Chris Lee & Partners Ltd

Market News 29 April 2024

Johnny Lee writes:

During a quiet period of New Zealand market activity, BHP’s announcement last week - that it would look to acquire copper giant Anglo American plc - shone a spotlight on a problem faced by stock exchanges around the globe.

The deal’s implied value of $39 billion USD would mark it as one of the largest seen this year so far, and indeed may end up being the largest of 2024. The deal is non-binding, with a firm offer expected in the coming weeks.

BHP is planning to fund the acquisition entirely with new shares, with no ‘’cash’’ paid. The indicative offer is priced at 0.7097 BHP shares per Anglo American share, plus a distribution of those assets BHP does not wish to acquire, including Anglo Platinum.

Predictably, the share price of Anglo soared, and the price of BHP fell sharply following the announcement, with BHP down around 5%. 

The acquisition would combine the worlds second and ninth largest producers of copper, and follows the consolidation of Newcrest Mining and Newmont Corporation in the gold sector late last year.

While shareholders and regulators debate the value of the takeover and large scale consolidation of key commodity producers, the news also set off alarm bells regarding the health of the London Stock Exchange.

The LSE is amongst the world’s largest but has suffered some recent setbacks that may sound familiar to investors in the much smaller New Zealand Stock Exchange.

Anglo American’s potential departure from LSE also followed comments from Shell CEO Wael Sawan that he believed Shell’s share price was inherently undervalued, as local investors in the UK were not pricing oil and gas stocks correctly. Shell is the largest company on the London Stock Exchange. Sawan believed a shift to a New York Stock Exchange home listing would see the share price better reflect the company’s value.

Such a move from Shell would risk a further exodus of major companies, especially if his view on improving shareholder value proved correct. Listed companies seeking to maximise shareholder value would find such a move far simpler and quicker than most strategies.l company’s employ.

Coupled with a sharp decline in new listings – only 23 last year on the LSE – there are now rising concerns that this trend will prove irreversible and lead to larger, but fewer, regional stock exchanges.

Xero’s departure from the NZX for the ASX in 2017 spurred similar debate on our own shores.

Indeed, the struggle to attract new listings has been mirrored by our own stock exchange, which continues its search for quality new listings for investors to consider.

New listings in New Zealand have been rare, and those that have recently made the jump into capital markets have been, frankly, abysmal. 

Many have almost immediately required further capital injections, diluting the new shareholders. Most attract almost no institutional investor support, and struggle to get serious consideration from the financial advisory community. Retail investors have largely been left to pick up the slack.

Between the various takeovers and delistings reported over the last few years, perhaps the most optimistic view of this is that a number of new companies have entered the NZ50 index, giving them access to those managed funds that consider only the constituents of that index.

The exchange operator, being a listed entity itself, is keenly aware that listing revenue will not be stellar at this point of the economic cycle. Indeed the exchange’s focus on diversifying its revenue streams - including its Smartshares and dairy futures arms - suggests the NZX is aware of the risks of focusing solely on revenue from listings.

The NZX will be hoping many of those companies currently engaged with Venture Capital funds and Private Equity funds will be actively considering a listed future on our exchange, while also looking to tempt ASX listings with strong New Zealand ties back to our shores.

The truth may be that the benefits of listing on the NZX, compared to the significantly larger ASX, are few and far between. The Government asset sales from 2013 were a huge shot in the arm for our exchange, and now form a core part of many people’s portfolios, as well as many KiwiSaver funds. 

Major names like 2Degrees and Vodafone (now One NZ) have not yet followed the same path, nor the likes of Kiwibank and the ports. 

BHP’s acquisition, should it proceed, will wipe billions of value from the listed capital of the London Stock Exchange. We have similar issues on our own shores, with companies like MHM Automation and Pushpay disappearing to foreign owners. 

While shareholders have been rewarded by these takeovers, the company’s coming through to replace them on our exchange have so far been lacking in both quantity and quality. 

Both the NZX and capital market participants will need to take a role in reversing this trend.

Fortunately for the NZX, the lack of larger shareholder scrutiny on our newer companies has meant the debacles associated with some of our small capitalisation stocks have largely gone unnoticed.

Blackwell Global is the latest company to introduce headaches, with the company announcing that it had just discovered one of its directors had been in jail in the Philippines for the last three months.

