Chris Lee & Partners Ltd

Market News 26 June 2023

Johnny Lee writes:

E-ROAD shareholders have been presented with another twist in its tale – this time with the news that a Canadian software company has launched a bid to take over the company. The share price soared following the announcement.The bid is only indicative and is non-binding. No action is required from shareholders at this time.Volaris Group – a subsidiary of Canadian giant Constellation Software – is seeking to acquire 100% of E-ROAD in a full takeover at $1.30 a share. The offer will likely be conducted as a scheme of arrangement, requiring a vote to be held by shareholders as to whether it is implemented. This same method of acquisition was used in the recent Pushpay takeover.This may prove a very difficult mountain to climb. Volaris begins the takeover with 17.7% of the company, however the remaining shareholders will be skeptical of the $1.30 valuation. Many have held their shares for years, and firmly believe the company’s value exceeds $1.30 per share.On the other side of this argument, of course, are those recent buyers who have been busily acquiring shares over the last 6 months, when the price has fluctuated from 50 cents to a dollar per share. $1.30 will be viewed as an attractive exit price for some of those traders.

Volaris, of course, has the right to increase this price. This occurred during the Pushpay takeover, with the bidder eventually relenting and increasing its price a few cents to secure the remaining shares.An independent valuation, assuming one is commissioned, will be a crucial piece of the puzzle for some. These independent valuations are difficult for Boards to ignore, especially in today’s more litigious environment. While most shareholders will have little interest in the short-term value of the company, an independent valuation justifying a price at or around the takeover price may persuade short-term holders to vote in favour of the deal.EROAD’s share price has been in steady decline since August 2021, falling from $6.50 to nearer 50 cents last month, before rebounding last week after the announcement. Volume has spiked since the news was released, as some buyers gamble on the takeover price escalating, while less confident sellers quit, their gains effectively capped at $1.30, in their view.If the takeover does eventuate, it will mark yet another technology company bought out from our shores following a sharp share price decline, following Pushpay’s departure earlier this year. Clearly, overseas investors are seeing something we are not – although whether they are correct remains to be seen.Volaris positions itself as ‘’a buy-and-hold acquirer of software businesses’’, with a focus on the ‘’long-term success of our companies’’ that has ‘’never sold a core business’’. The $140 million market capitalisation ($110 million Canadian) will not frighten such an investor.

It is still early in the process, and the bid - being only indicative at this stage - may go nowhere. Shareholders must now wait for further updates from the company, as they contemplate a $1.30 valuation.

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Another negative update from fruit grower Seeka was released to market last week, as the market downturn in the sector continues to deepen.Seeka’s share price has fallen 21% so far this year. The price fell further last week on the back of the announcement, although the dearth of liquidity has helped shield the visibility of the impact. The primary sector has been a poor performer this year, as well publicised weather-related disasters continue to plague it. Between cyclones, frosts and flooding, it is easier to feel sympathy for our nation's horticulturalists.The most recent update from Seeka, made in mid-April, speculated that the company was anticipating a large net loss, and a sharp reduction in harvest volumes. Both of these are now confirmed, with the loss likely to be around $20 million. 2022’s full year result was a $15 million profit, while 2021 saw a $24 million profit.

The harvest concluded at approximately 30 million trays. Last year saw this figure at 42 million.Undoubtedly, 2023 has been a tough year for all members of the horticultural industry. Between the weather, continued labour shortages and high inflation, it is clearly a period where the risks of investing in horticulture are on full display. One imagines we will continue to see individual failures, as the high indebted collapse under the weight.

Seeka reports its formal results in August. This is expected to show a modest profit, before the full year result in February confirms the full impact of the market conditions._ _ _ _ _ _ _ _ _Smartshares, the ETF provider owned by the NZX, is introducing another batch of new funds for investors to consider.The five funds are a Global Government Bond fund, a replica of the existing US 500 fund with its currency exposure hedged, and three new equity funds: an Australian large capitalisation ESG fund, a Global Property fund, a Global Infrastructure fund.The Australian large cap fund provides exposure to the largest companies in Australia – the banks, Woolworths, Wesfarmers, CSL, Transurban, Telstra – but without the likes of Woodside Petroleum, Rio Tinto or BHP.The Global Property Fund gives investors exposure to various global property companies, including the likes of Prologis – known by some as ‘’Amazon’s landlord’’ – as well as data center giant Equinix and self storage company Public Storage.The Global Infrastructure fund includes a portfolio of diverse assets including American railroads, Canadian pipelines, British electricity transmission providers, Australian toll-road operators, Spanish airport owners and wireless towers across the United States.Smartshares has found something of a niche in New Zealand, offering investors a publicly listed product that carries the ability to tap into overseas markets, without the hassle of custodial accounts. They can provide diversification, both in terms of the assets held and the geographies and currencies they are exposed to.The funds list later this week.

