its cashflows and dividend outlook. 

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The upcoming dual-listing of Santana Minerals – which is expected to occur this Thursday - has led some investors to ponder the decision of whether to shunt their shares to New Zealand or remain on the Australian board. 

While this is not an appropriate forum for individualised financial advice, there are benefits to each which can be discussed in generalised terms.

It is almost certain, in the short-term, that the ASX will remain the home of most of the shares and most of the liquidity for the company. Liquidity allows larger shareholders to enter and exit stocks quickly at guaranteed pricing. Over time, new shareholders buying on the NZX may change this balance. With no other listed gold miners to compete with for airtime, I would expect New Zealand media coverage to highlight Santana’s progress better than the Australian business news, where Santana remains a small fish in a large pond.

However, the New Zealand settlement system – utilising singular Common Shareholder Numbers and FINs – is preferable for some investors, particularly those who may hold Santana across multiple accounts. 

New Zealanders may also find the New Zealand share registries to be substantially easier to deal with than their counterparts across the Tasman Sea. From experience, this is particularly true when dealing with Estates, as the regulatory requirements can be challenging to navigate from abroad.

Traders seeking an arbitrage opportunity may also look to shunt their shares, taking advantage of the lack of liquidity to sell at higher levels.

The decision to shunt is not an urgent one and can be reversed at any time, should priorities change. 

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New Investment Opportunity

BNZ - Perpetual Preference Shares

Bank of New Zealand (BNZ) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for BNZ’s regulatory capital requirements and to have a credit rating of BBB.

This investment is perpetual, with an optional (and in our opinion likely) redemption date in six years’ time.

The initial six-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of around 7.00% per annum.

BNZ will be paying the transaction costs on this offer; accordingly, clients will not have to pay brokerage.

More details are expected on 5 August.

BNZ is one of the top four banks in New Zealand and a subsidiary of National Australia Bank.

BNZ has a strong credit rating of AA-.

If you would like to be pencilled in on our list, pending further details, please contact us promptly with an amount and the CSN you wish to use.

Indications of interest will not constitute an obligation or commitment of any kind to acquire this investment.

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Travel

24 July – Christchurch – Fraser Hunter

25 July – Ashburton (AM) – Fraser Hunter

25 July – Timaru (PM) – Fraser Hunter

26 July – Timaru – Fraser Hunter

25 July – Auckland (Ellerslie) – Edward Lee

26 July – Auckland (Albany) – Edward Lee

1 August – Wellington – Edward Lee

21 August – Christchurch – Johnny Lee

Chris Lee and Partners Limited