Blackwell Global’s independent directors then moved to demand his resignation, and that of another associated director. They both resigned days later, and the company applied to the NZX for a change of name to distance itself from the situation. Blackwell Global’s new name will be RTO Group.

The company is now urgently seeking a reverse listing transaction, meaning that Blackwell is looking for an unrelated company to effectively buy its NZX listing. Listing fees are expensive, and shareholder support will need to sustain these costs until a buyer emerges.

These reverse listing vehicles have seen some use over the last few years, with companies like Being AI and WasteCo both emerging from this avenue. Certainly, the shell companies continue to attract investor interest from those with a higher tolerance for risk.

For Blackwell Global shareholders, last week was not its finest hour, and the company will now be hoping for a buyer to take over and put the entire affair behind it.

_ _ _ _ _ _ _ _ _ _

While our newer companies have been struggling, some of our more established growth stocks have been experiencing a mixed bag of performance so far in 2024.

Fisher and Paykel Healthcare’s recent jump has it sitting up 15% for the year, while Infratil is up 5% since January 1.

Ryman is down 30%, EBOS is down 5% and Mainfreight is flat.

With the exception of EBOS, these companies are due to publish their financial results in May.

Expectations will not be sky high. Most of our growth stocks are reporting a difficult short term environment, and are more focused on plotting the long term picture.

Share prices do not tend to respond to long term progress and long term outlooks - investors will look at profit, dividends and short term outlook first. 

Reporting season is often volatile, and shareholders of these particular companies can anticipate some interesting reading in the weeks ahead.

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New bond issue

Auckland Airport has announced its intention to issue a new 6-year senior bond next week. Details are still to be provided, but based on current market conditions, we anticipate an interest rate around 5.60% with brokerage being charged.

If you are interested in this opportunity, please contact us to provisionally register your interest. We will update those on the list with more information as it becomes available, allowing potential investors to either confirm or withdraw their interest.

Travel

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

3 May (am) – Timaru – Chris Lee

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 042961023.

Chris Lee

Chris Lee & Partners Limited

Market News 22 April 2024

A REASONABLY quiet week for major company announcements last week allowed several smaller listed companies to gain attention including Tower Limited (dual listed New Zealand insurer) which provided earnings guidance for the year ending 30 September 2024.

Tower (TWR) expects full year underlying NPAT to be greater than $35m, which exceeded previous advice of expected underlying NPAT to be near the top end of a $22million to $27million range.

The updated guidance assumes full utilisation of the FY24 large events allowance which is conservatively set at $45million with TWR recording no large events in the financial year to date.

Higher than expected gross written premiums, favourable retention, and lower than usual claims costs are the basis for the company’s expectations. In essence the company enjoyed a period of time without any major disasters.

TWR shareholders will be pleased with the positive guidance update and the shares are currently trading above 80c (up 35% for the year to date) after several years of the shares largely trading between 60c and 70c, and perhaps TWR is in a position to pay a dividend after failing to pay a dividend since February 2023.

The company will be hoping for a continuation of relative calm following large-scale events such as the flooding and cyclones seen in recent years.

The insurance industry has talked up the need for higher premiums since the industry began - it is incentivised to manifest fear in its customers.

The guidance from TWR based on a period of relative stability for its customers is perhaps evidence that insurance customers more broadly may not be as susceptible to the dangers its insurance products hedge them against, or at least collectively they might be paying a little too much for the protection provided.

_ _ _ _ _ _ _ _ _ _ _ _

TradeWindow (TWL) was founded in December 2018 and listed in late 2021 with the goal of delivering a digital platform for exporters, importers, freight forwarders, and customs brokers intended to add efficiency to global supply chains.

Trade Window (TWL) describes itself as a global trade software company and has a relatively small market capitalisation of about $20 million.

On Wednesday the company announced that its $2.2 million capital raise offering shareholders new shares at $0.175 per new share had become unconditional as it had reached the $1 million minimum threshold following financial commitments from the CEO and founder AJ Smith and another cornerstone shareholder.