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David Colman writes:

Infratil Roadshow 2023

Last week, I was privileged to have been invited to the Infratil Roadshow in Wellington on the evening of Tuesday 20 June.

Timed, conveniently, to coincide with the company’s Share Purchase Plan which closes tomorrow (27 June 2023).

Held in the Public Trust Building, a rare surviving example of Edwardian Baroque architecture, it was a well attended and, I believe, well received presentation.

Matthew Ross (Infratil Finance Director) and Jason Boyes (CEO) were the main speakers with Phillippa Harford (Infratil CFO) presenting the One NZ portion of the event.

A large screen displayed multiple slides with one of the first including how much Infratil’s portfolio has changed in the last decade.

Ten years ago the portfolio included 38% renewable energy, 32% non-renewable energy, 15% airports, 11% public transport, and 4% other assets.

Today the vast majority, 66%, of assets, are digital with 18% in renewables, 11% healthcare, and 4% airports.

The geographic composition of the portfolio has changed significantly with investments being 48% New Zealand, 38% Australia, 11% USA, and the remainder in Europe and Asia as opposed to over 80% New Zealand ten years ago.

Infratil is a less diverse company per sector but more diverse geographically and certainly larger than it has ever been. This is a consequence of divestments of former positions (Z Energy, Tilt, Trustpower, Wellington Bus, etc.) and numerous acquisitions (CDC, Vodafone, etc.) over the years.

Infratil seeks to achieve target returns by using a blended mix of investments. Targets are described as core companies (lower risk) of 8-10% per annum, core plus/value add of 10-15% per annum, and development (higher risk) 15-25% per annum.

The businesses under Infratil tend to progress from the development category through to the core category.

Infratil have an enviable track record with after tax returns in the last 29 years of 18.6%p.a. including 19.4%p.a. in the last 10 years.

The full year result was particularly impressive against a mostly poor market performance, over the same period, with highlights including Longroad and CDC continuing to grow and the sale of Vodafone’s towers.

Matthew Ross notably described the Vodafone towers business as a good one perhaps hinting at some regret in selling that part of the business.

The strategic review of RetireAustralia didn’t result in Infratil pursuing a sale mainly due to conditions not being ideal for sale and recent performance for the business has been reasonable so will be retained for the time being.

Infrtail has a strong focus on renewable energy (solar and wind power) looking forward and has high expectations for Longroad with a massive projected increase in gigawatt generation from 2.4GW in 2022 to over 8GW in 2026.

The screen at the presentation showed all of today’s New Zealand electricity producers stacked on top of each other next to Longroad’s 2026 projected size to illustrate this significance with the total capacity of New Zealand of about 9.5GW not far above the scale of Longroad’s projections.

Longroad’s value was validated in October 2022 with a 12% stake sold to MEAG (asset management arm of Munich Re) for US$300million, and an approximate 37% stake maintained by Infratil and the NZ Super Fund investing a further US$100million.CDC Data Centres was noted as accommodating more and more data use and may benefit from the rise of Artificial Intelligence demands for data and computing power. A.I. infrastructure growth is expected to rapidly accelerate due to growing demand.

CDC has plans to increase resilience and security, accelerate customer digitalisation, meet sovereignty requirements, and have a greater emphasis on sustainability following strategic customer trends.

Two recent data centres were completed with CDC now having 11 operational data centres (9 in Australia and 2 in NZ) with 7 more under development (5 in Australia and 2 in NZ).

One NZ was described by Infratil, eye rollingly, as ‘One awesome business’ and Infratil will hope it will be as its stake increased to 99.90% (the other 0.10% owned by management) with the acquisition of the remaining 49.95% it didn’t already own costing $1.8billion funded by cash, bank debt, and the current $850million equity raise.

