Chris Lee & Partners Ltd

Market News 31 July 2023

Johnny Lee writes:

EROAD shareholders saw two important updates emerge last week, as the Non Binding Indicative Offer from Volaris - to buy the company for $1.30 a share - continues to stall.

The announcements came at the same time as the company held its annual meeting, which included a presentation to shareholders.

The first update was a public announcement by Volaris, indicating that it had no intention of lifting its bid at this time.

This came following media reports that Volaris would soon increase its bid to secure board support and gain control of EROAD.

Volaris did leave the door open for a future increase, but reiterated its position that it would require access for due diligence first. So far, EROAD has been unwilling to provide this.

The other announcement was that EROAD was inviting founder and former CEO Newman back into the fold, as an independent consultant for the company.

The announcement of the appointment specifically advised that discussions around his return occurred before the Volaris NBIO was officially announced. Newman, of course, possesses a significant shareholding in the company. Volaris’s path to a full takeover would be much easier with his support. With Newman now an employee of the company once more, there will be greater confidence in his stance.

From the outside in, this may very well appear to be a chess game of sorts. Volaris has made the early moves, and is clearly unsatisfied with only a 20% shareholding. The value it seeks comes from control of the company after all, not simply being a minority shareholder. However, EROAD’s refusal to provide access to its accounts makes this a much riskier proposition for Volaris.

It is worth recalling that when Volaris acquired its initial stake in EROAD, the agreement to buy the shares included an escalation clause, whereby Volaris would pay the difference if it lifted its offer price. However, this escalation clause would expire after six months.

EROAD’s presentation at its annual meeting suggested the company is already looking past the offer, pushing its long term agenda and promising that recent cost cutting and growth from the United States would see the company approach neutral free cash flow in 2025. 

It seems unlikely at this juncture that EROAD will alter its course and invite Volaris to conduct due diligence. Volaris, ultimately, may need to decide whether to up its bid, sell out, or simply retain its near-20% holding long term.

Ryman has held its annual meeting, predictably ending in a barrage from shareholders questioning the choices made over the last few years by the company.

Shareholders should take the time to read the address from Chair Claire Higgins.

She acknowledges why the company established the USPP, why the rationale changed, and the mistakes the company made throughout the process of making this decision.

Higgins was also up for re-election as Director, and found a perhaps surprisingly large percentage of votes against the re-appointment. While she was still re-elected, the message of discontent has been conveyed and, clearly, received.

Ryman stressed that its shareholder returns in recent years have been lacklustre, and that the company has a plan to address this. 

A key point going forward is clearly going to be a focus on these shareholder returns. Ryman shareholders have seen a large decline in share price over the last five years, while dividends have been either poor or non-existent.

This may mean a slower growth path, focusing on higher margin strategies and maintaining a focus on creating cashflow, relying less on borrowings to fund projects.

Ryman has also been criticised for disclosure and has apparently taken some steps to address these concerns. The company promises these steps will be evident come November’s financial results.

All told, the company is clearly looking to move from its mea culpa to a better and stronger company moving forward. The key now is whether the actions match the rhetoric. The team of so-called ‘’Rymanians’’ have plenty to prove.

Shareholders have bailed out the company after a decision to take on a foreign, long-term debt facility backfired spectacularly. Shareholders felt let down, and used their voice and votes to make that displeasure known. The board has accepted this, and now wants to regain shareholder trust.

With a promise to re-examine dividend payments next year, shareholders should be keenly watching their investment over the next twelve months and be ready to hold the board to account.

Mainfreight has had an update to market, confirming that the forecasted ‘’normalisation’’ of freight volumes and freight costs is well and truly underway. The update was part of last week's presentation to shareholders during its own annual meeting.

The share price fell following the announcement, which showed significantly weaker revenues and profits in the previous quarter. However, it is important to recall that this comes after a significant increase in both during the COVID lockdown period.

Immediately following COVID, the global supply chain was placed under great stress, with ports full or outright closed, leading to huge fluctuations in the cost of transport and logistics.

Mainfreight experienced a surge in both volumes and revenue, increasing dividends and investing the profits in increasing its land bank, warehousing capacity and improving the sustainability of its assets.

