Chris Lee & Partners Ltd

Market News 24 April 2023

Johnny Lee writes:

Inflation data for the quarter has been released and should come as an immense relief to those fearing future rate hikes – as the March figure came in below expectations and showing some signs of moderation in some areas.

The supermarket trolley remains the primary cause of inflation for consumers. The cost of fruit and vegetables rose sharply, while milk, eggs and bread all rose.

Conversely, the transport sector saw some price deflation, as the likes of petrol and airfares declined in cost. Petrol costs are well beyond our control, and also exposed to weakness in the New Zealand dollar.

These same two trends are also playing out overseas, with energy costs easing as food costs continue to find their peak. The cyclone has added a greater degree of uncertainty, but this data clearly showed that similar trends are playing out here.

The softening data will make the Reserve Banks next meeting – on the 24th of May – crucial for investors. The Reserve Bank is facing increasing criticism that it is hiking rates too aggressively, risking an overshoot (meaning, that inflation will begin cooling below the target range) and having an unnecessarily negative impact on the economy.

The market will be looking for a signal that the Reserve Bank is comfortable that medium-term inflationary pressures are easing. If the hiking cycle is to end, the question will then turn to exactly how long interest rates are likely to remain paused before easing towards a neutral rate.

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Last week saw a number of sharemarket announcements that are worth highlighting.

Seeka Limited shareholders received an unpleasant - but perhaps expected - update to market, as the company advised the status of its Kiwifruit crop.

Recent weather events across the country – cyclones, frost, floods, hail – have resulted in a reduction in volumes, which the company fears may be as high as a 20% fall. This has led the company to forecast a loss for the year.

The company has responded to this forecast loss by cutting costs and is looking towards further asset reviews. Asset sales in this environment are notoriously tricky, as valuations will be under pressure and bank lending for buyers, especially for land assets, will be difficult.

Seeka’s most recent results in February saw profit fall sharply as the company struggled to adjust to a post-COVID world, opting for a cautionary approach to capital management. Shareholders will recall that in August 2022, the company faced criticism from some in media for cancelling its dividend alongside its 4% increase in profit. This decision now looks to be somewhat prescient.

Seeka’s tough few years include battling ‘’extreme’’ labour shortages, shipping constraints, poor yields and fruit quality, and now what one could describe as increasingly-common uncommon weather patterns.

While these are factors beyond its control, the fact remains that Seeka’s poor share price performance and lack of dividends will inevitably result in unhappy shareholders. If nothing else, this serves as a reminder as to the risks of investing into the horticulture sector. Investment into automation, advertising in new markets and expanding into new products mean nothing if Mother Earth sends a cyclone through the crop.

In the interests of balance, it would also be fair to commend the company for its constant communication with shareholders. Seeka has taken its continuous disclosure requirements seriously, providing almost monthly updates to shareholders as these challenges emerged. Hopefully, this behaviour continues as economic conditions improve.

The company will lean on its balance sheet for the next twelve months, as it hopes for conditions to improve. This is a key benefit of its size and its public listing – smaller growers facing the same challenges will have far less flexibility in this environment.

Seeka’s update will be disappointing for shareholders, but not surprising. The horticulture sector has been dealt a rough hand over the last few years, and the share price performance reflects this. The short-term picture does not seem to be providing any relief, and shareholders should expect a challenging year ahead.

Seeka is expected to provide its half-year results in August.

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Michael Hill International has announced it is pausing its buyback programme, as the company instead looks to buy Australian jeweller Bevilles for $45 million. The share price reacted positively to the announcement.

Michael Hill will not be raising new capital to fund this, instead using existing cash reserves and bank facilities.

Bevilles is a jeweller focusing on gold, silver and watches, predominantly at the lower end (less than $500) of the market.

The acquisition comes as Michael Hill looks to reposition itself towards the premium and luxury end of the spectrum, as it targets growth in the diamond market. Almost three quarters of its sales mix is now in diamonds, and it is preparing the launch of a new luxury brand specialising in bespoke jewellery.

This distinction is important, as it justifies the acquisition in many ways. Michael Hill would argue that this acquisition does not materially cannibalise existing sales, and instead allows Michael Hill to target a sector of the market through one brand, without degrading its push towards the other end of the market with the main brand.

There will also be some minor synergies around supply and freight.