Phillippa Harford noted that Infratil may have liked to have bought Vodafone in its entirety in the first instance but did not have the capacity to do so at the time. Times have certainly changed.

The rebrand of Vodafone to One NZ was estimated to cost $18million in an effort to infuse the One NZ brand into New Zealand’s consciousness.

Phillipa also elaborated on One NZ having attractive long term fundamentals with expectations of equity returns of 10-12% per annum and that full control allows complete influence on strategic decision making.

The business was emphasized to help strengthen Infratil’s cash generative core.

The five radiology businesses (Pacific Radiology, Auckland Radiology Group, Bay Radiology, Qscan, and Envision Medical Imaging) represent an investment value of $900million with over 150 clinics and over 290 radiologists serving 1.5million patients and total scans of 2.4million which is a significant Australasian Healthcare undertaking.

Infratil sees benefits in its exposure to the healthcare sector as providing an essential service that has high barriers to entry, is non-cyclical, and provides some inflation protection although it can be a capital intensive enterprise.

I was impressed with the passion shown by Jason Boyes in this area and felt he wants Infratil to improve the healthcare options for any patients they can provide services to with a hope that early detection and diagnosis becomes more frequent at a low cost driven by any efficiency gains they can implement.

The presentation was concluded with a question and answer section with one question providing a useful insight in my view.

The basis of the question was what keeps the CEO up at night in regards to the Infratil business.

Jason answered that a major risk for Infratil is that of losing quality employees and Infratil will need to work hard to keep valuable employees as it grows. Providing staff with equity in the business was part of its strategy to retain valuable human capital.

The CEO provided an elegant and earnest answer to a great question.

There are certainly many risks involved in the various Infratil business units but I left the event impressed by the well communicated presentation and the clarity it provided in regards to Infratil’s history and its future ambitions.

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New Issue – Genesis Energy Capital Green Bonds

Genesis Energy Limited (GNE) has announced a new capital bond.

A minimum interest rate of 6.50%p.a.has been set, with interest paid quarterly.

The interest rate will be fixed for five years, and Genesis will then run an election process, enabling investors the chance to be repaid at this time.

GNE will be paying the transactions costs for this offer. Accordingly, clients will not be charged brokerage.

We have uploaded the investment documents to our website which we encourage investors to read, and if you would like a FIRM allocation, please contact us no later than 9am Thursday 29 June.

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Seminars

This week our seminars are in Tauranga Monday, 1.30pm and Hamilton on Wednesday, 1.30pm.

The last round is in Ellerslie (FULL), Milford, and Whangārei on July 3, 4, and 5.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below), but some (not all) of our venues are roomy and can accommodate walk-ins if you are having trouble registering. Please contact our office if you need help booking.

To register yourself for our free seminar, please click on the relevant link below:

Tauranga – 26 June 1.30pm - Tauranga Yacht & Power Boat Club, 90 Keith Allen Drive

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/Tauranga

Hamilton – 28 June 1.30pm - Ventura Inn, 23 Clarence Street

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland – 4 July 11am - Milford Cruising Club, 24 Craig Road

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei – 5 July 10am - Flame Hotel, Waverley Street, Onerahi

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4 (afternoon).

Please contact us if you wish to make an appointment during the seminar round.

_ _ _ _ _ _ _ _ _

Travel

Edward will be in Wellington on June 29.

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

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

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

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

Chris Lee

Chris Lee & Partners Limited

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Market News - 19 June 2023

Last week's GDP data showed that the New Zealand economy is officially in another recession, three years after COVID and the subsequent lockdowns last sent our country into a recession.

While some sectors - mining, telecommunications, and the arts - saw some growth, weakness in manufacturing, retail, and education dragged us into another quarter of negative growth.

The impact of the cyclones continues to be felt around the country, both in terms of the human impact and the economic impact.

The weak data has led to commentary surrounding interest rates, with some fearing that the Reserve Bank has indeed overshot its inflation goals and is taking heat out of the economy too quickly.

Indeed, last week saw the People's Bank of China actually cut rates, as further data comes in showing a rapidly cooling economy. The US Fed paused its rate hikes in the same week. The cycle of tightening may be nearing its end.

Interest rates continue to be tilted towards the front end, meaning that 12-month term deposits are considerably higher than longer-dated deposits. Investors accepting such offers will be hoping rates do not deteriorate during that timeframe, leaving them worse off than if they had accepted a lower, but longer-dated, offer.