Now, conditions are beginning to weaken. Revenues for the quarter are down across the board, significantly so in both the US and Asian divisions. The half-year profit, due to be reported in November, will likely see a significant fall.

While revenue has declined 19%, net profit fell 43%, reflecting an environment where cost pressures are building. Eventually, these costs will be passed on the customers and consumers.

Mainfreight has long been a favourite amongst analysts, due to its high growth rates and historical outperformance. The company continues to expand worldwide, gaining new customers as its offering grows. There are positive, albeit longer-term, signals emerging from its reports.

However, there is no doubt that last week's update was poorly received and paints a picture of yet another listed company experiencing short-term difficulties. The COVID period of super margins and profits seems to have ended. 

However, Mainfreight remains well capitalised, with virtually no debt and high cash flows. The board will not be unduly concerned. The question now is how long these conditions persist, and if they do, exactly how the company intends to respond.

New Issue – Westpac New Zealand Subordinated Notes

Westpac NZ has announced an offer of up to $100 million (with the ability to accept unlimited oversubscriptions) of unsecured subordinated notes.

The offer opens today and closes at 9am on 3 August.

The notes have a first optional redemption date and interest rate reset date of 14 February 2029 when Westpac NZ will decide either to redeem the notes or reset for the remaining 5 years until the maturity date of 14 February 2034.

The interest rate is set for the first 5.5 year term after the offer closes and might be in the vicinity of 6.50%p.a. based on the indicative margin range and underlying rates.

More details are available under our Current Investments webpage.

Travel Dates - August & September

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

18 August - Christchurch – Fraser (FULL)

30 August - Blenheim – Edward

6 September - Auckland (Ellerslie) - Edward

7 September - Auckland (Albany) – Edward

8 September - Auckland (CBD) – Edward

13 September - New Plymouth – David

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

Chris Lee and Partners Ltd

Market News 24 July 2023

INFLATION data for the quarter has been announced, with the annual rate of 6% coming almost exactly in line with market expectations.

Fruits and vegetables have once again soared past the market average. Council rates and insurance costs have also seen sharp increases over the period.

The falling price of petrol has been the major saving grace, although this might see a reversal in due course, as the temporary reduction in fuel tax is reapplied.

The recent spike in global grain prices may also impact the next round of inflation data, both here and abroad.

The next major data point will be the unemployment figure, due early next month. Expectations remain that unemployment should begin to slowly rise, reducing pressure on wage growth.

Such an outcome could well confirm the Reserve Bank's stance that interest rate settings are sufficient in the short term. A surprise in the data may prompt a rethink ahead of the Reserve Bank’s next meeting on the 16th of August._ _ _ _ _ _ _ _ _ _

VULCAN Steel’s update to the market has been poorly received, sending the share price tumbling nearly 20% as traders re-evaluate the company’s prospects.

Not only has the company lowered the midpoint profit guidance from $102 million to $94 million for August’s results, but it has also stated that the difficult trading conditions might persist for the rest of the year, with an expectation for conditions to improve later next year.

No financial guidance was provided for the next year as the company looks to provide periodic trading updates throughout the year. This is becoming a common theme across this sector.

Its previous update in April highlighted that the demand for steel, globally, was expected to improve as the Chinese economy recovers following its battle with Covid. Vulcan’s next update - due in a month's time - should provide greater certainty around this. Concerns have been raised globally about the state of the Chinese economy, and Vulcan will be hoping its construction sector will weather that storm better than most.

Vulcan has responded to these conditions by reducing debt and carefully managing its working capital and inventory levels.

Vulcan’s next update will be made during its half-year results next month.

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MICHAEL Hill’s update to the market also gave us a glimpse into the state of the retail sector, following a recent update from Kathmandu.

Although these are two very different companies, both are heavily tied to similar macroeconomic drivers - consumer discretionary spending, consumer confidence, and inflation.

Kathmandu was pleased to forecast record sales after a strong first half, but its negative commentary surrounding more recent trading sent the share price lower. Consumers, particularly in Australia, were beginning to feel the pinch from rising mortgage rates and food costs.

Its next result - due in September - may not yet show the impact of these forecasts. The true picture may come in subsequent trading updates.

For Michael Hill, it has now completed the Beville’s transaction and is firmly focused on expanding its footprint around Australia.