Bevilles is viewed as having a significant growth profile, with its relatively small footprint across Sydney and Melbourne. Bevilles has existing relationships with the major ‘’Buy Now, Pay Later’’ providers, allowing them to target the sector of the market that relies on such services for their jewellery needs.

While the retail sector is under pressure, Michael Hill is taking the opportunity to acquire a new business in Australia. At the same time, the company is looking towards ‘’Brand Elevation’’, repositioning itself from the ‘’affordable value’’ end of the market towards the ‘’premium, luxury’’ market, effectively operating Bevilles as the brand for the lower end of the market.

Michael Hill expects the acquisition to conclude within the next two months.

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The NZX hosted its annual shareholders meeting last week, providing an insight into the current conditions facing the market operator and regulator.

Guidance of $36m - $40.5m EBITDA remains in place, a range that would represent either a stable level of earnings or a modest improvement on the previous years. Like most businesses, costs are rising.

Trading volumes remain soft, while market performance has impacted its Funds Under Management business. Although significant inflows of cash continued, the poor performance of the market has caused gains of funds under management to be far more modest.

The NZX maintains its view that its individual business units remain undervalued, and is working towards realising value from these. The idea of publicly listing the Funds Under Management business was floated during the meeting, but no definitive answer was given.

Shareholders also enquired as to the likelihood of dividend growth, a common question posed when listed companies request an increase to the directors’ fee pool. The NZX, presumably, is aware that shareholders would like a clearer pathway to increased dividend returns.

Lifting director fees is always a touchy subject for shareholders, despite the irrelevantly small sum involved. If nothing else, the procedural matter of lifting director fees provides shareholders an opportunity to convey their pleasure (or displeasure) with the performance of the company.

Ultimately, the vote passed with an overwhelming majority.

The last decade has seen significant change for the NZX, as it used a change of leadership to exit investments that were no longer relevant, and made new investments into areas it thought would add value.

Judging by the reaction of its shareholders, the time is fast approaching to realise value from these investments.

Postscript: The NZX has announced that it plans on offering a reinvestment offer for its NZX010 subordinated notes. More details on this will be announced over the coming weeks.

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A note for Precinct shareholders and bondholders:

Precinct has notified shareholders of its intention to hold a meeting of all shareholders, to vote on a proposed redesign of the company’s ownership structure.

Shareholders will be given the option of either maintaining the status quo, or moving to a Stapled Structure. The board is recommending adopting the Stapled Structure, and early indications are that the vote should pass without any significant objection.

A Stapled Structure would mean that Precinct Shareholders own shares in both Precinct Property New Zealand, and Precinct Properties Investments, together ‘’stapled together’’ as one listed security – Precinct Properties Stapled Group.

Instead of owning shares 1,000 shares in Precinct Properties, shareholders will own 1,000 shares in Precinct Properties Stapled Group, which will own the exact same assets. Stride Property Group, another Listed Property Trust, operates a stapled structure.

The restructure is designed to enable Precinct to maintain its growth strategy without sacrificing its PIE – Portfolio Investment Entity – status, and the tax benefits this PIE status provides. Precinct has stated that should the vote fail, it would likely abandon the planned growth strategy in question, rather than the PIE status.

In order to qualify as a PIE, certain thresholds must be met regarding its source of revenues and whether certain income is passive – meaning dividends, interest and rent. In January, Precinct announced its intention to move into the residential development market as part of its growth strategy to increase shareholder returns.

The change in structure should not alarm shareholders, and those in support of both its growth strategy and its PIE structure will not struggle deciding which direction to vote.

The vote will occur on the 11th of May and requires 75% approval to pass.

Heartland Bank Subordinated Notes

Heartland finalised its interest rate for its subordinated notes at 7.51% per annum, fixed for the first five years. It raised $100m which included $25m of over-subscriptions.

Thank you to all of those who took part in this deal.

If you have missed out on this deal, we may be able to access a further allocation. Please let us know if you would like an allocation.

Travel

Edward will be in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Fraser will be in Timaru (FULL), Oamaru (FULL) on Thursday 27 April and Dunedin (one appointment left in the morning) on Friday 28 April.

Clients are welcome to contact us to arrange an appointment.