The next update from the Reserve Bank - July 12 - will address last week's data. This meeting is seven days before the next release of inflation data, so investors will face two key data points in the coming weeks.

The first half of 2023 is over, and while the net performance of our share market has been muted, there are many outliers on either side.

The New Zealand Gross Index, which includes dividends, is up almost 1% for the year. Both the US Dow Jones and the Australian ASX 200 are about 4% higher. The NASDAQ - an index that places a much higher weight than the Dow Jones on technology companies - is up nearly 30%.

The star performer among the New Zealand major companies has been Ryman Healthcare, which is up 25% for the year. Context is important here, as the share price tumbled significantly in the last six weeks of 2022, giving it a low starting point for the year.

Since raising capital earlier this year, Ryman has seen a meaningful rebound, rewarding those who took the risk to put more money into the company after a difficult 2022. The company's most recent update suggested dividends would look to return next year, as the company uses this injection of shareholder capital to reposition itself.

Restaurant Brands, the owner of the KFC, Pizza Hut, and Taco Bell brands, is another top performer this year, alongside Infratil, Mercury, Sky TV, and, perhaps surprisingly, Hallenstein Glasson. During a poor year for retail stocks, Hallenstein has comfortably outperformed the market (mainly due to the rejigging of the NZX50 index).

Outside the majors, technology stocks Smartpay, Serko, and Gentrack have all had a great start to the year, as excitement around our relatively niche technology sector grows. While these are not necessarily household names, shareholders will be delighted with the first six months, with each posting more than 50% gains. Serko - a platform for corporate travel management - did not perform well during the COVID years, but the rebound since exiting that period of history has been impressive to observe.

The worst five performers so far among the larger stocks have been Scales, EBOS, A2 Milk, The Warehouse, and Synlait.

EBOS continues to find its feet after the unexpected loss of the Chemist Warehouse supply contract. The share price is proving volatile, moving a few percentage points each day. Current shareholders and interested buyers alike will be keenly awaiting the next update from the company, outlining its analysis of the impact of the lost contract.

Synlait remains in the doldrums, albeit slightly higher following confirmation of the Chinese registration approval earlier in the month. Shareholders are similarly waiting for its next major update as its investment bankers determine a valuation for the Talbot Forest Cheese and Dairyworks assets. Shareholders and bondholders alike will be hoping the market for such assets has not deteriorated since their acquisition only a few years ago.

The Warehouse, following the suspension of its dividend in March, is another area where buying demand remains wary. The sidelines are beginning to crowd as investors await greater certainty from the company.

While the New Zealand market as a whole has been relatively flat during the first half of this year, it has been far from uneventful for some. The second half of this year will include some important updates for these companies as we head towards August and the next reporting season.

An important note for Infratil shareholders:

Infratil is currently raising capital from shareholders, raising $100 million to help fund the purchase of 49.90% of One NZ (formerly Vodafone). Some of the communications from Infratil have led to confusion among shareholders.

The offer to buy additional shares entitles all shareholders - who held their shares on the 6th of June - to apply for more shares. They can apply for any number, up to a maximum as defined in the offer documents. For New Zealand shareholders, this maximum is $80,000 NZD.

If you hold 100 shares, your maximum is $80,000. If you hold 100,000 shares, your maximum is $80,000. There is no minimum - shareholders can choose not to accept the offer.

The ‘’127 per 1,000 shares held,’’ mentioned in the communications from Infratil, refers to maintaining the current proportional ownership of Infratil that retail investors currently hold. It is neither a minimum, a maximum, nor Infratil's recommended amount.

In the event Infratil receives bids totalling more than $100 million, some shareholders may have their bid scaled. Infratil has stated that such scaling will be tilted in favour of maintaining this proportionality, meaning that those who bid beyond this 12.7% may be scaled differently than those who do not.

The days of holding 100 shares in 5 different entities to apply 5 times for discounted shares seem to have passed, at least for offers that prove popular. This process of allocating shares to larger shareholders to maintain proportional ownership is commonplace now.

The price paid for this issue has a maximum of $9.20. If the share price of Infratil falls below $9.20, there exists a mechanism to adjust this figure lower. This protects those who wish to apply early and provides Infratil with greater certainty in the event that world markets tumble over the offer period.