Subject to shareholder approval, the CEO will contribute between $300,000 and $500,000 depending on shareholder participation in the capital raising. This suggests shareholders have only participated to a level in the vicinity of $500,000 of the $2.2million sought, somewhat betraying the CEO’s obvious firm commitment to the company.Shareholder approval will be required to allow for the large allocation to the CEO and to allow delayed settlement for his subscription to the offer which is to be aligned with the company’s cashflow requirements.

The Board of TradeWindow considers the CEO’s proposed allocation as is in the best interests of the company given its forecast capital needs.  It has announced a meeting will be held for shareholders to vote on the matter.Smith's commitment will be undertaken as part of the placement at the offer price of $0.175 per share, which was seeking up to $2 million in total commitments – the further $200,000 was sought from eligible TWL shareholders through a share purchase plan which opened on 8 April and closed on 19 April.

The minimum subscription condition was met in an unusual manner and allows TWL to commence settlement of the other subscriptions received to date in the share placement.

TWL released an investor update on Thursday to encourage shareholders to support the company, including Smith boldly stating that the company “has demonstrated – beyond doubt – that its digital trade solutions deliver enormous value to global trading networks and the exporters, importers and shippers who sit at its heart”.The Australasian dairy, meat, seafood, and horticulture sectors were provided as examples of shipping needs that can be met by TWL’s software.

Revenue growth for the business included a record result in the fourth quarter of the year ending 31 March 2024 with $1.6million in trading revenues delivering at the top end of TWL’s most recent guidance of $6.0 million to $6.2 million for the full year.

The company has a goal of achieving $7.3 million to $8.3 million for FY25 (1 April 2024 to 31 March 2025) 

TWL continues to work on improving gross margins as the business scales up by focusing on reducing the cost of goods sold with initiatives such as prompt customer onboarding.

TWL has looked to reduce costs and last year’s restructure resulted in the company

allowing team members to work remotely and a move to smaller (presumably less expensive) premises in each of its hubs in Australia, New Zealand, and the Philippines.

The company is targeting monthly EBITDA break-even during March 2025 with profitability targeted beyond.

Reference was made to an offer from an alternative debt lender to match its funding once it reached the $1.5million to $2million range suggesting the company is considering taking on debt funding.

TWL continues to court potential investors for the placement and the final subscription levels will be announced on 22 April with allotment of the SPP shares expected to be on 26 April 2024.

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WHILE the TWL capital raising is struggling, Heartland Group (HGH on the NZX and ASX) has a capital raising that will successfully conclude today.

Heartland’s capital raising is underwritten, which ensures the company will raise over $210million for the acquisition of Challenger Bank from Challenger Limited (CGF.ASX) after receiving indicative regulatory approval from the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of New Zealand (RBNZ) for the acquisition.

The initial institutional component of the offer was successfully completed, with $131million raised at $1.00 per share from existing and new institutional investors. Eligible institutional shareholders took up 98% of their entitlements and were allotted their shares on 15 April.

The second part of the offer is the $105million retail entitlement which closes at 5pm today (22 April) (unless extended).

Eligible shareholders are entitled to 1 new share for every 6.5 shares held since before the capital raise was announced and can apply for additional shares up to the number of shares they are entitled to.

HGH eligible shareholders who have waited before taking up the entitlement have seen the share price on market fall from $1.22 on Friday 5 April (the day of the capital raising announcement) to close at $1.03 on Friday 19 April (has traded between $1.03 and $1.05 this morning).

I suspect the HGH share price trading at levels just above $1.00 may be influenced by traders that participated in the institutional offer and were allocated new shares on the 15 April selling at any price above what they paid to make a quick profit.

It seems that taking up the entitlement at $1.00 will still provide a brokerage-free way to buy shares at a slight discount (depending on trading today) and avoid dilution perhaps tending to suit an investor looking to support HGH longer term that is supportive of HGH’s plans for its Australian assets.

HGH’s acquisition of Challenger Bank is intended to lower the cost of funds (enables the group to offer term deposits in Australia) that can then be lent out through the group’s Australian businesses concentrating on reverse mortgages and livestock lending to start with. 

Advisory clients who are HGH eligible shareholders are welcome to contact us regarding their entitlement.

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PGG Wrightson shareholders may have been left confused by recent announcements involving proposed director changes.

A request for a special meeting in March of this year made by major Singapore based shareholder, Agria Pte Ltd, in an attempt to bolster the board with directors appointed by them, was withdrawn.