Chris will be holding seminars around the country beginning in the last days of May, finishing in early July. We will contact all clients with dates and times shortly, and details of how to apply for a free ticket. We are not taking names or confirmations at this stage.

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Market News 17 April 2023

Johnny Lee writes:

Chorus shareholders have reason to cheer, as the share price continued its good start to the year. This share price incline was further supported last week by an announcement regarding major shareholder Unisuper. The Australian superannuation fund has been granted permission by the Crown to increase its holding of Chorus to up to 20%.

Any shareholdings above 10% of Chorus require Crown approval, as per the ‘’Limitations on shareholders’’ section of the Chorus constitution. Foreign holdings above 49.9% would require further approval, although the possibility of a Government granting such approval seems remote, such is the sensitive nature of this asset in today's climate.

The announcement does not state nor imply that UniSuper will necessarily follow through and acquire more shares in Chorus. Its current holding – already around 9% - was approaching this 10% threshold, and with Chorus in the process of buying and cancelling shares, its holding would be slowly climbing on a percentage basis.

Infrastructure assets, like fibre optic cabling, have proven very appealing to many of these international pension funds. Spark’s recent sale of its TowerCo business to a Canadian fund is another example of such an investment from abroad. 

Many of these international players see New Zealand as a politically stable nation that is respectful of property rights, a reputation, successive governments have worked hard to foster.

One issue it raises is the gradual diminishing of liquidity. While we are not yet at a point of concern, many of these large scale buyers - including Chorus itself - will find it increasingly difficult to acquire meaningful holdings without paying more for the privilege.

The New Zealand stock market has had a modestly positive year so far, with Chorus placing itself as an outperformer. Demand for our infrastructure assets, particularly from abroad, remains strong.

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The sorry saga of Oceania Natural Limited is about to be put to bed, with a court ruling that both the Chief Executive of the company and his wife were guilty of market manipulation. Sentencing will follow shortly.

Oceania – not to be confused with the aged care operator of the same name, nor the gold miner of the same name – described itself as a ‘’premium food supplements company’’, distributing Manuka Honey products and a range of Noni fruit products. It was listed on the NXT exchange, a sub-exchange operated by the NZX to encourage smaller companies to engage with capital markets.

The details of the case, frankly, would stretch the imaginations of most. The Chief Executive Officer operated his overseas-based father’s ASB Securities share trading account to purchase shares in the company. It was reported that he would call ASB and impersonate his father during these purchases, in order to buy shares in his own company at higher prices.

During Oceania’s case, the CEO’s parents were unable to present evidence due to difficulties in operating teleconferencing technology from China.

The Chief Executive also involved two accountants - apparently working at the same premises as Oceania – to assist him in the scheme. Both accountants had already admitted to market manipulation, and were fined $310,000 between them last year.

The website of the accountancy firm, which touts its adherence to ‘’integrity, professionalism and efficiency’’, appears to be devoid of all reference to the people fined.

The behaviour of this gentleman reminds me of another Chief Executive of a small, NZX-listed company, who would dedicate time out of his day to anonymously promote the company on online forums. He is no longer an employee of the company. Not all Chief Executives are created equally, it seems.

The successful case provides a resolution, but also helps explain why the NXT concept was so quickly abandoned.

The idea behind the NXT Exchange was to provide an avenue for smaller companies to access a transparent market through which to raise capital and grow, without imposing the regulatory burden associated with a full NZX listing. Disclosure requirements were weaker, and investors wanting to engage with the exchange were required to sign an ‘’NXT Warning’’ acknowledgment form, agreeing to these weaker disclosure requirements.

Other conditions, such as the minimum number of shareholders, were also relaxed. The thought was that companies would, eventually, migrate from the NXT board to the NZX board, a ‘’business development plan’’, as it was described.

The NXT Exchange was scrapped in 2019, 4 years after the first listing occurred on the market.

The NZX Chief Executive at the time, Tim Bennett, faced some criticism at the time for pushing ahead with the idea of such an exchange. Oceania Natural was one of only a handful of companies to ever formally engage with the NXT exchange. One of these, Marlborough Wine Estates, remains listed today on the main board.

The arguments for and against the NXT reflect two pressures. On the one hand, the NZX needed (and still needs) new listings, and the country as a whole needs a credible pathway for growing companies to access investor capital. Small companies found the costs and rigmarole associated with a full public listing prohibitive. These arguments remain as valid today as they did in 2015.

