Chris Lee & Partners Ltd

Market News 29th January 2024

Johnny Lee writes: 

January is almost over, and attention now turns to February’s reporting season in the weeks ahead, which is shaping up as an important one for investors.

Markets typically see a lull in activity during the December and January months. Dealmakers and issuers alike are aware of the seasonal nature of the retail investor, and usually elect to wait until the holiday period has fully concluded before engaging in the early groundwork of announcing and marketing new offers.

While these deals finalise, 2024 is also shaping up as an important year for many of our major listed companies, as shareholders can scrutinise some of the strategies put into place over the last few years. 

Reporting season gives these companies an opportunity to update shareholders on the progress they have achieved since August, when the last batch of results were announced.

One such company is Synlait Milk.

Synlait’s chart of share price performance over the last five years does not make for pleasant viewing, as the company struggled with changing international dynamics, as well as several strategic pivots over the last few years.

The first quarter of this year should see at least two major issues addressed.

Firstly, the company is actively engaging with its banking syndicate to solicit support for a ‘’deleveraging plan’’, with all options seemingly on the table.

Synlait’s pre-Christmas announcement highlighted that its major shareholder, Chinese giant Bright Dairy, remains supportive of the company and viewed Synlait as a ‘’gateway to resources and capabilities in advanced dairy-related nutrition’’. If new financial support becomes necessary, it seems Bright Dairy is willing to play a role.

Secondly, Synlait is working towards a solution for its Dairyworks business. The company has sought interested parties with an eye towards selling the business, but the process remains ongoing. The board will be conscious of the fact that the Dairyworks acquisition is a recent one, and that shareholders will – rightly or wrongly – view the transaction more negatively if the sales price announced is significantly lower than the price initially paid in 2019.

If Dairyworks cannot be sold for an acceptable valuation, Synlait has publicly stated that it will pursue other avenues. Once such avenue would be a capital raising from shareholders. 

Sky Network Television’s capital raising during the COVID era showed that appetite for financially distressed companies does exist - at the right price. Such rescue plans can work - but shareholders would need to be convinced that the company can either outlast or adapt to market conditions.

Of course, resolving the Dairyworks saga by way of sale would go some way towards resetting the company’s balance sheet woes, potentially avoiding any dilutionary actions for shareholders to consider.

Synlait’s listed bonds, SML010, continue to trade at a significant discount, now trading around 85 cents in the dollar. The scheduled repayment date is in December of this year, and the $180 million issuance is almost equal to the company’s entire market capitalisation. Synlait paid around $110 million for Dairyworks in 2020, as part of its growth strategy at the time.

As we near this December repayment date, one would expect the bond price to move significantly – either nearer par if repayment is likely, or lower if Synlait’s situation worsens.

Synlait is not alone as a company struggling with debt, but with a share price in the doldrums, and both shareholders and bondholders raising concerns, the next two months will be crucial for determining what shape the company will take once this period of stress passes.

For Ryman Healthcare, 2024 will need to be a year of progress.

It will mark a full year since its well publicised capital raising, when the company chose to raise an enormous amount of capital from shareholders in order to repay its USPP debt lines.

While those who took part in this rights issue will be pleased with the subsequent share price recovery, it still remains well down from previous levels.

And with dividends now firmly off the table, shareholders of Ryman will be looking towards both earnings growth and debt management as two key indicators to illustrate progress on its ‘’reset phase’’.

Part of this reset may involve further land sales, as the company looks to walk the tightrope between preparing for its future building pipeline, while also ensuring capital is being employed efficiently.

As reported in September 2023, Ryman’s gearing currently sits within the 30 – 35% target band, and fiscal discipline should remain a focus in the near-term. Recycling capital - building assets and selling them - will be essential to not only regaining shareholder faith, but also maximising the company’s opportunities.

Kiwi Property Group will also be completing a major milestone this year, as its new apartments at Sylvia Park inch towards their May 2024 scheduled opening date.