The New Zealand Shareholders Association’s (NZSA) vehement opposition to the request and proposal to add additional resolutions to the special meeting seems to be an influencing factor in Agria backing down.

Since the withdrawal Garry Moore, who was elected independent chair in February of PGW, publicly addressed (in a Business Desk article) NZSA’s assertion that Meng Foon is seen as an Agria representative rather than the independent director he is described as in PGW’s reports.

Garry Moore stated that he and some other directors agreed with the NZSA’s views that Meng Foon is viewed as an Agria representative requiring clarification to the NZX that his comments in the media did not reflect a formal determination of Meng Foon’s independence. The clarification announcement did include that Meng Foon’s independent status will be formally reconsidered in the near future.

On Thursday, in a departure from rearranging seats around the boardroom, Moore provided comments in a PGW guidance update including that since releasing its half-year results in February, trading conditions have deteriorated because of market conditions that are impacting the whole of the agricultural sector.

PGW announced a revision to its Operating EBITDA to be around $43 million (from $50 million) for the financial year to 30 June 2024.

Restrained spending was noted as being influenced by:

- Drought conditions with soil moisture deficits against historic averages across much of the East Coast, Tasman and Northland over the first quarter of 2024.- Weak demand for sheep meat from China and increased supply culminating in lower returns for farmers.- Interest rates and input costs remain elevated, impacting on-farm and on-orchard profitability with clients looking to reduce debt and defer spending.- Time lag before farmers and growers see the financial benefits from harvests.

The harvest season was described as broadly positive and the company noted a slight uptick in farmer and grower confidence in recent months off a low base but sentiment in the sector was described as subdued with reduced investment by farms and orchards expected.

PGW’s outlook for the remainder of the financial year remains cautious.

Some PGW clients were noted as delaying spending where they can and holding off on discretionary items.

PGW remains positive about the prospects for the rural sector over the medium to longer term, beyond difficult market conditions seen currently, and I expect should be in a better position once the distracting governance issues have been addressed.

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Travel

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

1 May – Ashburton – Chris Lee

2 May – Timaru - Chris Lee

3 May (am) – Timaru – Chris Lee

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 04 2961023.

Chris Lee

Chris Lee & Partners Limited

Market News 15 April 2024

Johnny Lee writes:

Heartland Bank has received indicative approval from the regulators for its acquisition of Challenger Bank in Australia.

One of the key rationales for this purchase was the decrease in Heartland’s cost of funding in Australia. Heartland pays around 6.75% for its funding in Australia at the moment, while Challenger’s recent retail deposits have averaged nearer 5%.

The purchase of Challenger is conditional upon Heartland raising capital, which has led to the company to write to shareholders offering new shares via an accelerated non renounceable entitlement offer, or ANREO.

The rights are being issued at a ratio of 1 new share offered for every 6.85 held, meaning a shareholder of 10,000 shares will be given an allocation of 1,459. With an offer price of $1 per new share, the settlement amount is the same. There is no brokerage or fees involved in the shareholder offer.

The accelerated aspect relates to the relatively short timeframe facing shareholders. Shareholders have until 22 April (next Monday) to bid.

The non-renounceability means that shareholders cannot sell their entitlement. There will also be no shortfall bookbuild. The combination of these two things means that those who do not apply for their rights accept a total forfeiture of the value of the rights and accept the dilution that accompanies it.

The value of the rights - today - is approximately 10 cents, providing an incentive for shareholders to act. As with most rights issues, there is no reason to act early - investors can wait until nearer the 22nd to ensure the price does not fall below $1.

Those without the short-term liquidity to act on this offer do have the option to sell shares on market equal to the number of their entitlement - at market rates - before buying them back at $1 through the offer and pocketing any difference. Last week, this difference was worth about 10 cents per entitlement.

On the other side of the ledger, shareholders also have the option of bidding for an allocation beyond the 1 for 6.85 ratio through the Additional Shares offer. This offer is limited to 100% of the original offer and is not guaranteed, as it is effectively bidding for those new shares that other shareholders do not accept.

With a 10 cent incentive, Additional Shares may be limited. The Institutional acceptance rate was very high and was priced at the same level.