Sales were up from last year, mostly driven by Australia. The second half of the period was notably softer, due to weakening economic conditions.

Consumers are returning to online shopping after a steep drop immediately after lockdowns were lifted. Whether this is seasonal or a continuation of a trend remains to be seen.

The retail sector has been heavily sold across global share markets - oversold, in some eyes - as both economists and analysts predict a difficult environment in the short term. While some believe these challenges will be strictly short-term, there will still be company failures as access to funding from lenders and shareholders dries up. Those with the strongest balance sheets will be well-positioned if we do see a rebound in the longer term.

The collapse of EziBuy - owing creditors a remarkable $100 million - shows that these concerns are very real and beginning to have real-world consequences.

While Michael Hill’s update saw the share price fall, the Beville’s acquisition leaves the company with genuine prospects for sales growth and an avenue to target new and specific markets across its brands.

Like Vulcan, the company is expected to report its formal results late next month.

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WHILE ERoad shareholders debate the worthiness of the recent takeover approach from Volaris, another battle is taking place for small-cap Metro Performance Glass, also known as Metroglass.

Metroglass is New Zealand’s leading manufacturer and supplier of glass, catering to both the new build and retrofit market.

Metroglass listed in August 2014, valuing the company at $315 million, or $1.70 a share. While the company enjoyed a positive reception from shareholders initially, the share price began to crash in 2017 and has been in the doldrums since, trading below 50 cents since Covid, and now resides at about 20 cents per share, after touching lows around 13 cents per share.

Following this share price decline, two major shareholders announced they would join forces, forming a consortium to acquire the remaining 75% of the company they did not hold at a price of 18 cents per share. The offer was conditional on the board supporting the approach and granting the pair exclusive access to conduct due diligence.

One of the major shareholders in question is an investment vehicle owned by Vulcan Steel founder Peter Wells. The other, Masfen Securities, is owned by Peter Masfen. Vulcan Steel itself is not a party to the proposed transaction.

Like ERoad, the Metroglass board has immediately rejected the unsolicited offer, stating that 18 cents per share substantially undervalues the company. And like ERoad, the Metroglass board did not publicly provide guidance to either shareholders or the bidding party around the price required to coax board support – simply stating that the 18 cent bid undervalues the company.

The offer to take the company private follows the announcement of a net loss in May, with a large impairment to goodwill driving the fall. Net debt also climbed. However, the company also stated that work to reduce costs was proceeding, revenue was gradually improving, and that some costs, including international freight, were slowly moving back in the company’s favour. While the outlook suggested difficult trading conditions, the company had a clear strategy on how it wanted to approach those headwinds.

Whether this bid is an attempt by shareholders to salvage a sinking ship, or simple opportunism, remains to be seen. The board has made it clear that it believes it to be the latter. The share price reaction – up 30% - suggests agreement that the shares were undervalued.

The Metroglass board explicitly references that it has received advice from its corporate advisers, Jarden and Bell Gully, which should comfort shareholders looking for a neutral point of view. In the event that the price deteriorates and falls through, it also provides the board with a justification for rebuffing the approach.

This trend of falling share prices prompting takeover interest may continue, especially among smaller companies. Many companies are seeing elevated debt levels, frustrated shareholders, and uncertain outlooks. To some, this may be viewed as an opportunity.

Like many exposed to the construction sector, MetroGlass has seen significant share price volatility of late, after years of individual underperformance. Two major shareholders are now looking to buy out the other shareholders and take the company private. The board has rejected this proposal, and the onus is now on the new consortium to either make a formal approach directly to shareholders or try again with the board at a higher price.

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New Issue Announcement

Westpac Bank has announced its intention to issue a new subordinated Tier 2 capital note. Although specific details are currently unknown, the bonds are expected to mature in 10.5 years, with a possible repayment date after 5.5 years.

These notes are anticipated to have a strong A- credit rating from Standard and Poor's.

Westpac is likely to cover the transaction costs for this offer, and the interest rate is expected to be set around 6.50%.

Further information about this issue will be provided next week. If you would like to express your interest and be added to our list, pending more information, please email us with your CSN and an indicative amount. We will be in touch once more information has been released.