Kiwi Property Group is another company that has embarked on a strategic pivot, evolving from a retail property owner (shops, malls), to now encompass residential properties and building entire communities.

There was always risk with such a change. The company will need to prove itself as an architect, builder and manager of such properties, and will be hoping Sylvia Park can act as a proof of concept, before expanding it further, including its Drury investment.

Kiwi Property Group unitholders will also be keenly focused on distributions throughout this build out period. The company has already provided guidance on this, suggesting its previous distribution levels will be maintained. Its dividend yield is above the sector average at this rate.

Record migration numbers will be encouraging them, suggesting the rental market it is hoping to enter will remain busy. 

If Kiwi Property Group can end the year with its construction projects on schedule, dividends maintained and a pipeline of future growth in a sector it has proven itself in, then 2024 will be considered a success for unitholders.

Air New Zealand is another company with eyes on it during the 2024 year.

Its December 2023 update highlighted that domestic travel is weakening sharply, while trans-Tasman travel is also softening.

Inflation – staffing costs being a major component – remains a problem, particularly against a backdrop of increased consumer price sensitivity.

Worse still, Air New Zealand warns that it expects conditions to deteriorate further following February’s result. International competition will put pressure on margin growth within some routes.

After flirting with failure during COVID and leaning on both the Government and shareholders for support, demand for air travel rebounded post-COVID. Now, pressure on consumer wallets may halt rebound. 

Air New Zealand is another company with a February result, and expectations will not be high as we near the announcement date. 

_ _ _ _ _ _ _ _ _ _

As mentioned, 2024 will also be a year with plenty to look forward for bond investors, with a number of issuers and lead managers beginning to ink deals.

Not every deal ends up seeing the light of day, as economic conditions – particularly interest rates – can change plans.

However, there is some cause for optimism. It does seem the next few months will include new opportunities in the fixed interest space, although the decline in swap rates since December may mean expectations for yield will need to adjust lower.

The secondary market has also seen a deterioration in yields. Last week’s inflation data supported this move, showing inflation is gradually moving towards the target range.

October 2023 saw on-market yields exceed 7% for some bonds. These same bonds now trade around 6%, with buyers entering the market fearing further long-term declines in market rates.

In the term deposit world, rates remain competitive at the shorter end, with the bond market likely to instead continue targeting the longer-term investor. Most banks still offer north of 6% for short term deposits.

New Zealand companies will be active in the bond market this year, either as part of a long-term debt programme or to fund new projects - particularly in the electricity generation space. With investors back on deck, the next two months can be expected to busier than the previous two.

Travel Dates

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

7 February – Christchurch – Chris

8/9 February – Ashburton/Timaru – Chris

7 February - Blenheim – Edward

8 February - Nelson (PM) – Edward

9 February - Nelson – Edward

12 February – Tauranga (PM) – Chris

13 February – Tauranga (AM) – Chris

14 February – Auckland (North Shore) – Chris

15 February – The Wairarapa – Fraser

15 February – Auckland (Ellerslie) – Chris

21 February – Christchurch (Russley) – Fraser

29 February – Kerikeri –David

1 March – Whangarei – David

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Market News 22 January 2024

David Colman writes:

New Zealand King Salmon (NZK) announced that it has received a positive aquaculture decision for its Blue Endeavour open ocean farm from Fisheries New Zealand.

An Undue Adverse Effects Test (UAE test) was conducted by Fisheries NZ (operating as part of the Ministry of Primary Industries) to assess the effects of the proposed marine farm areas.

NZK’s proposed marine farm cannot proceed if it would have ‘undue’ adverse effects.

The decision was announced on 16 January and is followed by a 30-working day judicial review period which would require a High Court judge to examine whether the way the decision was made was in accordance with the law, and no other matters.

Currently all salmon farms in New Zealand are inshore or close to the coast.

Blue Endeavour has been researched and planned by NZK over the last 4 years and if it progresses will be a salmon farm 7km offshore in Cook Strait (northwest of Cape Jackson Lighthouse).

For those familiar with the Kapiti Coast the proposed waters are 60km west of Queen Elizabeth Park.