The share price is currently well above this figure, leading some shareholders to sell some shares to fund their bid. To be clear, shareholders who sell today at this higher price will retain their rights to buy into the offer.

So far, demand for the offer has proven to be strong. Applicants seem undeterred by the historically high price, and while Infratil does reserve the right to accept unlimited oversubscriptions, it may also choose to scale back this strong demand, depending on how the last week of the offer concludes.

The offer closes on the 27th of June, with the new shares allotted shortly after.

Investment Opportunity:

Genesis Energy has announced plans to issue a new subordinated capital green bond, with further details to be announced next week.

While the interest rate is not yet known, based on current market conditions, we expect it to be around 6.50% per annum.

The bonds will have a set maturity date of 30 years; however, Genesis will offer an election process after 5 years, enabling investors the chance to be repaid early if the election process is successful. We expect this process to run smoothly, enabling repayment after 5 years, subject to market conditions.

Genesis will cover the transaction costs for this offer. Therefore, clients will not be charged brokerage fees.

If you are interested in an allocation of these bonds, please contact us with the desired amount and the CSN you would use. We will send further information to those on this list on Monday, 26 June. Please note that requesting more information does not commit you to invest.

Seminars:

The program moves to Napier on Tuesday, June 20, then to Tauranga on June 26 and Hamilton on June 28.

The last round is in Ellerslie, Milford, and Whangārei on July 3, 4, and 5.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below), but some (not all) of our venues are roomy and can accommodate walk-ins if you are having trouble registering. Please contact our office if you need help booking.

To register yourself for our free seminar, please click on the relevant link below:

Napier

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/napier

Tauranga

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

Hamilton

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland - Ellerslie

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/ellerslie

Auckland - Milford

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round.

Travel:

Edward will be in Napier on both June 22 and 23 (Mission Estate).

Edward will be in Wellington on June 29.

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

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

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

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

Chris Lee & Partners Limited

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Market News 12 June 2023

Johnny Lee writes: 

A very eventful week for New Zealand investors has ended, as shareholders across a number of companies digest some major announcements. 

Pacific Edge’s (PEB’s) share price fell dramatically, after the company confirmed Novitas, the entity with Medicare jurisdiction for its US laboratory, would cease coverage of its tests on the 17th of July. 

These tests accounted for roughly 77% of its 2023 total revenue. This loss is devastating for the company, and caused a significant decline in the share price. The share price fell close to zero, before rebounding to close the day at 11 cents per share. Days prior, the price had hovered near 50 cents. 

The initial share price decline was undoubtedly an overreaction. Pacific Edge maintains a positive cash position in the tens of millions of dollars, affording the company a value in excess of what was suggested by the share price at the time. Unless the remaining assets of the company had a negative value, the company was pricing in a significant degree of panic. 

Nevertheless, the determination is disastrous for the company. To their credit, management immediately fronted shareholders, acknowledging the problem, and highlighting that the next steps the company makes will be critical to the company’s future. 

Pacific Edge may appeal the decision. It will need to weigh up the costs - and likelihood of success - of such an action. Shareholders will not want to see a prolonged and expensive legal battle unless a genuine error was made in Novitas’s determination and there was a realistic chance that such an appeal is successful. 

Pacific Edge may also look to pivot its growth strategy, although it is clear that many of its eggs were in one basket. Its contract with Kaiser Permanente remains in place for now, and there is potential for this to be an avenue of some growth moving forward. 

It may also look to further develop its suite of research and clinical evidence, providing a more compelling case to put before the likes of Novitas for future review. Such a step may take many years and comes with no guarantee of a positive outcome. 

All of these options remain on the table. For now, the company is doing what it can to control costs, implementing a hiring freeze and halting discretionary spending. 

Since the announcement, a large number of shares have changed hands as the market reacted to this significant setback. Some long-term shareholders have finally quit their holdings, while some new, perhaps more speculative holders have emerged. Larger sellers are selling to numerous smaller buyers, a pattern that often speaks to an evolving shareholder register. 

It has been a long and ultimately disappointing journey for Pacific Edge investors. The share price has had many false starts over the years, with the company successfully raising capital time and again to provide them with sufficient cash to reach milestones, before finding new and difficult roadblocks. This cash balance will sustain them during this difficult time, but the company will need strong leadership as it ponders its next step, and evaluates the best course of action going forward. 