We have uploaded a presentation on Westpac to the current investments page of our website.

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Travel Dates - August & September

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

18 August - Christchurch - Fraser30 August - Blenheim - Edward6 September - Auckland (Ellerslie)- Edward7 September - Auckland (Albany) - Edward8 September - Auckland (CBD) - Edward13 September - New Plymouth - David

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

Chris Lee and Partners Ltd

Market News 17 July 2023

Johnny Lee writes:

EROAD has firmly planted its stake in the ground as the company outright rejected the non-binding, indicative takeover proposal from Canadian technology investment company Constellation Software (through its subsidiary Volaris).

Volaris remains the largest shareholder of EROAD, owning around 19% of the company, according to a recent disclosure.

EROAD’s refusal to even allow Volaris access to its books – in order to conduct basic due diligence – suggests a strong level of conviction from EROAD’s board that the $1.30 price offered by Volaris is not even in the ballpark of where the board values the company.

As a reminder, the share price was 70 cents last month and had traded below $1 for many months prior to that.

Long-term Steel and Tube shareholders will recall Fletcher Building’s 2018 bid to buy Steel and Tube at $1.70, which was similarly rejected by Steel and Tube’s board as materially undervaluing the company. In that instance, the rejection worked against Steel and Tube shareholders, which continues to trade well below the offered price.

For EROAD, the company will be pleased to see that the price rallied following the rejection. The rally also gives an off-ramp to those unhappy with the board’s response, as they can sell their holdings above the $1.30 price and leave the battle for EROAD’s ownership to the buyer.

One wonders if New Zealanders are tiring of this trend of small local companies with long-term strategies being bought out by overseas companies before (hopefully) moving on to greater heights.

A more charitable view might describe them as long-term strategic partners, providing capital and a long-term investment horizon for a company with increasingly impatient shareholders, as the high-interest rate environment sees investors more closely scrutinize their positions.

For Volaris, the refusal to even engage in discussions leaves it in an awkward position. It could increase its bid in an attempt to coax enough interest from the board to create a dialogue.

This would be a positive outcome for those who chose to sell to Volaris early. The initial 17% Volaris acquired included an escalation clause, meaning that any price increase offered within six months of the acquisition would also apply to the sellers of the initial 17%.

Typically, a company would need to conduct due diligence before aggressively pursuing another company unless it was convinced the company was materially undervalued.

Volaris could also choose to retain its holding at its current level. Doing nothing would leave Volaris with a minority stake in a small capitalization New Zealand company. A holding this small would offer little ability to effect change – shareholder votes would remain beyond its control.

The unlikelihood of such a scenario may explain why buyers have entered the market, acquiring shares above the $1.30 mark. Some will be punting that Volaris intends to increase its bid, an outcome similar to what occurred in the recent Pushpay takeover.

The key difference between those two takeovers is the gap between investor expectations and the initial bid. Speaking to shareholders since the takeover announcement, simply increasing the bid from $1.30 by a few cents is unlikely to change the response.

One positive consequence, regardless of the outcome, is the highlighting of New Zealand’s burgeoning technology sector. Amongst the likes of Xero, Diligent, TradeMe, Pushpay, and EROAD, we have seen a number of listed companies receive interest from overseas investors.

One hopes that this success begets success, illustrating a pathway for small companies to access capital for growth. New Zealand capital markets would welcome more opportunities to invest in real companies offering solutions to real problems.

For EROAD shareholders, the next step will be up to Volaris to decide. The ball is firmly in its court as it ponders a response to the EROAD board. Having participated in many takeovers over the years, Volaris will now need to decide whether to pursue EROAD further and, if so, a more realistic price point to get shareholders on board.

The Reserve Bank has maintained the Official Cash Rate at 5.50%, as it continues to see data suggesting the tide is turning against inflation.

Shipping costs are reverting back to lower levels. Oil prices have fallen over the past 12 months. While food inflation remains problematic, there is hope that this too will moderate in the medium term.

Migration is returning. While the number of New Zealanders leaving is continuing to climb, the number of migrant arrivals is increasing at a faster pace. While this has a number of different impacts across the country, one is that labor shortages in specific industries are easing.