NZK has worked with international experts in open ocean aquaculture to develop the farm’s design which consists of a total of 20 circular pens combining to cover 12 surface hectares.

In late February or early March once the judicial review period is over NZK will make another announcement giving effect to its already granted resource consent and provide more information regarding the development.

---

New Zealand Retirement sector minnow Radius (RAD) announced the completion of the sale of the Arran Court care home which is located in Te Atatu, Auckland.

The specialist care provider’s market capitalisation is measured in tens of millions and is dwarfed by dominant established retirement sector operators such as companies that are listed, including Ryman (RYM) and Summerset (SUM), and unlisted, including Bupa NZ and Metlifecare, all of which exceed billion dollar valuations (Arvida (ARV) and Oceania Healthcare (OCA) have market caps in the hundreds of millions).

The net sale proceeds of $18.3m have been used to repay existing ASB loans.

RAD also announced that ASB agreed to amend the expiry date of a $4.7 million loan due on 31 January 2024 to 1 November 2026 explaining the agreement as being consistent with the majority of RAD’s term borrowings.

As part of the facility extension, ASB also agreed to remove any requirement to further reduce debt which completed the company’s debt management program with ASB and alleviates any requirement for further sales.

The executive chair of Radius, Brien Cree, noted that the sale of Arran Court and material reduction in debt levels provided a strengthened balance sheet.

Operating performance in RAD’s year to date results was described as strong and with the improved balance sheet the executive chair concluded Radius Care is in a strong position to accelerate its growth strategy. A comment seemingly at odds with the recent requirement to sell assets to pay off debt and twice extended debt repayment terms.

The company is looking to expand through brownfield developments (improving existing sites) and expects improved operating results and recent momentum to continue for the remainder of its full financial year to March 2024.

-- 

Infratil provided news of its CDC valuation increase of A$133 million at the start of January and reported on Wednesday that CDC has since signed large new customer contracts.

CDC has now entered into over 110MW of new customer contracts which supports its capacity growth and underwrites further accelerated development.

The contracts are from new and existing customers across Australia and New Zealand and will be delivered through expansion of CDC’s existing data centres and new facilities, all of which have commenced construction.

The customer contracts will be phased in over the next 3 years and extend the Company’s weighted average lease expiry, with options to extend terms.

CDC’s total contracted capacity has increased by over 200MW over the last 12 months, including reservations and rights of first offer.

CDC has announced over the same timeframe that it has commenced construction of a further 265MW of capacity, and significantly extended its future build capacity beyond that.

Infratil CEO Jason Boyes was pleased to announce the conversion of advanced customer conversations into contracted capacity in line with the accelerated growth expectations announced in October last year and January this year.

Infratil’s progress has been reflected in the material increase in the independent valuation of CDC over the course of the financial year with Infratil’s 48.24% investment in CDC valued between A$3.7 billion and A$4.3 billion.

Infratil appears to have immense confidence in CDC’s future growth prospects with CDC looking likely to be an ever larger part of Infratil’s portfolio.

---

Ampol Limited (ALD), which completed the acquisition of Z Energy in May 2022 and is dual listed on the NZX and ASX, provided a brief update on the group’s trading for the 2023 financial year and the fourth quarter Lytton Refiner Margin.

Refining margins were down from historically high levels achieved in the prior year but were offset by earnings growth from non-refining divisions.

Non-refining earnings included consistently strong performance in the Australian Convenience Retail business and Z Energy delivering performance improvements and synergies.

ALD realised gains in trading and shipping in the third quarter that are expected to underpin the second half result.

Ampol’s Brisbane based Lytton refinery volumes for the fourth quarter totalled 1,428 million litres compared with 1,580 million litres in the prior corresponding period.

The reduction in volume in the quarter was described as largely reflective of an unplanned outage towards the end of December. The refinery has since returned to normal operations.

The Lytton Refiner Margin averaged US$10.52 per barrel in the quarter compared to US$11.76 per barrel for the fourth quarter in 2022. 