On the other hand, every such failure will dent investor confidence and reinforce the idea of the public that the sharemarket remains littered with rogues. The FMA’s response to this, at the least, should give some confidence that these rogues do not always escape scot-free. Promoting an alternative exchange as having weaker disclosure requirements always carried the risk of attracting such people.

Since this idea was floated, the concept of crowdfunding has become more commonplace, and has tried to solve some of these problems. Crowdfunding remains a source of trepidation for many in the financial advisory industry, fearing a further loss of this investor confidence, particularly amongst young people intrigued by the idea of investing into these smaller companies and investing for the first time.

These smaller companies vary, but include the likes of craft breweries, medicinal cannabis companies, small-scale property developers and technology startups. These companies are often well known, but of insufficient scale to approach higher net worth investors. Some succeed. Some do not.

The demise of both Oceania Natural and the NXT itself mark the end of a black spot on the history of the exchange. The FMA’s efforts, to pursue such rule breakers, are appreciated, and one only hopes that the lessons from these events are not forgotten.

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The strong response to Heartland’s note offer, and the increased activity in secondary market bonds, provide two compelling pieces of evidence that point to one conclusion: investor demand for competitive bonds remains strong.

Yields in the bond market have been gradually improving over the last few weeks, with a number of secondary market bonds rising above 6% and enticing investors to lock in longer term money.

Similar decisions are being made on the other side of the coin, as borrowers consider locking in long term rates at these levels, or borrow short term in the hope that interest rates will subside.

It is impossible to know at what point interest rates will peak. Certainly, there remain inflationary pressures in some areas, noticeably in the supermarket aisles. Globally, inflation remains high, but appears to be gradually easing. 

A number of listed bonds mature over the next three months, and some will be replaced by new issuance. The benchmark has been lifted over the last few months, and investors can expect competitive offerings from these issuers.

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Heartland Bank subordinated notes

Heartland Bank Limited is issuing a subordinated note this week with a minimum interest rate of 7.30%p.a. for the first 5 years with an indicative margin range that suggests the initial interest rate could be higher.

The Notes will constitute Tier 2 Capital for Heartland Bank's regulatory capital requirements, will have an interest rate reset after 5 years, and a fixed maturity date of 10 years. The notes may be repaid after 5 years or on any quarterly Interest Payment Date after that date.

They will be listed on the exchange using the code: HBL1T2.

The full details of the offer can be found on our website under current investments.

Please contact us with your CSN and an amount if you would like a FIRM allocation no later than 9am Friday.

Travel

Chris will be in Christchurch on April 18 and 19 (FULL).

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Edward will be in Nelson 21 April, and in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Fraser will be in Timaru, Oamaru and Dunedin on Thursday 27 April and Friday 28 April.

Clients are welcome to contact us to arrange an appointment.

Chris will be holding seminars around the country beginning in the last days of May, finishing in early July. We will contact all clients with dates and times shortly, and details of how to apply for a free ticket. We are not taking names or confirmations at this stage.

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Market News 10 April, 2023

Johnny Lee writes:

THE Reserve Bank surprised many last week, opting for a 0.50% increase to the Official Cash Rate to 5.25%.

Prior to the announcement there were many voices – if perhaps not a chorus – suggesting that inflation was weakening. There were also suggestions that some sectors, particularly construction, were in danger of reaching a turning point for the worse.

Indeed two days prior in Australia, its Reserve Bank had made the decision to pause its interest rate hikes, citing these very factors. Of course, Australia had not just experienced a major supply shock in the form of a destructive cyclone.

So instead, the Reserve Bank sang a different tune, opting to surprise the market with a 0.50% increase.

It is important to remember that the inflation component of the Reserve Bank’s mandate is to maintain inflation between 1 and 3 percent on average over the medium term. The past two years have seen a rate in excess of this amount, at times double such a range.

However, after years of looking through short-term shocks on the downward end, the Reserve Bank has justified its decision to lift rates by highlighting the short-term effect of Cyclone Gabrielle.

Sharemarkets responded predictably, with the index quickly hitting reverse and closing down for the day. Income shares in particular responded poorly. Whether this was a knee-jerk reaction, or a repricing, remains to be seen.