The Reserve Bank remains unconcerned about the slowly rising levels of stressed lending. Over the next year, average mortgage rates are expected to continue climbing as fixed-rate mortgages continue to roll over, resetting at higher rates.

Concern was raised regarding the situation in China. The Chinese economy is cooling rapidly, and recent data suggests that deflation is quickly becoming a real risk, with rate cuts now expected in an attempt to spur consumer demand. China’s response to the COVID outbreak, as well as the impact from the global supply chain issues that the West encountered post-COVID, has led to a markedly different set of problems for the Chinese government to overcome. This situation will be particularly relevant for countries that have established themselves as trading partners with China, including New Zealand.

The question now is where interest rates go from here. Market pricing continues to suggest that interest rates are at or near their peak, a peak that may last 12 to 18 months.

Swap rates, while extremely volatile, have risen overall over the past few months. The listed bond market has a number of offerings above 7% now.

Even the term deposit market is responding. Bank term deposit rates remain tilted to the front end, meaning that interest rates are higher for 1-year deposits than longer durations. If interest rates were to fall next year, banks will be pleased to have short-term money resetting at these lower rates.

The Reserve Bank’s next monetary policy update will be on 16 August and will have additional data - including next week's CPI data - to consider. Overall, it seems our Central Bank is happy to sit on its hands as it considers whether further tightening is needed.

Summerset shareholders will be pleased with the company’s most recent update, which saw the share price reach new highs for the year. The share price is now up 15% since 1 January.

The company reported a record number of resales for the quarter as it gradually increases its stockpile of recurring revenue.

The company also noted that the challenging market conditions previously observed seemed to be moderating, good news not just for Summerset shareholders but for the aged care sector overall.

Construction continues around 17 sites, although the company notes the full-year delivery figure will be towards the bottom end of previous guidance as it deliberately tapers supply until economic certainty improves.

The share price is now firmly in recovery mode, approaching last year's heights, prior to the sector downturn and the capital raising from market peer Ryman. While dividends remain small, they are expected to gradually increase in line with growth in sales.

While the situation with Ryman has created some fallout, Summerset has continued to grow its portfolio amidst tough conditions. It now sees these conditions improving, and the share price reaction this week should reassure shareholders that the company remains on the correct trajectory.

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Infratil Bond

Infratil has now announced the terms for its new 6-year bond. 

It has set a minimum interest rate of 6.70% and has confirmed that it will be paying the transaction costs for this bond. Accordingly, clients will not be charged brokerage.

We have uploaded the investment statement to our website. 

If you would like to secure an allocation, please contact us before 9am this Friday. Please include your desired investment amount and the CSN you plan to use.

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Travel

Edward will be in Auckland on July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD). 

Edward will also be in Wellington on Tuesday 25 July.

Johnny will be in Tauranga on July 26 (FULL).

Fraser will be in Christchurch on August 18.

Chris will be in Christchurch and Auckland in September.

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

Chris Lee and Partners Ltd

Market News 10 July 2023

Kiwi Property Group, Vital Healthcare Property Trust, and Precinct Properties have all updated the market, informing investors about the latest news for their respective portfolios.

Kiwi Property Group, trading at a near 10% dividend yield, presented to shareholders to outline the vision for the next two years.

Like many of the property trusts, Kiwi's steep discount to both Net Tangible Assets and historical pricing limits options for raising capital. While delaying further development until the economic environment (mostly interest rates) moves further in Kiwi's favor, there are no guarantees this will occur on a timeline appropriate for investors.

One option Kiwi Property Group could consider would be to introduce external capital by inviting a partner on board. While this is explicitly mentioned in the presentation, it is clear that it remains in the early stages strategically.

The next two years will prove critical to Kiwi's success, a period that is likely to include significant capital investment.

Next year will likely mark the completion of the Build To Rent projects at Sylvia Park. Much will hinge on its execution of this project as it is a core pillar of the Sylvia Park strategy. Having thousands of happy tenants living, working, and spending in the area should lead to a virtuous cycle - but execution is key.

Another core pillar will be the arrival of Swedish giant IKEA in 2025. This is expected to drive an increase in consumers to the area, providing people with an additional reason to travel to Sylvia Park.

Drury continues to progress its development. Earthworks are well underway as the company considers its options for releasing capital for the project. This may include land sales or the aforementioned external capital partners.