As the offer is fully underwritten by Jarden, the Challenger transaction will conclude regardless of shareholder participation. Those who do not participate will see their shares given first to existing shareholders who bid for Additional Shares, and then to the underwriter if there remains an excess of unwanted rights.

Shareholders who elect to participate in the offer can do so online via the website link sent from the share registry on 11 April. The same email contains the Entitlement Number, which is needed to apply. Payment is by direct debit and occurs the day after application. 

An important note in the announcement was that of a change in the company’s dividend policy, as well as a blueprint of the growth opportunities Heartland sees in Australia.

Heartland has indicated that next year's dividend will be equal to only 50% of underlying net profit after tax. The company’s forecast is for this profit to be near $110 million. Coupled with the new shares being created via this rights issue, short-term dividends are likely to decline.

Furthermore, the company mentions that it will be targetting inorganic growth - expanding through acquisition - and will plan its long-term capital needs (and therefore dividends) around these ambitions.

However, the company also included a forward projection - an ambition rather than formal guidance - for the next few years. The company is hoping to see profit rise to $200 million by its 2028 result, with this growth being driven by three key factors.

Firstly, is the anticipated increase in demand for Reverse Mortgages. The population of both countries is getting older, and demand for these services is higher among the older generation. An aging population presents many challenges, particularly around taxation and workforce participation, but does create opportunities for some like Heartland.

The second factor is the forecast growth in protein demand internationally, leading to growth in livestock production and demand for livestock lending services. This has been a very long-term trend - increased wealth has led to increased meat consumption - and Heartland believes financing will be a key part of Australia’s journey into feeding this market.

The last factor is an opportunity in the second-hand car lending market. Demand for new vehicles in Australia, including electric cars, is forecast to increase for several more years. Demand for second-hand cars is expected to follow this, and Heartland hopes it can capitalise on this demand with regards to financing.

The change in dividend policy is specific to 2024 and may mean a decline in income this year for its thousands of shareholders. This may be short-lived, as the company is hoping the Challenger acquisition will lead to significant growth in profit over the medium term. However, the company is also highlighting that these ambitions may require further capital.

Those who receive financial advice from Chris Lee and Partners have been sent an email with our view regarding this offer.

_ _ _ _ _ _ _ _ _ _ _ _

ALSO included in the announcement was confirmation that long-time CEO Jeff Greenslade will leave at the end of the year. The final eight months should provide ample time to arrange an orderly handover to a new CEO.

Greenslade has led what is now called Heartland for near 15 years. Such tenures are almost unheard of in the modern era - indeed Mr Greenslade is one of the country’s longest serving listed company CEOs.

The 2011 result saw the company proudly trumpet that it had achieved guidance with its $7.1 million profit and was planning to create a dividend policy to return some of these millions to shareholders.

Now the company is reporting $100 million profits and is raising further hundreds of millions to tackle new opportunities in Australia with the full support of major institutional investors.

At the same time, thousands of New Zealanders continue to benefit following the introduction of new financial products and services, including its Reverse Mortgage product. The banking landscape has undoubtedly been enhanced by the willingness of Heartland to disrupt, and the drive of those leading it.

The new CEO will be inheriting an exciting period of growth for Heartland, which is a testament to the vision, hard work and commitment of both Greenslade and the entire team at Heartland.

_ _ _ _ _ _ _ _ _ _ _

Travel

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

18 April – Tauranga – Johnny Lee

19 April – Hamilton – Johnny Lee

19 April – Christchurch – Edward Lee

1 May – Timaru – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a new gold mine in Bendigo, Central Otago, including the history of gold mining in the area and plans for the future.

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 04 2961023.

Chris Lee & Partners Limited

Market News 8 April 2024

Johnny Lee writes:

Several of our Listed Property Trusts issued news last week, with Argosy, Kiwi Property Group and Property for Industry all providing an update for shareholders.

 Argosy has confirmed the unconditional sale of 8 Forge Way. It settles next March.

It marks the fourth sale from Argosy over the last twelve months, as the company seeks to deleverage and reduce bank debt. All four sales were conducted above book value, an impressive feat in this environment.

The strategy of selling ‘’non-core’’ assets to repay debt makes sense with the company trading at such a steep discount to its inherent value. The shares are trading at around $1.15, well below its published Net Tangible Assets of $1.52.