Further in the statement, the Reserve Bank highlights that the actual impact of these rate rises has been insufficient. Term deposits and lending rates are lower than the level necessary to control inflation, necessitating the stronger than expected response.

Reading the rest of the statement would lead an observer to conclude there was a compelling argument to LOWER rates. The New Zealand economy was expected to see little growth this year, the global economy was slowing and the housing market in particular was weakening. Indeed, many of the same arguments used during the 2019 period of interest rate reductions were reused in this month’s statement.

The statement included a lengthy reassurance regarding the New Zealand financial system. This was to be expected after the significant turmoil seen in the banking sector in the United States over the past month.

The Reserve Bank also made the point that a weakening global economy would likely see the dairy industry weaken, with an expectation that the recovering tourism sector would compensate such a decline.

Overall, while the statement did not necessarily surprise, the decision to lift rates did. Nevertheless, the prevailing view remains that rates have either peaked, or are very near such a peak, with perhaps one more rise. Once such a peak is reached, discussion will turn to how long rates must remain plateaued until returning to a level it deems neutral.

The Reserve Bank next meets on 24 May.

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SPARK shareholders were given a glimpse of the future last week, as the company outlined its three-year strategy. It is a lengthy presentation and acknowledges the many variables that it will need to address if they emerge.

Spark’s ambitions go far beyond those of a simple telecommunications company, with a plan to enter the data centre sector, to expand into digital health and digital security, and use its access to data to create products better suited to individual customers.

Wireless broadband remains a focus as the company tries to divorce its customers from fibre and the limited margins associated with it. Chorus, by contrast, will be working on improving the value proposition of fibre and find ways to wed customers further to the product. The net result of such a competition should be a benefit for consumers.

Spark’s stated goal is to grow its broadband customer base from 30% using wireless broadband to 35% within 3 years. The continued rollout of 5G will no doubt aid this cause as the company already prepares for the next generation (6G).

Part of Spark’s focus moving forward would include using data to personalise offers to its customers, improving value based on the specific needs of the end customer.

Spark’s data centre capacity is expected to quadruple over the next 3 years, as it joins the likes of Infratil and Amazon in chasing the high margins offered in this space. One assumes that these high margins will moderate as competition continues to enter the market, but for now, the industry is young enough to offer returns for those with the capital to take advantage.

Spark, investors will recall, recently sold its TowerCo business, releasing capital for redeployment in such ventures.

Other areas, including Digital Health and Digital Identity, will act as projects to explore to add value. After the brief foray into Sport, investors will be cautious about assigning too much optimism to these projects. However, the thematics driving these investment decisions seem undeniable.

Our healthcare sector is undeniably in need of change. Our population is changing – aging, specifically – and our healthcare needs are changing alongside this. Our healthcare workforce is getting older, while worker strikes and delays in service continue to prove that the system is under stress.

Spark believes it can utilise technology to improve this system. While some of these solutions may seem obvious – sharing data across healthcare providers, sharing data from Smart devices and IoMT devices – actually taking the lead on implementing these ideas is something that Spark believes it can play a role in.

Alongside this, Spark’s moves into Digital Identity are seeking to solve an ongoing problem around data verification, privacy and security. Its subsidiary – MATTR – looks to resolve issues around how people control their own data and how that data is stored.

This subsidiary may be in its early stages, but the addressable market is large and Spark is better positioned than most to disrupt it. While it may produce relevant profits in the short term, it does highlight Spark’s willingness to seek out new ways to push its business forward and take the lead on market opportunities in a country with few groups with the size and relevance to take such a lead.

As we saw from Spark Sport, sometimes these risks do not produce satisfactory outcomes.

The three-year strategy presentation highlights a company trying to remain innovative and seeking growth beyond simply that provided by immigration. Spark, at its core, is a telecommunications company providing mobile and broadband services to millions of New Zealanders. However, these services are reaching maturity, and the company is looking ahead towards the services New Zealanders will need as our population changes.

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TWO announcements from the electricity sector are worth highlighting, as the sector continues to find ways to advance the development of renewables across the country.

The first was from Mercury, which signed an agreement with global retailing giant Amazon to sell a fixed amount of electricity from its Palmerston North wind farm to power Amazon’s new data centre to be built next year. The wind farm is still under construction, but is now somewhat ‘’derisked’’, as the agreement includes an agreed fixed rate. Amazon, in turn, reduces its risk of fluctuating electricity prices.