Precinct's latest valuations, released Friday, confirmed a 7.1% reduction for the portfolio, or a 16 cents per share fall in net tangible assets. The share price fell 3 cents following the announcement.

Rising interest rates continue to impact the value of office space, with falls being particularly evident in Auckland.

Meanwhile, Vital Healthcare's devaluation was more modest, reporting a decline of 4.6% across half of the portfolio subject to valuation. The Australian portfolio outperformed Vital's New Zealand assets.

Vital's valuation decline was largely expected and did not see a significant share price movement.

The property market continues to be driven by rising interest rates. Share price reactions are moderating to these announcements as the market better understands these property market dynamics and prices companies accordingly.

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Pacific Edge shareholders received a stay of execution as Novitas confirmed it would delay the implementation of its proposed Local Coverage Determination.

In plain English, this means its core bladder cancer detection product, Cxbladder, would continue to receive Medicare coverage for the time being.

Pacific Edge's share price doubled, back to around 20 cents a share. Shareholders have been taken on a wild ride this year, and while it remains down for the year, the familiar glimmer of hope has returned.

The decision to delay implementation was also accompanied by an assurance that Novitas would allow Pacific Edge a forum to discuss the value of its products and the evidence supporting this value. No timeline was given regarding this.

The question now is whether the evidence supporting Cxbladder is sufficient to justify Medicare coverage and can be considered “medically reasonable and necessary.”

Pacific Edge has spent decades building up its suite of research, and while this is an ongoing process, both the company and its shareholders should be confident in its ability to argue its case.

If it succeeds, the share price will likely rebound further. Most analyst valuations for PEB now include a very large range - near zero in a worst-case scenario, more than triple its current level of coverage is permanently reinstated.

The next few months will see Cxbladder maintain its coverage under Medicare, and revenues continue. It may stretch even longer than this, but a permanent determination will eventually be made.

Trading will remain volatile. Those buyers at 7 cents, having tripled their investment, can derisk and move on. Those who believe in the product and the researchers - and the regulators in the US - may take the punt at 20 cents.

Pacific Edge's next shareholder meeting is on the 27th of July - shareholders may receive some clarification around expectations at that stage.

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Mainfreight has updated the market with what could be described as an attempt at tempering expectations.

While revenue, earnings per share, profit, and dividends continue to grow at an impressive rate, the company outlook towards the end of the announcement is the more important information for shareholders.

It warns that the six-month result - to be issued in November - is likely to reflect the challenging environment it finds itself in. The company highlights the medium and long-term tailwinds that the company hopes to enjoy, a horizon that deliberately excludes the short term.

For the benefit of long-term shareholders, Mainfreight also outlined its 5-year plan.

This plan includes both environmental goals - electric trucks, water collection, solar panels, and batteries on all new sites - as well as business goals.

These goals include $10 billion in revenue in 2027, quickly growing its Asian business, and exploring an expansion into Africa and the Middle East.

Reaching these goals will require investment, with hundreds of millions in capital expenditure expected over the next year. It may take years to realize value from the assets being built.

The company is ambitious and has an uncanny knack for achieving these ambitions. Its next result may not meet expectations. However, it is laying the groundwork for longer-term success as it navigates today's difficult environment.

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Sky Network Television updated shareholders last week as part of Craigs Investment Partners' "Rapid Insights" conference.

It provided guidance, suggesting revenue would climb further from last year's result, but an increase in capital expenditure would lead to a profit slightly lower than last year's, and a dividend similarly lower.

After a disastrous collapse in shareholder value over the last decade, the company's fortunes began to improve in 2020, after some difficult decisions were made to dilute shareholders and invite new capital.

Now, the company is forecasting profits and dividends while investing in new product lines.

Between its Sky Box platform, its streaming platform, its broadband offering, and its commercial arm - targeting customers like bars and hotels - the company now has diverse revenue streams with different objectives and drivers.

The transformation from an outdated, slowly diminishing brand to today's product has been equal parts impressive and surprising. COVID could have been the death knell for Sky TV. Instead, shareholders are receiving dividends as the company posts profits in the tens of millions.