Ampol will provide a detailed trading update as part of its full year results presentation on 19 February 2024.

---

Colonial Motors (CMO) has signalled that earnings for the 30 June 2024 financial year are unlikely to meet the record returns achieved in the two previous financial years.

Clean Car Discount (CCD) legislation has proved to negatively impact the non-EV market up to the end of December 2023.

No vehicles are subject to any fees, or eligible for rebates, associated with the CCD scheme any longer as at the start of this calendar year.

It is yet to be seen if sales of EVs will slow dramatically without the rebates offered as part of the scrapped scheme.

The CCD scheme was intended to be funded by CO2 emitting vehicle fees but was ultimately underwritten by all taxpayers.

There is still a Clean Car Standard (CCS) which sets targets for the average CO2 emissions of imported vehicles in place.

CMO anticipated that there would be consumer delays in purchasing Light Commercial vehicles and SUVs which was proved correct with weaker demand evident through November which worsened in December.

Light Commercial Vehicle registrations across New Zealand were down nearly 50% for the December quarter.

Notably CMO provided context with December 2023 itself being the lowest month for registrations in this segment since January 1999 (an almost 25 year time frame) excluding covid affected months.

CMO Car dealerships were impacted by the deferral of vehicle sales to post 1 January 2024 and the cost of holding inventory for an extended period in a higher interest rate environment.

CMO expects these effects to decrease its half year result to 31 December 2023 by close to 30% compared to the comparable 2022 half year which was the second of two consecutive record results. Half of the decrease occurred in December alone.

Deferred deliveries into this year are flowing through CMO’s system and the company expects heavy truck sales to remain reasonably strong in the second half.

CMO’s 31 December 2023 half year results will be released towards the end of February.

The Colonial Motors update combined with recent Turners (TRA) and Heartland (HGH) announcements provides further evidence of how regulatory change impacts business with all three companies involve in the motor trade.

Car sales patterns have clearly been affected by regulatory change and with a new government in place we may see several industries influenced (positively or negatively) by potentially more regulatory changes in future.

Travel Dates

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

31 January – Auckland (Ellerslie) – Edward

1 February – Auckland (Albany) – Edward

2 February - Auckland (CBD) AM only – Edward

7 February – Christchurch – Chris

8/9 February – Ashburton/Timaru – Chris

7 February - Blenheim – Edward

8 February - Nelson (PM) – Edward

9 February - Nelson - Edward 

29 February – Kerikeri –David

1 March – Whangarei – David

Market News 15 January 2024

David Colman writes:

2024 has started with a typically slow early January as many workers start to trickle back after the holiday season.

One of the few companies to release news is Summerset Group which provided its fourth quarter metrics relating to the sales of occupational rights.

360 sales were achieved for the quarter ending 31 December 2023, comprising 186 new sales and 174 resales.

The total number of settlements for the quarter were 30% higher than the 277 total settlements achieved over the same comparable period in the quarter ending 31 December 2022.

Both new sales and resales were at record levels and contributed greatly to the company achieving a record full year result of 1,103 total settlements for the full year to 31 December 2023.

Summerset CEO Scott Scoullar was pleased with both the quarterly and full year figures particularly as he noted the residential property market (which has an influence on the retirement sector) has been very slow and unpredictable at times.

He noted that while the residential property market certainly has an influence on Summerset’s business, the drivers for residents to come to its villages including community, security and health don’t change.

Summerset continues to see very high demand and has achieved record results in a very difficult macroeconomic environment.

A strategic focus for Summerset has been to target when and where it wants to build retirement villages.

The build programme's flexibility, coupled with the extensive distribution of existing villages across major centres and various regions, has proven advantageous in meeting demand and attracting a broad range of New Zealand residents.

Summerset now accommodates 8,000 residents.

Three main buildings were completed and opened in 2023 with Kenepuru (Wellington) in February, Bell Block (New Plymouth) in September, and Te Awa (Napier) in November, combining to release 309 new units to the market. Strong sales and pre-sales were observed.