Such agreements are, in theory, mutually beneficial, and allow the sector to continue renewable energy developments without a fear of oversupply. Demand is guaranteed.

The second announcement was from Meridian, which signed an agreement with NZAS, the entity that owns the aluminium smelter in Southland.

The agreement grants Meridian the option of effectively supplying less electricity to the smelter during times of stress (drought, high usage, transmission failure), with a fixed rate of compensation being paid to NZAS. 

Such agreements work towards improving the reliability of the overall system. Rather than firing up fossil fuel generators to bridge shortfalls in generation, the demand for power can be reduced for a set fee.

Both announcements highlight a sector that is searching for ways to maintain a reliable electricity network, while ensuring the momentum towards further renewable generation is not lost.

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Travel

 

Chris will be in Christchurch on April 18 and 19 (BOTH FULL).

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Edward will be in Nelson on 21 April, and in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Fraser will be in Dunedin on Thursday 27 April.

Clients are welcome to contact us to arrange an appointment.

Chris will be holding seminars around the country beginning in the last days of May, finishing in early July. We will contact all clients with details of dates and times shortly. We are not taking names or confirmations at this stage.

Chris Lee & Partners Ltd

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Market News 3 April 2023

Johnny Lee writes:

Amid the fluctuations in the market over the first three months of this year, one sector under pressure has been the property sector.

The Listed Property Trusts have long been a core part of income portfolios, providing regular quarterly distributions, gradually growing Net Tangible Assets, high liquidity and a relatively stable share price.

Dividends have largely been intact throughout this period of volatility. While some companies have elected to suspend dividends in order to bolster cash reserves, the property trust sector has emphasised its predictability and reliability as a source of income for unit holders.

The Listed Property Trust sector tends to perform inversely to underlying interest rates, rising in value as interest rates decline and falling in today's environment of rising rates.

Several announcements over the March period provided an insight into what headwinds the sector is facing.

Vital Healthcare reported its full year results, showing an increase in gross earnings and valuation, but a decline on a per-unit basis, following the capital raising in May last year.

Gearing sits at 33.7%. Gearing has sat consistently around this level for some time.

Importantly, it has restructured its debt maturities to ensure that the next debt maturity occurs in March 2025. If interest rates were to remain elevated over 2024 before gradually easing – as some Central Banks expect – this strategy should shield unit holders from the worst impacts of this.

Of course, the reverse is also true. If interest rates begin to fall, unit holders will find themselves paying higher rates than their peers.

The next twelve months should see an uplift in rental income. Much of this income is tied to CPI adjustments, meaning that rental income will increase alongside inflation.

Vital Healthcare has also made a habit of raising capital when its share price is near or above its Net Tangible Assets. Today's price, well below NTA, has seen the company instead commence an asset sale programme, realising $200 million from within the portfolio to fund its development programme.

Property for Industry's annual result had similar themes.

Property devaluations saw a loss after tax for the company, but actual rental income rose for the year. These rental increases were overshadowed by increases in the cost of debt.

Gearing remains low at 28.5%, well below covenants, and below levels that have previously caused issues for the sector.

Part of its debt management programme included the establishment of a $250 million USPP facility, giving them access to long-term debt as needed.

For Ryman shareholders, the US Private Placement market may have fallen from favour, but Property for Industry will no doubt have noted Ryman's experience closely and be certain of its value before committing to exercising the facility.

For now, PFI's focus is on several developments of its existing properties, with $140 million committed to these projects. The previously announced share buyback has been paused to further these commitments, which will seek to add shareholder value both in terms of rental income and asset valuation.

Argosy Property Trust, Goodman Property Trust and Kiwi Property Group report next month.

Kiwi Property Group's most recent valuation update occurred in early March, reporting a 4.1% decline, while Goodman Property Trust's March update saw a 4.7% valuation decline.

The current investment environment - particularly the direction of interest rate movements - is a challenge for the sector. 

While most of these property trusts remain sufficiently capitalised to avoid any risk of actual failure, the challenge remains to position themselves going forward and optimise returns for unit holders.

2023 may end up being a year of balance sheet and existing asset management for the sector, as depressed valuations and the rising cost of capital limit progress on long-term strategies.