EBOS Group (EBO) was another seeing a sharp share price decline last week, as it reported the loss of a major supplier contract.

The Chemist Warehouse has signed a supply contract with EBOS’s Australian competitor Sigma Healthcare, ending its five year contract with EBOS. This caught the market by surprise and will impact approximately $1.9 billion of revenue. For context, EBOS reported underlying revenue of $10.7 billion last year. The impact on Net Profit will be far more modest, but will still amount to millions of profit lost.

The contract expires in June 2024, meaning that the financial impact will not be immediate and EBOS has time to adjust. Realistically, this may also mean reviewing whether its previous investments made to support this space are still fit for purpose, or whether the loss of scale will require an adjustment on this capacity. 

This does not appear to be an instance of EBOS losing a contract due to poor service. More likely, the offer from Sigma was simply unable to be matched, putting EBOS between a rock and a hard place – match a contract on bad terms, or lose the contract altogether. 

EBOS first won the contract in July 2018, beginning its supply agreement in July 2019. At the time, the contract was expected to initially generate $1 billion in revenue and was a core rationale for much of the capital expenditure it committed in the lead up to that signing. 

On the other side of the deal, Sigma’s share price rose strongly in Australia after the announcement. Part of its agreement with Chemist Warehouse included issuing almost 11% of Sigma’s shares (after the issuance) to Chemist Warehouse. Despite this concession, it is positive news for Sigma, and gives them much greater scale to compete with EBOS. 

The equity component, combined with a previously disclosed investment relationship between Sigma and Chemist Warehouse’s CEO Jack Gance, has raised suggestions that Chemist Warehouse may use Sigma as a vehicle to reverse list on the ASX. If this is indeed the long-term intention, it casts further doubt as to whether EBOS can win back the contract in 2029. 

EBOS has spent the last five years diversifying its income streams, expanding further into its Community Pharmacy division, the medical devices sector, animal care and acquiring LifeHealthCare. It continues to hold a large cash balance, operates profitably, and carries relatively manageable levels of debt. 

However, the loss of this supplier agreement will be meaningful for the business. The first evidence of this – in terms of revenue – may not be seen until the half year results reported in February 2025. Such a lead time gives the company time to plan its future in this space, and shareholders a chance to query these plans as they develop. 

The share price fell about 15% on the back of the news, as analysts considered the impact to long-term earnings and growth. EBOS's next set of financial results are reported in August.

Air New Zealand (AIR) has updated the market, increasing its guidance even further from its last update. Its guidance has increased from a range of $510 million to $560 million, to ‘’no less than $580 million’’. Its 2018 result, pre-COVID, saw earnings before taxation of $540 million. 

Demand for air travel continues to increase, and jet fuel – a key input cost – has fallen in price. Notably, the company has ramped up its advertising and Grabaseat campaigns, as it tests the waters for domestic demand. Clearly, the appetite for travel is returning. 

There has also been a clear increase in advertising from abroad. Advertising agencies from the likes of Melbourne, Brisbane and even Texas have been reaching our airwaves, as the global travel market begins to heat up.  

Air New Zealand specifically commented that it expects airfares to trend lower in cost, as certainty around demand allows them to more accurately adjust its capacity. 

Air New Zealand had previously signalled that its August result would consider the payment of a dividend and discuss the approach to dividends going forward. Such a return would no doubt be welcomed by its shareholders, after years of no shareholder returns and a plateaued share price.

While this guidance update is merely a forecast, with the result formally expected to be announced in only two months, one can expect it to be accurate. 

August’s result announcement will provide shareholders with more clarity around the company’s strategy moving forward, as well as its intentions for shareholder returns. The company will need to balance any such return against the uncertain economic environment ahead of it. However, the guidance update shows that there remains significant demand for air travel, and that the recovery stage of its COVID strategy may be over.

Seminars

Our seminar programme continues.

Clients, friends, and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below) but some (not all) of our venues are roomy, so can accommodate walk-ins if you are having trouble registering. Alternatively, you can contact our office for assistance.