Summerset also welcomed the first residents at four new villages at Cambridge, Boulcott (Lower Hutt), Waikanae, and Milldale (Auckland).

Summerset’s first Australian residents move into Cranbourne North (Victoria) over the next few months after completion of the first 10 villas there late last year.

Summerset produced resident satisfaction scores for the year with 96% for village residents, and 95% for care residents which indicates residents are well catered for.

CEO Scott Scoullar indicated that the company is optimistic for the year ahead, seeing positive signs that the residential property market is improving, with strong levels of demand and pre-sales seen already this year.

The New Zealand retirement sector, including Summerset’s rivals, will be encouraged by the signals mentioned.

Summerset’s full year results to 31 December 2023 will be released on 26 February 2024.

---

The New Zealand market is set to lose a few more companies from the exchange this year which has been a disappointing trend for the NZX for several years.

The NZX greatly prefers new listings of high-quality companies to enhance the market's size but must accept that some companies will leave the exchange for any number of reasons from time to time.

The first company to delist this year looks to be Geo Limited (GEO) which was originally listed on the now scrapped NZAX (Alternative Market) in 2013 and migrated to the NZSX (the NZX main board) in 2017.

GEO has announced its intention, subject to shareholder approval, to delist.

Reasons to delist were provided including that the company is:

- too small (the company has a market capitalisation of just $2.9million

- not providing liquidity for shareholders

- finding an NZX listing to be prohibitively costly and time consuming to manage

The proposed delisting is part of the company’s ongoing cost reduction program with the goal to achieve EBITDA profitability and cashflow breakeven within 2H FY24.

Compliance and governance costs were seen as eating up valuable resources for the software-as-a-service (SaaS) business.

The Geo Chair Tim Molloy’s comments encouraged all shareholders eligible to vote to support the resolution at the upcoming general meeting.

Shareholders will vote at the general meeting on 23 January to delist or not.

Another upcoming delisting is Good Spirits Hospitality (GSH) which no longer has any reason to be listed since shareholders passed a resolution to delist the company last year.

Its delisting will be delayed until the company has discharged all liabilities to any creditors and pays a proposed dividend.

It would be great to see new share listings this year to replace the above struggling entities.

---

Heartland Group Holdings (HGH) released a full year 2024 performance update late last year based on unaudited results to 30 November 2023.

HGH achieved YTD (Year to Date) receivables growth of 4.7%, with Australian and New Zealand Reverse Mortgages notably achieving YTD growth of 20.4% and 17.8%, respectively.

Heartland, despite the substantial reverse mortgage growth, experienced a slower than expected start to the financial year ending 30 June 2024 (FY2024) due to:

- a decrease in the purchase of new cars influenced by policy changes

- adverse Australian climactic conditions impacting livestock purchases

- later than expected repayments of lower yielding loans

- a tighter deposit market delaying net interest margin (NIM) recovery

HGH has revised its FY2024 NPAT (net profit after tax) guidance to reflect the following:

- short-term operational challenges ($8 million to $10 million impact)

- Heartland Bank New Zealand’s response to issues affecting some legacy lending post COVID-19 (11.5 million impact)

- NPAT related to the acquisition of Challenger Bank Australia ($3.5 million impact).

HGH now expects NPAT to be in the range of $93 million to $97 million, excluding any impacts of fair value changes on equity investments held and the impact of the de-designation of derivatives.

The guidance range was previously $116 million to $122 million, excluding any impacts of fair value changes on equity investments held, the impact of the de-designation of derivatives, and any costs related to the acquisition of Challenger Bank.

Underlying operational performance, excluding the impact of the post-COVID-19 legacy lending and Challenger Bank issues, range is $108 million to $112 million.

The above NPAT forecast is disappointing to long-time shareholders who have seen the company grow in scale but have not yet seen annual NPAT rise above $100 million.

A $100 million NPAT was a goal of the former chair of Heartland’s board, Geoff Ricketts, who sadly passed away last year with the goal just out of reach in his lifetime.