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Hallenstein Glasson also reported results, showing a 31% increase in sales and a 75% increase in net profit after tax. Last year's result saw a 40% decline in NPAT.

An increase in dividend saw the share price continue its strong start to the year, following a poor 2022.

While the price of many goods and services - particularly food - has increased over the last year, clothing inflation has been much more benign. Nevertheless, rising costs will mean a shrinking wallet for other spending, including mid-range clothing.

After the strong growth in online sales during COVID, customers are returning to physical stores again, prompting the company to pivot back towards store refurbishment and new store rollout.

Australia continues to outperform New Zealand. Its presence in Australia is smaller and less established than New Zealand, giving it more room for such growth.

Since the financial period began - February 2 - sales have continued to track upwards, although the company reiterated a cautious tone. 

The Hallenstein Glasson result was a positive one overall, and contrasts with the disappointing Warehouse Group result a week earlier. Clearly, clothing is proving more resilient than larger ticket items like whiteware.

The 24 cent dividend will be paid to shareholders on the 19th.

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David Colman writes: Friday marked the end of the financial year and end of the first quarter of a turbulent calendar year so far. January brought us a new prime minister and rain to Auckland. More rain fell than ever recorded in the city in a single month (539mm). February brought rate rises from the major central banks in Europe, England and the USA continuing a trend established during, or before (depending on the jurisdiction), 2022, with the shared aims of reducing inflation

The Reserve Bank of New Zealand (RBNZ) likewise moved the OCR up 50 basis points to 4.75% (the highest level since January 2009).

Much of the north and east of the North Island bore the brunt of powerful cyclone Gabrielle that inundated aging infrastructure to breaking point and covered large tracts of productive land with water, silt, and pine tree off cuts.

Massive earthquakes flattened buildings in Turkey and Syria resulting in the tragic deaths of tens of thousands of people. March marked the unanimous re-election by the National People's Congress of President Xi Jinping in the Great Hall of the People across from Tiananmen Square.

The former 16th largest US bank, Silicon Valley Bank (SVB), on which many technology start-ups relied, failed.

The demise of Credit Suisse in the wake of numerous scandals, multi-billion euro losses, and evaporating investor confidence, became a purchase by another international bank of Swiss origin, UBS. The deal was arranged by the Swiss Government to avert a greater crisis.

UBS now faces cutting tens of thousands of staff in Switzerland and around the world.

Regardless of the above banking failures, the Federal Reserve raised the fed rate again while the RBNZ is expected to follow suit when the OCR is updated on Wednesday.

Following significant falls in 2022, market performance was broadly positive belying the volatility experienced during the events above, albeit that some rises have been modest in size.

Movements for a number of indices for the year to date were as follows:

NZ50G (50 biggest NZX listed companies by free-float market capitalisation) up 2.56%

S&P/ASX200 (200 biggest ASX listed companies by free-float market capitalisation) up 3.33%

S&P 500 (500 largest US listed companies) up 7.46%

Nasdaq Composite (Dominated by US Technology Companies) up 17.67%

Stoxx600 (600 European Companies) up 6.74%

FTSE 100 (100 UK Companies) up 1.03%

The positive figures above for a relatively short duration should not be used as a prediction for the rest of the year, or any other time frame, and I encourage investors to look at investment strategically, ideally with advice, with the longer term and their own unique criteria in mind.

The sharemarket gains show that markets can be positive during a period of relative unease (particularly concerns in the banking sector) but I warn it is not usually a sign of strong growth when vast numbers of employees are laid off.

Many Nasdaq listed companies, in the top performing index above, have laid off, or plan to lay off, workers. The remaining workforce, and likely implementation of labour saving technology, will be described as more efficient.

The desire for such efficiency gains is understandable given global issues including high inflation, higher interest rates, staff shortages, aging populations, climate change, and ailing infrastructure.

Geopolitical tensions are still to be alleviated in a world that well before, and during, a pandemic largely relied on quantitative easing (QE), low/negative interest rates, and government stimulus.

QE and low interest rates are long gone (at least for now) with governments finding further stimulus will be difficult in the face of stretched budgets.

France raised its retirement age from 62 years to 64 years of age against massive resistance.

Its decision was based on budget shortfalls. Violent clashes between police and protestors have been frequent since the reform was first proposed, and since passed.