With giants including Amazon, Netflix, and Disney fighting for consumers' entertainment dollars, Sky TV will need to be clever in the markets it targets and the strategies it pursues. It will not win by outlasting the largest companies in the world.

Its next result to the market will be made in August.

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Infratil Bond Issue

Infratil has announced that it intends on launching a new 6-year senior bond issue next week.

While the initial interest rate has not been announced yet, based on current market conditions, we are expecting it to be around 7.00% per annum.

If you are interested in being added to the list for these bonds, please contact us promptly with the desired amount and the CSN you wish to use, and we will pencil you on our list.

Next week, we will send a follow-up email to anyone who has been added to our list once the interest rate and terms have been released. 

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Travel

Edward will be in Auckland on July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD).

Johnny will be in Tauranga on July 26.

Fraser will be in Christchurch on August 18.

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

Chris Lee and Partners Ltd

Market News 3rd July 2023

The public enthusiasm for Infratil’s business model has rarely been more demonstratively displayed than in its response to Infratil’s recent capital raise.

After a huge $720 million wholesale placement at a modest discount to its market price, Infratil then offered its shareholders new shares at the same price.

Infratil sought $100 million.

The public responded with nearly $400 million of demand.

Infratil responded by accepting $180 million, a mathematically-calculated sum that enables every applicant to retain the same percentage of the company held previously.

If one owned 1% of Infratil, one would be offered enough new shares to remain 1% of the company after the expansion of capital.

Infratil will use the $900 million raised as part of the sum needed to buy total ownership of Vodafone (now One NZ), an asset whose certainty of cash flow will be a nice balance for Infratil.

There can be no question about the success of Infratil in capturing the admiration and respect of its investors.

In the awkward times in which we live, such a response to capital-raising is mightily impressive.

To put this into perspective, recall that just two years ago Infratil raised capital at half the price of its latest offer and received a less enthusiastic response.

Perhaps it is worth examining what Infratil has achieved in its 31-year history.

Founded by the late Lloyd Morrison, an unusually bright and socially-aware sharebroker, Infratil sought to build a listed investment trust based on raising public money and using it as a basis to borrow more, to buy long-life infrastructural assets.

It bought into electricity generation (Trustpower), Ports (briefly-Port of Tauranga), airports (Wellington, and many regional ports in Europe), public transport (briefly, NZBus) and benefitted when some of these assets, most notably Trustpower, grew rapidly in value.

Infratil was not a typical “fund manager”.

It used its clients’ money to borrow much more, it was active in developing its acquisitions with governance and financial market expertise, and it performed investment banking tasks.

Its skills were held by Morrison & Co, which had the perpetual management rights for Infratil, earning very large fees for Morrison & Co and as many have come to realise, earning bonus fees based on private valuations, of a scale that has rarely been seen in New Zealand.

Fund managers have been slow to include Infratil on their favoured (over-weighted) lists.

They have often claimed that Infratil is “just another fund manager” and then (falsely) alleged the individual fund managers were just as skilled at buying assets at a discount.

That argument is fading.

Infratil does not follow any fund manager creed.

It does not track an index, it buys out-sized helpings of a few companies; it is “active” but is bound by no stupid, politically- correct rules.

It is more like a private equity fund, in that it nurtures its investments, leverages them, and sometimes sell out, as it did with NZBus, the European airports, Port of Tauranga, Metlifecare, and Z Energy, and must wish it could do with Retire Australia.

Its big victories have been the gains made by valuation increases (Canberra Data, various renewable energy projects), a model that fits the private equity description.

The move into data protection was smart, signalling that the Morrison & Co people were simply more alert to a permanent shift on the horizon, than its competitors.

Infratil’s recognition of the growing political demand to support renewable energy projects, here, in Australia, in the US and in Europe, required less foresight.

Its shift to buying unlisted assets was arguably just a recognition that fund managers chasing the safety of following an index, often pay too much for an asset, competing against each other for quarterly-measured victories.

None follow the model of headhunting people who combine specialist skills with capital market experience and governance skills.

Infratil might observe that the likes of KiwiSaver fund managers have any number of people with sales or administrative skills but almost none have the mix of skills and access to the networks of specialists that Infratil can claim.