While Argosy was selling assets at a premium, Kiwi Property Group (KPG) had a valuation update, finally recording a positive increase in fair value with a 0.1% uplift.

Its last update in September showed a 2.4% decline in values. The prior update in March 2023 saw a 4.1% decline. Values are still well off their high.

Last week's update from KPG leaves its net tangible asset backing at around $1.17 a share – 30 cents higher than the market price. Such a discount might imply that the market is expecting further devaluations, but this singular data point will be a relief to management. Certainly, CEO Clive Mackenzie seems convinced the tide has turned, labelling the sell down of the shares as ‘’overdone’’. 

The next round of portfolio valuation updates will be very interesting from this standpoint, in terms of analysing whether the sector has finally turned a corner.

For Property for Industry, the company held its annual meeting last week and confirmed its commitment to investing in future growth.

Gross rental income has grown over the last twelve months, and the company anticipates a further uplift in the years ahead. Three specific projects over the next few years will be driving these increases.

The Springs Road development should see significant progress this year, with Stage 1 - 25,500 square meters - leased to Fisher and Paykel Appliances for 15 years. Further development will continue on the site if conditions are supportive.

The Bowden Road and Spedding Road developments will also add to the company’s pipeline for future growth. 

The Listed Property Trust sector has had a very underwhelming few years, with higher interest rates and falling property valuations a common theme. The sector believes it is close to turning a corner. Time will tell.

The handling of new listing Being AI last week has caused a few brows to furrow, as the regulator utilised a new market warning system for the first time.

Being AI describes itself as ‘’a diversified artificial intelligence services, development and investment business’’, deploying EATs - Exponentially Accelerating Technologies - and various other acronyms.

The company used a ‘’Reverse listing’’ vehicle, whereby it was voluntarily acquired by Ascension Capital, a company already listed on our exchange. The shareholders of Being AI were paid in shares of Ascension Capital, which then changed its name to Being AI, completing the reverse listing. 

Being AI is made up of three distinct companies.

The first is its Filing and Mailing division SGL, which includes a retailer for filing products such as manila folders and cabinetry. SGL was previously listed on the NZX’s ‘’NXT’’ exchange, then under the name G3 Group Limited, before delisting to save costs.

The second is its Schooling arm, AGE, which operates a school in Takapuna with a roll of approximately 100 students. The school takes a non-traditional approach to New Zealand education and employs Learning Coaches for its young students.

The last is its Artificial Intelligence side, BCL, which offers consulting services for companies looking to integrate AI, and a venture capital investment business searching for opportunities in the AI sector.

The reverse listing valued Being AI at $45 million, with SGL valued at $25 million, AGE valued at $15 million and BCL valued at $5 million.

This initial value equated to 2.5 cents per share with 1.8 billion shares on issue. This price tripled within a day, valuing the company at near $150 million, similar in size to, say, Synlait Milk.

The huge leap in share price prompted the NZX regulation arm, NZ RegCo, to issue a share price enquiry – sometimes called a ‘’speeding ticket’’ - to Being AI, asking the company to confirm it was still compliant with its continuous disclosure requirements. This is standard practice when NZX-listed companies see their share prices soar very quickly, and almost always sees a response from the company in the affirmative. It would be very unusual for a company to be in breach of its continuous disclosure obligations three days after listing.

After confirming that the company had disclosed everything required of it, the regulator then made the highly unusual decision to issue its first ever ‘’Trade with caution statement’’ – reminding the market of the 2.5 cent valuation from earlier in the week.

This market warning is a recent innovation by the regulator and was designed to be used when the regulator took the view that trading in a particular stock was ‘’anomalous’’. 

The regulator, of course, is not trying to offer financial advice, nor would it be appropriate for the market regulator or exchange operator to put forward opinions as to the value of a listed company. Financial advice has clear definitions in law, and ‘’urging potential investors to exercise caution when dealing in the shares’’ probably does not meet the threshold of financial advice. 

Nevertheless, it had the desired effect and saw the share price of Being AI to rapidly decline. Presumably, investors will now wait for the exchange to issue a ‘’Trade with confidence statement’’.

It is undoubtedly true that retail investors, especially those investing in recent listings, have struggled of late, with the decline of Cannasouth being one particularly recent example. And it is also true that a negative experience for these investors may reduce long-term engagement with capital markets. 