The venues which have some flexibility are:

19 June Palmerston North – Distinction Coachman – 11am28 June Hamilton – Ventura Inn 1.30pm5 July – Whangarei – Flame Hotel 10am

To register yourself for our free seminar, please click on the relevant link below:

Palmerston North

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/feilding-and-district

Napier

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/napier

Tauranga

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

Hamilton

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland - Ellerslie

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/ellerslie

Auckland - Milford

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Dunedin June 12 (before the seminar), Invercargill June 13 (before the seminar), Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round. 

Travel

Edward will be in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

Edward will be in Wellington on 29 June.

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

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

Johnny plans to visit Christchurch, Hamilton and Tauranga in July and August.

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

Chris Lee & Partners Limited

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Market News 6 June 2023

Another listed company has announced its intention to depart from our exchange, as technology mid-cap TASK Group focuses its attention on the Australian market and its primary listing on the ASX.

TASK Group, formerly known as Plexure, VMob Group, Velo Capital, Forge Media Group and Media Technology Group, is leaving the NZX in order to reduce costs and improve liquidity for its ASX listing.

Shareholders of TASK Group will vote in July whether to approve of the delisting plan. Assuming the vote passes, shareholders will then decide whether to hold Australian shares or sell their holdings.

TASK is one of a number of companies that has left our exchange over the last few years, with most citing cost-savings as the overriding driver of the decision. This is a troubling trend for both the market operator and investors in general, as investor choice can help promote both liquidity and efficient pricing. 

As these options for investments diminish, investors will increasingly look to invest overseas, or focus further on a shrinking group of the larger companies for which listing fees are irrelevant. It also presents problems for funds that invest specifically into New Zealand listed companies, as they exit and reinvest into other companies.

One step taken by the Exchange to help reverse this trend was the recent open letter published to the New Zealand Herald, requesting the Government take steps to address its concerns.

NZX CEO Mark Peterson put forward the idea of creating new investment vehicles, focused on national infrastructure projects, and listing them on the exchange. New Zealanders could then invest directly into the projects, helping reduce the debt burden placed on the Government when developing our much needed infrastructure.

Demand for such an investment vehicle would be significant, if structured correctly. The New Zealand investment community has always had a strong preference towards defensive assets, and would welcome an opportunity to improve our nation's infrastructure.

The open letter also included ideas around tax incentives for new listings, as well as making certain IPO requirements more accessible to smaller listings.

The NZX and the Investment Banking community are very well informed as to what barriers companies face when finding ways to access capital and growth. The barriers will differ between smaller companies - where cost is a greater issue - and larger companies, where access to capital and scale become more relevant. 

While the NZX simply cannot compete with the ASX on some of these points, there may be more technical barriers that are proving problematic to smaller companies when considering a public listing. Testing the advantages and disadvantages of these barriers is a worthwhile exercise.

TASK’s departure, should it eventuate, will see it join a growing list of companies leaving our shores. A number of our other, smaller companies are struggling with profitability and reviewing their own capital structures. TASK may not be the last to make such a move, if conditions do not improve.

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Peterson also makes the suggestion that the Government consider partially listing some state assets, similar to the Mixed Ownership Model seen following the 2011 election.

Considering the furore following the Auckland Council’s decision to explore decreasing its holding in Auckland Airport shares, this might be a forlorn hope. 

Despite this furore, it is looking increasingly possible that the sale of the Auckland Airport shares will proceed. While airports are not necessarily low-risk assets in this environment, there are many who will accept this risk at the right price. KiwiSaver funds, in particular, will have interest in acquiring some of the shares.

The drawn-out saga has also caused something of an overhang on the Auckland Airport share price, as potential buyers retreat, pending the potential of a major seller emerging. 

While the odds of a Government of either stripe pursuing a policy of selling its assets is low, there are a number of major, well-known companies that are privately held around the country, that would generate interest.

The likes of Vodafone, 2 Degrees, Gull, Vocus and TradeMe have all been linked to public listings over the last few years, with most finding a home with either private equity or within listed investment vehicles. 

The NZX will no doubt be well placed should any such company look towards a public listing. The investment community would also welcome it, as investors await new options to explore.

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Synlait Milk has announced it is looking to sell its recent acquisitions - Dairyworks and Talbot Forest Cheese - as its well-known debt burden begins to force its hand. The proceeds from the sales will be used to repay some of this debt.

Its share price responded positively to the news, and its bonds saw a marked improvement after several months trading at a steep discount. The price, while improved, still implies a small chance of non-repayment. Much will depend on exactly what value the market puts on these assets.