Neither can their competitors claim a 31-year record of gains that is even a half of what Morrison & Co/Infratil can display, even if some of these gains are somewhat theoretical, unable to be established by daily, transparent pricing.

The latest display of shareholder affection for Infratil is remarkable.

Investors will not feel that Infratil is making its hay during conditions when every farmer is enjoying perfect, hay-making conditions.

The late Lloyd Morrison became a philanthropist, a supporter of the arts, a lover of sports, and an extremely well-heeled business leader, adept at finding any rare competent politician, yet sufficiently “Commercial” that he created a model that has made many of his colleagues wealthy by any measurement.

That his investors salute him demonstrate he developed a model that has met the needs of his followers.

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While Infratil has prospered in the last two troubled years, most markets have been stumbling.

Rarely do market sages appear in public pointing out what to them is obvious.

They know that market indexes are misunderstood. 

In most simple terms, a market, like the NASDAQ, that falls 30 per cent in a year, and then rises 30 per cent the next year, has not broken even.

When an index of 30000 falls by 30%, it falls to a new low index figure of 21000, a fall of 9000 points.

If it rises by 30% the next year, the rise would be 30% of 21000 – 6300- so the index would then be 27300, still well south of 33000.

Rarely do the fund manager salesmen discuss this. 

There have been two omens in the last year that preoccupy those sages whose views I follow.

Few sages are based in NZ, where we historically have had very few wise intellectuals who were not distracted by market noise or by the pursuit of quarterly trading gains.

I will not embarrass the NZ contacts by naming them but I can safely say that their successes are rarely, if ever, on display to the public as such leaders would seldom, and then only with great caution, take the risk of being misunderstood by our media.

They will right now be watching our 10-year NZ Government Stock rate, creeping up to 4.64%, maybe heading to 5%.

This rate is set by those who understand our need for ever more foreign investment at the same time as we run huge fiscal deficits (too much spending, not enough tax receipts), huge trading deficits (too much frivolous consumption, not enough growth in our exports) and at the same time as the wage/inflation spiral threatens.

The sages will know that these conditions usually lead to a falling currency AND sticky, high-interest rates.

Servicing ever more debt, at higher rates, means bigger deficits or much larger tax takes.

Investors should focus on the 10-year NZ Government Stock rate.

It is a rather more obvious predictor of long-term base rates than the noisy, volatile traders’ measurement provided by swap rates.

NZ will be issuing tens of billions of long-term bonds, most of which will be supplied by foreign capital.

If the current rate of 4.64% for a 10-year bond does not rise, and if the NZ dollar does not fall, New Zealand will have been the beneficiary of extreme global investor kindness at a level usually shown only when these global investors believe we have constant, careful governance.

Hmmm

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Another interesting signal is provided by the global gold price, which traditionally has provided some sort of guidance on investor sentiment.

When conditions are benign, debt levels sane and the cost of debt signalling stable inflation, the gold price may be weak.

If we go back just 12 months, gold was priced around US $1700 an ounce.  It reached $2000 four months ago, and now sits around US$1900.

In that time the NZ Dollar has been weak so in NZ terms, gold has risen by around 20% in the last year.

China has been the main buyer of gold, perhaps because it distrusts fiat currencies, perhaps because it wants to create a dominant, global currency linked in some way to gold and maybe oil.

Twenty years ago, gold was around US $600. There will be some who argue that gold is an irrelevant commodity, sparingly used in electronics, frivolously used in jewellery, and mostly used to hoard in vaults.

Others argue that its value reflects some measurement of demand.

It would be hard to argue that it is another version of some cryptocurrency.

Perhaps you might argue that after cryptocurrencies have been on stage for centuries.

Seminars

Our Seminars end this week, today’s presentation in Ellerslie, being followed by one in Milford tomorrow (open to new attendants, timing 11.00 am) and in Whangarei (Flame) at 10.00 am unless the road to Whangarei is closed.

We will provide a summary of the seminar notes on request, next week.

Travel

David will be in Palmerston North on July 6 and in Lower Hutt on July 7.

Johnny will be in Christchurchon July 12 and Tauranga on July 26.

Edward will be in Aucklandon July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD). He will also be in Auckland again towards the end of August.

Fraser will be in Christchurchon August 18.

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

Chris Lee

Chris Lee and Partners Ltd