But this is a tricky balancing act. Regardless of the validity of the regulator's views, this creates an uncomfortable precedent for market purists. 

In days past, market participants were charged with the responsibility of ensuring their buy and sell orders on the market did not create disorder. The definition of disorder was always an imprecise one, but it seems the regulator has formed a view on this and is taking responsibility for ensuring market order going forward. 

With the share price plummeting following the warning, the buyers of Being AI from earlier in the day are now left to rue their unfortunate timing. The sellers who missed out may feel the same.

Overall it was a very eventful few days for the new listing. It welcomed hundreds of new shareholders to its register, and now the real work - of growing revenues and turning a real profit - begins.

_ _ _ _ _ _ _ _ _ _

Seminars

Chris is hosting an investment seminar in Cromwell on May 6th (7:15pm) at the Harvest Hotel, including a discussion on the progress seen at the Bendigo gold mine. Both clients and the public are welcome to email us should they wish to attend.

Travel Dates

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

10 April – Auckland (Ellerslie) – Edward Lee (FULL)

11 April – Auckland (Albany) – Edward Lee

12 April – Auckland (CBD) – Edward Lee

12 April – Lower Hutt – Fraser Hunter

18 April – Tauranga – Johnny Lee

19 April – Hamilton – Johnny Lee

19 April – Christchurch – Edward Lee

Chris Lee & Partners Ltd

Market News 1 April 2024

Johnny Lee writes:

WAS that the first domino falling?

Listed medicinal cannabis company Cannasouth has entered voluntary administration, five years after breaking ground as the first such company to list on the NZX. Its public listing was followed by several others, including Rua and Greenfern, while others chose to remain unlisted or on various crowd funding platforms.

The listing of Cannasouth saw support from many retail investors, with some investing for the first time. Loss-making niche investments rarely attract institutional investors, and investors seeking income and low volatility would have looked elsewhere.

The share price climbed for a while before cash reserves evaporated and discounted capital raisings - and an economic environment no longer supplying low-cost capital - saw the price decline.

In November of last year, the company sought to raise money via a secured convertible note offer, paying a coupon of 15%. A million dollars was raised from the company’s own directors, with a further million raised from wholesale investors a month later in December.

The company also raised $1.4 million in the same month from shareholders as part of a rights issue of ordinary shares. Chairman Tony Ho - a shareholder and secured note holder - publicly thanked the loyal shareholders for their support.

The directors’ decision last week to call administrators followed an earlier announcement that it was in a dispute with some of its secured convertible note holders. The same announcement stated that the company would need to conduct another urgent capital raising to remain solvent.

The administrators - Blacklock Rose - now begin the unenviable task of finding a pathway forward for the company as it looks to protect the secured creditors and restore shareholder value.

At this stage, it is very difficult to imagine a solution which is favourable for shareholders. If a further capital injection is required, shareholders will need to be convinced that the company has a viable and credible path to profitability and shareholder returns that justify the risk.

The company stated in February that it had a cash balance as at December 31 of $2.26 million and was looking to secure a loan from an unnamed private capital firm. It would also be seeking a dual listing on the Australian stock exchange, believing that the cost of listing on a second exchange would be justified by the new pool of investors and capital available to it.

Investors may be more familiar with the opposite argument, as a number of other companies have recently delisted from the NZX or ASX in order to save money spent on listing fees.

The truth is that voluntary administration rarely concludes with a long-term benefit to shareholders. Indeed, it is possible the shares never trade again.

The next question will be one of fallout. While it may not be fair, it is nevertheless true that shareholders of Cannasouth’s peers will be on edge. Those companies looking to raise capital from retail investors may find the well dry in the near term.

The next step for Cannasouth shareholders will be to await a report from the administrators and evaluate any plan put forward by them. This may involve a request for further capital. Shareholders would need to weigh the risk of “throwing good money after bad’’.

Investor confidence is weak in this sector at the moment, both here and abroad. Last week’s announcement - issued at 5:03 PM on a Thursday before Easter weekend - will not help.

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SYNLAIT’S announcement this morning has put to bed some of the lingering questions asked over the past few years.

The financial results are official and the company has reported a loss of $96 million. The company continues to blame weakening demand and rising costs.

Net debt has soared to $559 million and is obviously the largest issue facing the company.