South Korea and Japan may end up without a retirement age. The countries rank first and second respectively for the employment of seniors beyond the retirement age of 60 (Korea) and 65 (Japan).

Korea has a birth rate of just 0.84 births per woman (Japan 1.3). The two countries are on track to have too few younger workers (tax payers) to support the elderly. School closures, abandoned real estate, and ghost towns will become more common, especially in rural areas of the two nations.

Let's not forget, the USA government hit its current $31.4 trillion (an unfathomable number) debt ceiling in January with both sides of Congress taking an uncompromising approach to the issue.

The debt ceiling will have to be raised to avoid defaults causing a severe credit downgrade, and to fund a multitude of federal expenses including social security, health care, and the military.

Sadly, the ongoing stalemate in Congress, over a globally important issue, is more evidence that the planet is desperately short of compromise.

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Restaurant Brands (RBD) released its Annual Report on Friday.

The operator of 488 fast food outlets (including KFC, Pizza Hut, Carl's Jr. and Taco Bell) spread across New Zealand, Australia, Hawaii and California reported that total sales increased by $170.8 million for the year to $1.239 billion,  up 16.0%, with all four operating divisions showing growth.

Combined store EBITDA for the period was $180.2 million, up 4.3%.

Seventeen new stores increased the number owned to 376 with a further 112 franchised. Store numbers owned at the end of December included 143 in New Zealand, 83 in Australia, 75 in Hawaii and 75 in California.

Reported net profit after tax of $32.1 million for the year was down $19.8 million due to the ongoing adverse impact of inflation and noting the previous full year results included forgiveness of the $11.4 million US Government loan.

A fully imputed final dividend of 16c per share was declared, down 16c from the previous full year dividend.

RBD's Chairman and CEO's report stated that the company views the sudden significant inflation pressures across all operating divisions as an even bigger challenge than COVID was.

On top of food price increases, and the adverse effects of COVID in the first quarter of the year, the company faces staffing issues with high levels of vacancies across all divisions and higher general and administrative wage costs.

EBITDA margins (as a percentage of sales) reduced from 16.2% to 14.5% due to continued cost pressures across all divisions.

Total assets climbed $87.4million to $1.417 billion with liabilities increasing by $84 million to $1.124 billion with expenditure on new stores and refurbishment of existing sites.

Operating cash flows were down $7.3 million to $94.6 million, reflecting the lower margins from the effects of inflation.

Establishing the Taco Bell business in Australia and New Zealand has been difficult and the pace of new Taco Bell store builds will be slowed while menus, cost structures, and expansion opportunities for the brand are reviewed.

Anecdotally, the Taco Bell near Auckland Airport might benefit from a more conscientious clientele, and/or dedicated cleaner, based on my own experience of floors and tables littered with used wrappers, leftovers and spilt drinks.

The retirements of Russel Creedy as Group CEO and Grant Ellis as Group CFO in March and May of this year respectively have resulted in Arif Khan being appointed as Acting Group CEO and Julio Valdés as new Group CFO.

The company remains focussed on longer-term growth strategies with its existing brands including new store builds and major refurbishments with California seen as the greatest network growth opportunity. Interestingly, this is the same region that experienced declining same store sales, with consumers facing high inflation levels and the withdrawal of government stimulus payments to households.

A lack of hungry customers was not noted in the areas it operates in.

Nor was there any sign of much consumer interest in the advice of health authorities. KFC fried chicken and cheesy pizzas are clearly food preferences for many.

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Thank you to those of you who participated in the recent new issues from Contact Energy and Christchurch City Holdings

Contact set an interest rate of 5.62%p.a. for its 6-year senior green bond (if you have not already done so, please contact us if you would like an allocation)

Christchurch City Holdings set the interest rate for its 5-year senior bonds at 5.043%p.a.

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Travel

Edward will be in the Wairarapa on 3 April, in Nelson 21 April, and in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Chris will be in Christchurch on April 18 and 19 (FULL).

David will be in Palmerston North on Wednesday 19 April and in Lower Hutt on Thursday 20 April.

Fraser will be in Dunedin on Thursday 27 April.

Chris will be holding seminars around the country beginning in the last days of May, finishing in early July. We will contact all clients with details, shortly.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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