The Talbot Forest Cheese assets were acquired in August 2019, while Dairyworks was settled in April 2020. The strategic rationale at the time was that the assets would provide positive earnings, diversification and new growth streams for Synlait. Together, the assets were purchased for around $150 million, less than 4 years ago.

However, the company’s strategy has changed and it is now moving in a different direction. Synlait’s focus has returned to ‘’growing the highest margin segments of its value-add businesses’’. 

Early analyst expectations predict a valuation range below this $150 million figure, in some instances well below it. However, these assets have not had their value rigorously tested by the market. Synlait will need to prove it is a substantially better asset than that purchased five year prior.

And the market for such assets is also well off its peak. Borrowing costs are higher, appetite for risk seems low, and multiples on such transactions have changed.

Exactly who emerges as a buyer for these assets remains to be seen. One imagines that foreign appetite, if permitted, will be tested as part of the sale process. For the sake of the employees of these two companies, one hopes that the future owner will be committed longer term than Synlait was.

The announcement from Synlait included such effusive praise of the assets that it read more of a sales pitch to potential buyers, than an explanation to shareholders. Shareholders will instead read the announcement as one of a company that finds itself without a better option. Raising equity from shareholders was presumably considered and viewed as an inferior option.

Shareholder patience will not endure indefinitely. Synlait’s share price has underperformed for years now, after passing $10 a share in 2018. Profit guidance, published just months ago, suggested little to fuel enthusiasm in the company. 

The next step will be for Synlait and its investment bank to assess and test the value of the assets, before making a final decision as to whether a divestment will occur.

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Delisting

JPG – JPMorgan Global Growth & Income PLC will delist from the NZX with the final day of trading on Wednesday 21 June.

The shares will continue to be quoted on the London Stock Exchange (code: JGGI).

Any JPG shareholders are welcome to contact us to discuss this event and how it may affect them particularly as administering UK shares as a New Zealand resident can be onerous.

New Issue - Mercury Senior Green Bonds

Mercury NZ Limited (MCY) has announced a new 5-year senior green bond.

The initial interest rate has not been set, but a minimum interest rate of 5.40%p.a. has been provided.

The green bonds are expected to have an investment grade credit rating of BBB+.

The proceeds of the offer are intended to be earmarked to finance and refinance Eligible Projects in accordance with Mercury’s Green Financing Framework.

MCY will not be paying the transactions costs for this offer.  Accordingly, clients will be charged brokerage.

The bonds are expected to be listed on the NZX under the code: MCY060.

We have uploaded the investment documents to our website, and if you would like a FIRM allocation, please contact us no later than 9 June by 9am.

Seminars

Our seminar programme continues.

Clients, friends and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below) but some (not all) of our venues are roomy, so can accommodate walk-ins if you are having trouble registering.

The venues which have some flexibility are:

8 June Timaru – Sopheze on the Bay – 1.30pm12 June Dunedin – Edgar Centre – 1.30pm13 June Invercargill – Ascot Park Hotel – 1pm19 June Palmerston North – Distinction Coachman – 11am28 June Hamilton – Ventura Inn 1.30pm5 July – Whangarei – Flame Hotel 10am 

To register yourself for our free seminar, please click on the relevant link below:

Timaru 

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/timaru

Dunedin

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/dunedin

Invercargill 

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/invercargill

Fielding & District

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/feilding-and-district

Napier

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/napier

Tauranga

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/tauranga

Hamilton

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/hamilton

Auckland - Ellerslie

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/ellerslie

Auckland - Milford

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar/auckland/milford

Whangarei

https://www.eventfinda.co.nz/2023/chris-lee-and-partners-seminar-whangarei/whangarei

Please note that Chris will be available to meet clients in Christchurch on June 7, Timaru on June 8 before and after the seminar, in Dunedin June 12 (before the seminar), Invercargill June 13 (before the seminar), Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round. 

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Travel

David Colman will be in New Plymouth on 9 June, Palmerston North on 6 July, and in Lower Hutt on 7 July.

Edward will be in Blenheim on 15 June (Chateau Marlborough), in Nelson on 16 June (The Beachcomber), and in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

Edward will be in Wellington on 29 June.

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

Johnny plans to visit Christchurch and Tauranga in July and August.

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

Chris Lee & Partners Limited

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