The company has outlined a plan to address this.

Firstly, it has renegotiated with its banking syndicate on various covenants and extended the timeframe for repayment of some of its debt. Specifically, the March 2024 debt has been extended to July 2024.

The planned sale of Dairyworks is continuing but has yet to find a suitable buyer. Clearly, market conditions for such assets are suboptimal and both the seller and potential buyers are conscious of this. The company does state that it has written down the value of Dairyworks by over $30 million, in light of the offers to buy the company so far.

Synlait is also conducting a review of its North Island assets, including Pokeno. More detail on this will emerge over time.

At the same time, Synlait may seek to raise capital from shareholders via an equity issue. The company suggests that the poor share price has relegated this option to a last resort, and selling assets will be explored first.

The largest shareholder, Bright Dairy, has agreed to participate if such an equity raise is made. There was no comment regarding its other major shareholder, a2 Milk.

The other impacted party, of course, is the SML010 bondholders. These bondholders are due $180 million in December. The company does not (yet) have $180 million.

Shareholders in Synlait have a decision to make. These shareholders are now on notice, and know they will likely be asked - soon - to inject capital into the company. Doing so would require a belief that market conditions will eventually improve and see the company reverse course back into profitability. 

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HALLENSTEIN Glasson’s result has been announced and marks a pleasant surprise against a backdrop of a challenging environment. 

The share price lifted modestly following the announcement. The profit of $21.1 million was in line with guidance from February.

At a time when cash reserves and profits are king, Hallenstein has built a considerable cash balance - over $40 million - and has managed to produce a profit almost identical to last year’s.

The dividend of 24 cents has been maintained. This equates to about $15 million paid to shareholders for the six-month period and represents about a 9% gross yield. Similar to last year, the dividend is only partially imputed.

Hallenstein Glasson noted a growing discrepancy between the Australian and New Zealand markets, with Australia seeing reasonable growth while New Zealand sales weakened. The company explicitly stated that Australia will be the focus moving forward, with bigger and better opportunities seen across the ditch.

Margins were slightly improved, as freight costs receded from the extreme levels seen post-Covid with supply chain issues. Inventory management has also been improved.

Online sales weakened as a percentage of total sales as consumers showed a renewed preference for physical stores. The push towards ‘’omni-channel’’ has become a necessity since Covid, and developing its online presence remains a focus for broadening Hallenstein’s reach beyond its footprint.

Early indications for 2024 are positive, with the company reporting sales marginally higher than last year’s figures. Again, the company notes a discrepancy between the two markets, with Australia expected to outperform New Zealand going forward.

Overall, those shareholders attracted to the higher dividend yield on offer will be pleased. While the share price has been volatile - too volatile for some - the company has a reasonable amount of cash on its balance sheet and is hoping this will be a buffer if conditions worsen as expected, particularly in New Zealand. In the “mixed bag” of results from our listed retailers, this was one of the more positive ones.

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Christchurch Airport Bond Offer

Christchurch International Airport (CIA) has announced details of a new 7-year, senior bond issue.

The bonds will mature on 15 April 2031.

The interest rate has not been set, but based on current market conditions we expect the interest rate to be approximately 5.40%.

These bonds have a strong credit rating of A-.

CIA is not expected to pay the transaction costs for this offer. Clients will be charged brokerage.

The bonds will be listed on the NZX debt exchange under the ticker code CHC030.

The investment presentation for the issue is available on our website here:

https://www.chrislee.co.nz/uploads//currentinvestments/CHC030.pdf

If you would like a firm allocation to these bonds, please contact us promptly, with an amount and the CSN you wish to use.

The offer is open now and closes at 9:30am on Friday 5 April.

Payment will be required no later than Friday 12 April.

If you have any questions in relation to this offer, please contact our office and we will be happy to help.

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Travel Dates

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

8 April – Wellington – Edward Lee

10 April – Auckland (Ellerslie) – Edward Lee

11 April – Auckland (Albany) – Edward Lee

12 April – Auckland (CBD) – Edward Lee

12 April – Lower Hutt – Fraser Hunter

18 April – Tauranga – Johnny Lee

19 April – Hamilton – Johnny Lee

19 April – Christchurch – Edward Lee

Johnny Lee

Chris Lee & Partners Ltd