The updated forecast range includes the possibility of NPAT at a lower level than the previous year which clashes with the company’s history of increasing NPAT figures as shown below:

- FY2024 NPAT Forecast: $93million to $97million

- FY2023 NPAT $95.9milllion

- FY2022 NPAT $95.1milllion

- FY2021 NPAT $87.0million

- FY2020 NPAT $72.0 million

The merger of Canterbury Building Society, Southern Cross Building Society and Marac Finance which created Heartland New Zealand in 2011 really resulted from the global financial crisis.

In 2012 Heartland was granted bank registration by the RBNZ and became the first New Zealand registered bank to be listed on the NZX. Shares traded between $0.50 and $0.80 in 2012.

In 2018, a corporate restructure, resulted in Heartland Group Holdings being the listed entity under the code HGH with shares listed on the NZX and Australia’s ASX. 2018 saw the price slide from above $2.00 to below $1.50.

At the start of 2022 HGH traded close to $2.60 likely based on the company’s track record of growth and income from dividends up to that point.

The shares last traded at the time of writing at $1.45 well below the price of approximately $2.10 prior to the Stocklands acquisition in August 2022 when a capital raising at $1.80 per share was used to fund the acquisition.

The group has maintained dividends at respectable levels even through challenging times regardless of share price volatility.  HGH shares at $1.45 have a gross dividend yield of over 11%.

The group is once again entering new territory with the Challenger Bank (Australia) acquisition and New Zealand investors based on recent trading activity seem to be cognisant of the difficulties that a New Zealand company faces striving for success in Australia.

HGH already has a successful reverse mortgage business in Australia which provides some confidence that it can succeed in the Australian market again, this time in the deposit taking space, through Challenger Bank.

It is hopeful that the regulatory approval process will be concluded, and the Challenger Bank acquisition completed, by 31 March 2024.

HGH expects a stronger second half of FY2024, particularly as the anticipated backlog of stalled car purchases clears, and with climactic conditions in Australia expected to be more favourable. It continues to expect net interest margin to improve in calendar year 2025 as the deposit market eases and lower yielding loans are repaid.

The motor finance division is forecast to improve as the clean car discount scheme is repealed, and with the removal of internal combustion engine taxes on new vehicles which is believed to have caused consumers to delay new vehicle buying decisions until this year.

Australian Livestock Finance is also forecast to improve after livestock prices fell in the first five months of FY2024 due to adverse weather and drought risks.

Many producers destocked or consolidated debt from selling livestock at lower rates or retained livestock for longer periods to gain weight and recoup value.

HGH anticipates that these issues will subside in the second half of 2024, given the recent favourable rainfall on Australia's east coast and the diminished likelihood of extended drought. Notably, livestock prices rose by 35% in the weeks preceding HGH’s announcement.

Motor Finance and Asset Finance loans are taking longer to repay than anticipated as borrowers hold assets for longer in the current economic environment.

Managing margins with rising interest rates across Australasia was described as challenging with HGH intentionally delaying passing the full impact of these increases onto some borrower customers, specifically in the case of New Zealand Reverse Mortgages and Australian Livestock Finance in line with a socially responsible and more sustainable approach.

Heartland Bank NZ expects heightened competition in the deposit market that has impacted its cost of funds to continue through calendar year 2024 but anticipates net interest margin improvement in calendar year 2025 as the deposit market eases and low yielding Motor Finance and Asset Finance loans are repaid.

CEO Jeff Greenslade commented that a stronger 2H2024 than the first half of FY2024 is expected as overall performance continues to demonstrate the resilience of Heartland's portfolios and 'best or only' product strategy.

The senior management of HGH continue to have admirably, ambitious plans.

Travel Dates

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

31 January – Auckland (Ellerslie) – Edward1 February – Auckland (Albany) – Edward2 February - Auckland (CBD) AM only - Edward7 February - Blenheim - Edward8 February - Nelson (PM) - Edward9 February - Nelson - Edward 29 February – Kerikeri –David1 March – Whangarei – David

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd