Chris Lee & Partners Ltd

Market News 27 March 2023

Johnny Lee writes:

The Warehouse has published its annual results, announcing a lower profit and cancelling its dividend.

The headline result - record sales, but lower margins and higher costs - disappointed the market and sent the share price tumbling near 10%.

Grocery and The Warehouse (''The Red Shed'') both saw modest improvements on some metrics, while the other brands - Noel Leemings, Torpedo7 and TheMarket all saw a deterioration, in some instances a severe deterioration.

Inflation and declining consumer sentiment were blamed as the predominant drivers of the decline.

The cancellation of the dividend, while very disappointing for investors, should not have come as a surprise. Retail has been under pressure for some time now, both locally and abroad. 

When the company rebounds, dividends will return. After years of relatively benign economic conditions and strong dividends, companies are being forced to adapt, holding onto cash rather than paying shareholders. 

The company has a strategy in place to reverse the trend seen in the last twelve months. Part of that strategy will involve a strong focus on controlling labour costs. 

All New Zealanders will have seen the proliferation amongst major retailers - petrol stations, supermarkets, large format retailers, even restaurants and bars - to encourage customers to process transactions themselves. Between self-checkout, online ordering and touch-screen order placement, many sectors are now trying to minimise human involvement in these transactions.

The Warehouse, and indeed the retail sector in general, is keenly focused on such opportunities to remain ahead of the curve. The labour shortage nationwide has forced their hand.

Moving forward, the company intends to focus further on the Grocery division. As inflation continues to diminish discretionary spending, the grocery sector will be far more resilient than, say, clothing or toys. And ultimately, if customers are entering the building for groceries, there will be an opportunity to then promote other items.

The result, particularly the cancellation of the dividend, will be unwelcome news for shareholders. The share price responded negatively, but a plan is in place to address the drivers negatively impacting the result, with a hope to restore dividends in the half year result in November.

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Infratil has provided an update to market in the form of its Investor Day.

Even people who do not hold Infratil shares should make it a habit to read these announcements. Beyond being valuable as an insight regarding the infrastructure sector, it contains a number of interesting trends that the company is observing that may appeal to the curious of mind.

Infratil's largest investment is now the ''Digital Infrastructure'' division, which encompasses both One NZ (Vodafone) and CDC (Canberra Data Centres). Digital infrastructure now makes up over half of the company's portfolio.

The remaining half includes its renewables investments, healthcare investments and Wellington Airport.

The Digital Infrastructure arm has experienced enormous growth, particularly from its data centre investments. Forecasted capacity is expected to triple in the years ahead, with the current agenda seeing six more data centres being added to the portfolio across Australasia.

Infratil remains focused on highlighting the efforts it is making to minimise the environmental impacts of its data centres. Infratil, more than most, can see the direction the wind is blowing. Blunting potential criticisms and keeping major customers on-side will keep the industry in good stead.

Storing and using data remains a growth industry. Infratil quotes a study that estimates that within 7 years, 90% of major films would be produced using AI. Skillsets like script writing, marketing and even image design have been identified as areas where AI is already disrupting and expected to continue disrupting, using Generative AI to take text prompts and create a result.

The Renewables sector is another that is seeing some positive trends. Governments worldwide are spending more on incentivising renewable energy development, with the war in Ukraine providing an added incentive for some nations to remove dependence on fossil fuels. Infratil sees opportunities across the US, Australia, Asia and Europe for expansion in this space.

The Healthcare arm has yet to fully reach its potential. 

The aftermath of COVID has made it difficult to organically grow the sector. Competition is rising, and the labour force is not rising at the same speed.

Growth via acquisition, both locally and abroad, is now firmly on the agenda.

As a group, Infratil confirmed it is on track to meet its previous guidance, slightly narrowing its range.

Between its Digital, Renewable and Healthcare arms, the company has several distinct ambitions that it hopes to fulfil, taking advantage of trends emerging in the near future. Shareholders have been well rewarded so far, and the company intends to maintain that momentum.

David Colman writes:

Last week I had the privilege of attending the KangaNews-ANZ New Zealand Capital Market Forum 2023.

The day long forum included a number of well appointed panels covering a variety of topics including bank regulation, bond issuance, asset allocation and climate related investments.

Panel members were from the World Bank, Treasury, Local Government Funding Agency, NZX Smartshares, NZ Debt Management, Toitu Envirocare, Transpower, and a number of active fund managers and other financial institutions.

Individual speakers included Grant Robertson (current finance minister), Bill English (former finance minister), Paul Conway (RBNZ Chief Economist) and Sharon Zollner (ANZ Bank NZ Chief Economist).

The flooding earlier this year, cyclone Gabrielle, and recent events in the USA and Switzerland banking industries, were frequently referenced by most panels, and individual speakers, with various different views shared relating to how the events affect New Zealand's capital markets, and its economy more broadly.

Not surprisingly, inflation, staff shortages, and central bank expectations were also major subjects discussed and commented on.

I am sure to reference information gathered on the day, from the marvellous depth of industry knowledge presented, in future but in simple terms I concluded the following three points, some of which will be obvious to our readers already.

1. Fixed interest will continue to be a more popular asset class than it had been during the most intense period of covid-19.

Central banks around the world have been forced to raise rates in efforts to rein in inflation and this has resulted in better returns at the more conservative end of the risk spectrum.

Savers are now being rewarded after the many years of QE post-GFC that lowered government bond rates (for example) to practically zero. A five year government bond offers a yield above 4%p.a. today and many company issued bonds have been listed at rates well above 5%p.a. this year.

The increase in interest rates available has led to many investors adjusting asset allocations to include more fixed interest assets in contrast to many portfolios in the late to mid 2010s which favoured a greater allocation to shares.

Term deposits and bonds in some cases offer income at levels in excess of gross dividend yields. Growth assets including small cap stocks that offer no, or very low dividend income, have been sold off in a market that can lack liquidity for large orders that can push prices lower, faster when there are much fewer buyers than sellers.

The active fund managers present at the forum appeared to agree that they do not see a change to the current conditions that prescribe a greater allocation to fixed interest investments happening in the near future.

Notably many managed funds have historically higher levels of cash within portfolios in addition to targeting a greater allocation to fixed interest assets.

2. We face a bumpy ride ahead in more ways than one.

Grant Robertson stated that he doesn't see the idea of 'normal' conditions any longer and noted he is now facing situations as they happen which I worry signals reactionary policy may be hastily implemented in favour of proactive policy.

Bill English was not the first to suggest that neither of the much referenced 'soft landing' or 'hard landing' may happen and that we may be facing 'no landing' at all which I assume may mean economies bounce in and out of recession more frequently and perhaps inflation not stabilising to within the RBNZ's 1% to 3% target range.

The recent banking fragility is a reminder that expectations of higher interest rates can be thwarted by the real risk of losing money when banks are poorly governed and detrimentally managed. Once depositors lose confidence money can be rapidly pulled in a digital world.

Higher interest rates that attract savers will hurt borrowers including banks and may push companies with lower yielding assets, high levels of debt, and poor capital management to the brink and beyond.

On the back of the Credit Suisse tier 1 note holder write off, New Zealand banks potentially face having to offer higher rates for that category of subordinated debt despite different treatment for the notes here than that specific case. Heartland Bank has been understandably silent regarding a signalled offer of subordinated notes that it originally intended to announce in the middle of this month. We suspect this note issue has been deferred or cancelled.

The bumpy ride may be set to continue but let's not forget that the Federal Reserve and its central bank peers including the RBNZ will primarily target bringing inflation down.

Unfortunately, we don't know, and neither do central banks, precisely what effect their more recent actions have had on inflation yet and will only find out when data, which will already be perhaps months old, is released.

Despite much talk of an upcoming interest rate peak and then decline, rate hikes are still anticipated in the months ahead and there will be ramifications for borrowers.

Sharon Zollner commented that prospective house buyers in Auckland may be becoming more accepting of where rates have got to, especially on the basis of the lower house prices well off recent peaks. This is a somewhat encouraging sign that there are borrowers that are comfortable with interest rate settings as they are.

3. Companies will face more scrutiny and higher compliance costs.

Environmental, Social, and Governance (ESG) concerns have become common considerations for investors with many investors, including individuals and institutions, refusing to invest in companies that do not meet ESG standards.

Environmental measures to meet climate change policies will increasingly be imposed on corporations and will be scrutinised more closely by regulators.

Carbon credits already form part of a strategy to positively influence corporate environmental behaviour and there are biodiversity initiatives, which are well advanced, very likely to come.

Businesses will increasingly be required to more accurately measure their impact on the planet and will be required to meet strict standards to protect the biodiversity in the areas they operate. The complexity and cost to meet these standards is likely to be substantial.

Social goals for companies include standards such as minimum wages, leave, and workplace conditions but many companies offer other benefits such as living wages and more flexible hours.

Governance standards are critical. Experienced and reputable directors are crucial to the decision making of the company they serve. The disgraceful Mainzeal saga is a case in point.

I would like to thank Kanga News and ANZ for hosting me at their event and expect much of what I learnt on the day will filter through to future newsletters.

New Issues

 

Contact Energy Green Bonds

Contact Energy (CEN) has confirmed it is offering up to $300 million of 6-year fixed rate, senior green bonds.

A minimum interest rate of 5.40% per annum applies which may be higher when the rate is set on Thursday.

Contact has confirmed that it will not be paying the transaction costs for this offer, accordingly brokerage will be charged.

The bonds will be listed on the NZX using the code of CEN080.

Contact has an investment grade credit rating of BBB (stable outlook) and the bonds are expected to be assigned a BBB rating.

Contact will use the proceeds to finance and refinance renewable generation and other eligible green assets in line with Contact's Sustainable Finance Framework.

The offer has opened today and closes at 9am Thursday 30 March.

More details of the offer will be available on our website under current investments.

Christchurch City Holdings (CCHL)

CCHL is offering 5-year unsecured, unsubordinated, fixed rate bonds to both retail investors and institutional investors. The bonds mature in April 2028 and will be quoted on the NZX Debt Market alongside existing debt securities (CCH020). CCHL has a Standard and Poor's credit rating of AA and a stable outlook.

Full details of the upcoming bond issue will be released this week.

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Travel

Edward will be in Napier on 30 March (Crown Hotel) and 31 March (Mission Estate) and will be in the Wairarapa on 3 April. He will be in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Chris will be in Ellerslie tomorrow morning, on the North Shore on March 28 (pm) and in Ellerslie again on March 29 (am). He will be in Christchurch on April 18 and 19.

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

Fraser will be in Dunedin on Thursday 27 April.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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Market News 20 March 2023

Chris Lee writes:

IN banking, the cliché that if one finds a cockroach start looking for others, is a cliché that is meaningful.

If a bank is lending to second-hand car dealers and discovers a dealer has been switching its low moving stock by displaying as ''sales'' what was really a ''temporary swap'' with another dealer, a wise banker will know that this practice might be the newest swindle amongst many used car dealers.

A banker should know that in stressful times, when sales are constipated, the dealers are tempted to hide their problems with phony behaviour. He will initiate a new audit of car dealer clients.

The same games are played by stressed property dealers who will ''sell'' to their mates, agreeing to ''buy back'' when the auditors have gone home.

The likes of Bridgecorp did this before it collapsed, most egregiously when it ''sold'' assets to an accountancy firm on March 31 and bought them back three days later, thus hiding them from their balance sheet at year end, sidestepping their auditors and the regulators.

Now we have seen several American banks, of significant size, fail, guilty of hiding problems. The world must start looking for other cockroaches.

Silicon Valley Bank lent billions to companies that would need many years to achieve credibility. So it had two areas that were on public view only after it collapsed in recent days. It had not been prompt in marking to market the billions of unlent cash that it stored in long-dated mortgage backed securities. And it hides bad debts.

When interest rates rose, those mortgage-backed securities fell in market value by nearly two billion. They had to be sold at market to enable their depositors to be repaid.

Somehow, this mark to market exercise was not deemed to be compulsory every year and SVB's loan portfolio was funded excessively by term deposits that were repayable long before the loan would be repaid. The polite words for this are an asset/liability maturity mismatch. When investors wanted their money, securities had to be sold for far less than book value.

A third, as yet unaddressed, problem was the increasing likelihood that the loans to start-up technology companies look troubled, as interest rates rise, and as growing numbers of start-ups face at best delays, and at worst failures, in earning profits. There will be more bad debts.

As we have seen today, the world is now on red alert, anxiously initiating a cockroach hunt.

One focus will be on deposit maturity/loan repayment schedules being mismatched, borrowing short, lending long.

This practice can be hidden by lending for ''six months'' but with unwritten agreements to rollover loans for five years. This makes the lending look short term, and hides the mis-match.

Another concern will be the integrity of the provisioning for bad loans.

Fifteen years ago Europe's central bank and various sovereign funds rewrote their stupid loans to Greece at nil interest rates, repayable in 30 years, with no payments due till then.

The bad loans thus did not need to be displayed and provisioned. How can a borrower be in default if no repayment is due for 30 years?

A further focus will be on how assets are valued.

Property valuers, or at least the dishonest element in that area can find a valuation model to satisfy whoever is paying the valuer's bill. Banks who over lend to property companies should be anxious.

What is the value of a property, used to secure a loan, if the property is to lose its tenant and has only a forlorn hope of replacing the tenant at the same level of rent?

Competent banks are now on red alert, just as they were in 2008. They will be looking under the stones for a squadron of cockroaches.

They will wonder which banks are pure, and which have been hiding contingent liabilities, or bad debts, or derivative problems.

They will consider which banks would struggle to raise capital, and which banks simply could not raise capital in a crisis.

Investors everywhere will be watching for the signals.

The listed banks in NZ may have few, if any, nasty secrets but they would be wise to be prepared for the tremors that follow earth-shattering events in countries where our banks may have exposure, and where the silliest of our fund managers have exported our investors' money.

When the world's sixth biggest bank fails, the Richter scale reaches for its higher levels.

When the 8,000 banks in the USA are calling for unlimited, long time unconditional taxpayer guarantees, the Richter scale is even more dramatically moved.

All of this drama has its roots in the decisions by politicians and central banks to print trillions of dollars in the last three years, creating utterly false demand, and sending utterly misleading signals to anyone who wanted to believe that funny money is a cure.

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David Colman writes:

Kiwi Property Group's new issue of 6.5 year senior secured green bonds closed on Friday and we thank clients that participated. The bonds will provide investors with an interest rate of 6.24%p.a. until 27 September 2029.

For those that missed out we may be able to access more. Please contact us if this is of interest to you. _ _ _ _ _ _ _ _ _ _ _ _ Synlait Milk Limited (SML) provided an update that indicates its recovery will take longer than anticipated. The guidance range for full year 2023 net profit after tax (NPAT) is between $15 million to $25 million, well below NPAT of $38m for full year 2022. The company that primarily produces a range of nutritional milk products was scheduled to include full year NPAT guidance upon release of its half year results later this month but provided guidance early as it is outside market consensus. CEO Grant Watson observed that it is increasingly clear that Synlait's full financial recovery will now take three years, instead of the planned two years, despite underlying momentum lifting. Full year 2023 guidance will reference reductions or delays in advanced nutrition demand following forecast changes by Synlait's largest customer in half year 2023 and more recently by other customers. Operational stability and cost challenges are evident across Synlait, including a reduction in milk processed, raw material supply challenges, C02 shortages, an extremely tight labour market, extreme weather events, and high inflationary costs pressures. SAP business software stabilisation challenges were signalled in December. Implementing and stabilising the SAP system significantly impacted Synlait's ability to release and ship products to customers in the first quarter of FY23.

The flow-on effects resulted in higher inventory levels and costs, including interest costs. The software initially cost $57.5million in 2022 and evidently took up to 6 months longer to integrate than planned. The performance of Synlait's ingredients and consumer businesses remains strong. Commercial UHT cream sales commenced as planned in the Foodservice business, and market feedback is positive. Synlait's half year results will be released on Monday 27 March 2023 and will include detailed full year 23 guidance. The SML share price fell significantly following the announcement. _ _ _ _ _ _ _ _ _ _ _ _ Auckland Airport (AIA) announced its massive multi-billion-dollar redevelopment AIA confirmed it will replace the 57-year-old domestic terminal as part of its biggest redevelopment since the airport opened in 1966. After consultation with its major airline customers since May 2011, including 21 concept designs, AIA has concluded that the domestic and international terminals will be integrated with goals of resilience, building to meet climate change goals, and to create a more sustainable airport. The project is moving into the final stages of design as part of an estimated $3.9billion construction programme to take place over the next five to six years. There will be $2.2b for the combined terminal with the remainder on a number of other key projects associated with that development. The terminal integration programme will involve an expansion at the eastern end of the existing international terminal. The programme will also enable key airfield upgrades to assist the AIA goal of resilience. Carrie Hurihanganui, Auckland Airport's Chief Executive, indicated that simple renovations will not satisfy customers wanting modern spaces, efficient passenger processing areas, improved bathroom facilities and faster baggage systems, as well as better connections between domestic and international travel and via public transport and Auckland city. Expected improvements include shorter passenger transfer times between flights, smart baggage systems, faster links to public transport and 12 new (20% more) domestic gates. Pre-covid, 62% (9.6 million) of all domestic passengers in New Zealand and 11.5 million international passengers (including transits) passed through Auckland Airport each year. Airport infrastructure will also be improved with sustainability in mind. For example ground power units will be installed at each gate to supply power to aircraft, helping to reduce fuel use. Airports Council International (ACI) estimates around $US2.4 trillion needs to be spent on global airport infrastructure over the next two decades, more than half of that investment in the Asia Pacific region. The majority of investment is going into modernising and enhancing existing airports. AIA is in consultation with airline customers over the increasing charges they will pay in the future in line with the Commerce Commission's regulatory disclosure framework and target return parameters which are updated, reviewed and reported every 5 years. Domestic charges airlines currently pay are 40% to 50% less than comparable airports in Australia and New Zealand due to the aging terminal. The $7 domestic charge per passenger typically made up about 3% to 4% of the cost of an average domestic airfare in 2022. AIA is due to set prices for the remainder of the price setting event for the 2023 to 2027 financial years (PSE4) by the end of June this year. The new domestic terminal is expected to open between 2028 and 2029 and is expected to create 2,000 additional jobs at its peak.

Following this announcement, it is highly likely, in our opinion, that Auckland Airport will need to raise a significant amount of capital over the next 12 -36 months. _ _ _ _ _ _ _ _ _ _ _ _ Pushpay Holdings (PPH) has a new Scheme with an increased price.

Pushpay is a New Zealand Software as a Service company providing donation management systems predominantly to the USA faith sector (the company has a market capitalisation a little over $1.5 billion dollars).

The company received a takeover offer by way of a scheme of arrangement at $1.34 a share which was unsuccessful after a shareholder vote did not meet the conditions required for the scheme to proceed.

The consortium (which controls approximately 20% of PPH) consisting of a global investment firm and an Australian private equity firm has returned with a new scheme at a higher price with hopes the increased price will attract the number of votes required.

For the Scheme to proceed, it is necessary that both of the two voting thresholds are met, being 75% or more of the votes of shareholders who are entitled to vote and who actually vote must be voted in favour of the Scheme (this did not occur with the earlier proposal at $1.34); and that more than 50% of the total number of PPH shares on issue vote in favour of the Scheme. If the new scheme is approved, shareholders will receive cash consideration of NZ$1.42 per share, an increase of 6% from the previously offered consideration of NZ$1.34 per share. Six (ACC, New Zealand Superannuation Fund, ANZ New Zealand Investments, Fisher Funds, Nikko Asset Management and Salt Funds Management) of Pushpay's seven largest New Zealand-based institutional shareholders that voted against the previous Scheme, that in aggregate control 18.6% of the shares, now intend to vote in favour of the Scheme. A small number of sophisticated, professional offshore fund shareholders (curiously described as event driven) controlling in aggregate 10.3% of PPH have also entered into commitments to vote in favour of the Scheme and receive the original cash consideration of NZ$1.34 not the $1.42 applicable to every other shareholder. Non-Conflicted Directors unanimously recommend that shareholders vote in favour of the Scheme as they intend to do. A new Scheme Meeting will be held for Pushpay shareholders, with previous votes no longer valid. The Scheme remains subject to PPH shareholder, and New Zealand High Court approvals, and is also subject to other conditions, including the absence of material adverse changes. The new offer of $1.42 is a 6% increase to the previous offer, and a 37.9% premium to PPH at $1.03 on 22 April 2022 before any scheme was conceived, and might be more certain to proceed. The increased consideration is near the mid-point of Grant Samuel's assessed valuation range of NZ$1.33 to NZ$1.53 per share, as set out in their Independent Adviser's Report dated December 2022. More details regarding the new scheme including a timetable of events is expected in April 2023. _ _ _ _ _ _ _ _ _ _ _ _ Fonterra (FSF) reported its 2023 interim results Fonterra upgraded the full year forecast normalised earnings from 50-70 cents per share to 55-75 cents per share. The Co-op delivered a half year Profit After Tax of $546 million (up $182m compared to the same time last year), earnings per share of 33 cents, and will pay an interim dividend of 10 cents per share.  Its full year forecast normalised earnings increased from 50-70 cents per share to 55-75 cents per share and proposes to return capital of 50 cents per share, subject to completion of the sale of its Chilean Soprole business.  Fonterra CEO Miles Hurrell heaped praise on the Co-op referencing its scale and diversification which enabled it to make the most of favourable market conditions in a number of areas, against a backdrop of ongoing market volatility. Strategies included using more milk in skim milk powder and cream products (with whole milk powder prices down), and moving a higher proportion of current season milk into cheese and protein with favourable margins.      Fonterra noted that the ingredients channel performance had achieved normalised EBIT up by $494 million, up 118%, on the same time last year to $911 million. Consumer and foodservice channels were noted to benefit from improved in-market prices, with Foodservice normalised EBIT up $81 million, or 95%, to $166 million. Higher input costs and ongoing margin pressure have impacted overall consumer channel performance. A strong full year dividend was indicated in addition to the proposed capital return. Fonterra Brands New Zealand (FBNZ), the domestic consumer business, continues to be under margin pressure and is not improving as fast as planned. Asia consumer brands are impacted by currency weakness in the markets they operate, higher interest rates and some countries' declining economic conditions. The valuation of FBNZ was revised down by $92 million and the Asia consumer brands Anlene, Chesdale and Anmum by $70 million.  Consumer channel normalised EBIT was down $177 million to a loss of $94 million.   The storms and flooding in January and February delayed some product getting onto ships.   Fonterra has previously stated an intention to return around NZ$1 billion to shareholders by FY24, subject to the outcome of reviews of its ownership of Fonterra Australia and Chilean Soprole business. Fonterra Australia will be kept but the sale of Soprole will continue with proceeds intended to be used to reduce debt and return approximately $800 million (approximately 50 cents per share and unit).  The proposed tax free capital return is planned to be announced in late September 2023 and paid in October. The capital return will require a Scheme of Arrangement to be voted on by shareholders, and approval by the High Court.   Fonterra plans to continue supporting liquidity as farmers transition to Flexible Shareholding including new market maker arrangements and an on-market share buyback between 28 March 2023 and 9 June 2023.      Manufacturing sites are still planned to move away from coal by 2037. A partnership with PolyJoule, a Massachusetts Institute of Technology (MIT) spin-off, to trial the world's first industrial scale organic battery at Fonterra's Waitoa manufacturing site is intended to improve energy security in addition to the facility's switch to burning biomass instead of coal. Full year 23 Outlook was positive with high demand for NZ dairy but risks remain including the impact of recent weather events on supply chain and milk production.

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New Issues

Contact Energy Green Bonds

Contact (CEN) has announced that it is considering making an offer of 6-year fixed rate, senior green bonds. It is likely that these bonds will have an interest rate above 6.00% per annum.

Contact has an investment grade credit rating of BBB (stable outlook).

Contact will use the proceeds to finance and refinance renewable generation and other eligible green assets in line with Contact's Sustainable Finance Framework.

The offer is expected to open, with more details released, on the week beginning Monday, 27 March.

Heartland Bank subordinated notes

Heartland Bank Limited is considering issuing a subordinated note over the next month which based on market conditions could offer an interest rate of around 6.50 – 7.00%.

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

The Notes are expected to have a credit rating of BB+ from Fitch Australia Pty Limited.

It was expected that full details of the offer would be released in mid-March 2023 but Heartland are yet to announce further details.

Please contact us if you would like to be pencilled in our either of these issues and we will contact you once further information has been released.

Travel

Edward will be in Taupo on 21 & 22 March, and in Wellington on 24 March.

He will also be in Napier on 30 March (Crown Hotel) and 31 March (Mission Estate) and will be in the Wairarapa on 3 April. He will also be in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Chris will be visiting Christchurch on March 22 (FULL), seeing clients at the Russley Golf Club. (Johnny is unable to travel for family reasons).

Chris will be returning to Christchurch on April 18 and 19 (not yet full).

Chris will be in Ellerslie on March 27 (pm) and 28 (am), on the North Shore on March 28 (pm) and in Ellerslie again on March 29 (am).

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

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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Market News 13 March 2023 David Colman writes:

Federal Reserve Chairman Jerome Powell's brief speeches to Congress on Wednesday and the House Financial Services Committee on Thursday last week seemed to shock US economists. Powell simply stated that the Fed will move interest rates higher with expectations of these higher rates being imposed for a longer period of time than previously thought. Any shock experienced was likely due to Powell's notes on disinflation in February. The Fed was anticipated to raise its benchmark interest rate by 0.25 percentage points at its meeting later this month, with perhaps two more increases before stopping at a potential 5.25% peak. Powell cautioned that if inflation data remains strong, he expects rates to go higher and possibly faster than the current projections which raised the possibility of a 50 basis point increase next and a potential peak of perhaps 5.75%. Data will largely dictate what the Fed does next, just as it does here for the Reserve Bank of New Zealand (RBNZ). Fed commentary and our local RBNZ have been trying to prepare us all for higher rates that may be around for longer. US markets have been fixated on predicting an interest rate peak and subsequent decline with policymakers concerned that rates remaining higher-for-longer would be economically damaging. The traders in global markets have been overly optimistic that inflation will fall as dramatically as it has risen.

Many old-timers, sages such as the founder of the giant fund manager, GMO, believe the optimism was just 'noise' and would not alter the market's downward trajectory, which the GMO founder, Jeremy Grantham, sees as inevitable. The Fed becoming more aggressive would tend to continue downward pressure on shares and push the US dollar higher. Fears that higher borrowing costs would force business failure were realised when the failure of Silicon Valley Bank (SVB) unfolded on Friday. A run on the bank, when overwhelming numbers of depositors ask to withdraw their funds as quickly as possible, required the Federal Deposit Insurance Corporation (FDIC) to sweep in, take control and shut down the bank. In a rare move, this was done during opening hours, as it was projected the bank would not survive the day.

SVB will most certainly prey on markets. One must hope that it is the only ''cockroach'' to emerge. (Since writing, Signature Bank based in New York has also been taken over by regulators). The 40 year old SVB bank was significant but small, by US standards, with US$209billion in total assets and US$175.4billion in total deposits. For comparison NZ's largest bank is ANZ NZ with NZ$190b (US$116b) in total assets and NZ$138b (US$85b) in deposits. The biggest 4 US banks are measured in trillions. SVB was one of the 20 largest banks in USA but is expected to mainly affect customers, including tech start ups desperate for funding, in Silicon Valley and the wider San Francisco Bay Area. SVB depositors that chose to insure their deposits with the FDIC will receive any funds up to US$250,000 in deposits but there will be many at risk of losses due to the bank failure. New Zealand is looking at employing a similar deposit insurance scheme, with a limit of NZ$100,000. Higher central bank rates may be struggling to break the inflation chains that bind us all but, evidenced by the SVB failure, have worrying potential to destroy businesses that have bet on cheap money.

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Ryman Healthcare (RYM) concluded its fully underwritten $902million capital raising on Friday. The owner and operator of 45 retirement villages across Australasia with more than 13,000 residents and 6,800 staff conducted the capital raising to greatly improve its balance sheet with the repayment of costly USPP (United States Private Placement) loans. The final stage of the 1 new share for 2.81 rights issue was the Retail Shortfall Bookbuild which provided investors the opportunity to buy new shares that were not taken up in the retail component of the rights issue. The shortfall of those shares not exercised were sold through a bookbuild at $5.25, with the 25c premium above the $5.00 exercise price paid to either those that chose not to participate or those who were ineligible. This premium will be paid to applicable investors on or about the 14 March. Approximately 25 million New Shares were offered for sale in the Retail Bookbuild. This was well supported with scaling applied to institutional and broker bids. A clearing price of $5.25 per New Share was achieved which represents a premium of $0.25 above the offer price of $5.00 per New Share. Additional Shares applied for in the Retail Entitlement Offer will be allocated at the bookbuild price. Allotment of new shares acquired through the retail component of the capital raising will be on Tuesday. Ryman CEO, Richard Umbers was quoted as being pleased with the level of support received across both the retail and institutional components of the equity raising and expects proceeds from the equity raising to enable Ryman to execute its growth framework and maintain the high standard of care for which it is known. Ryman will repay the USPP Notes, and significant costs associated with the notes, in full, using proceeds from the equity raise. Ryman through the support of the investment community will end up with debt of $2.25 billion down from $3billion before the capital raising. The Ryman shares were trading at $6.40 before the raising and closed on Friday at $5.28. The shares traded as high as $14.00 as recently as September 2021. They briefly traded above $16.00 before the covid-19 pandemic. -- New Zealand Rural Land Company (NZL) is in the middle of its own capital raising and has successfully completed the institutional entitlement offer component of its pro-rata accelerated renounceable entitlement offer. The funds will be used for the acquisition of a 2,383 hectare forestry estate in the Manawatu-Whanganui region.

NZL will own over 14,000 hectares of rural land following the acquisition.

The transaction is forecast to increase FY24 earnings and dividends per share by 17% (from between 4cps and 4.5cps to between 5cps and 5.5cps).

NZL will continue to look for rural land acquisitions to hold long term for potential capital growth and lease income. The institutional offer raised $10.486 million at $1.00 per new share. Institutional shareholders have also applied for $4.535m of any potential shortfall with any shortfall advised after the close of the retail offer on Wednesday. The retail entitlement offer offers eligible shareholders the ability to buy 1 new share for every 3 held (any new shares bought also conveys 1 new warrant for every 3 new shares applied for). For example: a shareholder with 9,000 shares would be entitled to apply for 3,000 new shares which would additionally result in 1,000 warrants being issued to them.

Each Warrant gives shareholders the right, but not the obligation, to subscribe for one additional ordinary share in NZL on or before the expiry date, for an exercise price of NZD$1.20. The expiry date of the warrants is 30 November 2025 with the warrants listed on the NZX under the code NZLWA.

The application price of $1.00 reflects a 5.7% discount to the closing price before the offer was announced on Monday, 27 February 2023 of $1.06, a 4.3% discount to the theoretical ex-rights price (TERP) of $1.05 and a 39.5% discount to the NAV per share (as at 31 December 2022). Eligible retail shareholders can choose to take up their entitlement in whole, in part or not at all.

There will be no trading of entitlements on the NZX.

Shareholders who take up their full entitlement may apply for additional new shares by specifying the dollar amount of additional shares in their application. Applications are due no later than 5:00pm (NZT) on Wednesday, 15 March 2023.

An offer document is available for eligible retail shareholders here: http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/NZL/407533/389757.pdf -- The new Global Treaty for Ocean Biodiversity announced last week was welcome news and allows me to end Market News on a somewhat positive note. Diplomatic channels that ideally involve dialogue, handshakes, compromise and photo opportunities are seemingly being replaced by rhetoric, closed doors, intransigence and propaganda. Globalisation, which continued its advance early this century, is in retreat, after covid-19 disruption derailed it, many countries adopting more protectionist policies. The USA is looking to limit the leaking of its technology, particularly used in microchips, which can be used to advance military capabilities. China, which for some time became the factory of the world, is on a path towards becoming more self-sufficient, especially in terms of technological advancement. Countries appear to be more hostile towards each other with military spending increases widely reported. So it was a pleasant surprise that after 20 years of negotiations at the United Nations an international agreement to protect the sea has been signed. The agreement is intended to protect oceanic regions of the world that contain high levels of biodiversity particularly under pressure from human activity including overfishing, climate change and ocean acidification. The international community will establish marine protected areas and set clear procedures for assessing the environmental impacts of human activities. In the background geopolitical tensions remain high (the terrible conflict in Eastern Europe is now more than a year old) but the agreement is a sign that much needed international cooperation can happen. --

New Issues

Kiwi Property Group Limited senior secured green bonds

Kiwi Property (KPG) announced an offer of $100 million 6.5 year fixed-rate senior secured green bonds with an option to accept $25million in oversubscriptions.

The offer is expected to open on 14 March and close on 17 March.

The offer is expected to open, and a minimum interest rate will be determined, tomorrow. The green bonds have an S&P credit rating of BBB+. Kiwi Property will apply the net proceeds of the Offer to repay existing bank debt. The bonds will be listed on the NZX with the ticker code KPG060. Kiwi Property is one of New Zealand's largest listed property companies with a portfolio that includes mixed-use, large format retail, and office buildings with a combined valuation of over $3billion. Property valuations are vulnerable in the face of inflation, employee shortages, falling household discretionary income, and interest rate rises. KPG's property portfolio valuation fell by over $200million (5.8% decrease) for the 6 months ended 30 September 2022 with a further preliminary decline of $134million (4.1% decrease) announced by KPG on the 6 March. Annual results are due to be released on 22 May. Net rental income recently rose to a record $100million in the first half of 2023. Occupancy is close to 100% with portfolio vacancy at a low 0.3%. Sylvia Park represents almost half of the portfolio's valuation and has been a significant driver of growth for the company. The expansive retail precinct has seen shopper numbers recover broadly in line with pre-pandemic levels. The company has $217 million worth of current development including the 3 Te Kehu Way 6 story medical and office building, and the Sylvia Park build to rent apartments (296 units planned), but is more cautious towards any further development activity, including at the Drury site, under current economic conditions. A product disclosure statement is available for investors to evaluate the bond offer here: 

https://www.chrislee.co.nz/uploads//currentinvestments/KPG060.pdf

Heartland Bank unsecured subordinated notes

Heartland Bank Limited is considering making an offer of up to $125 million of unsecured subordinated notes.

The Notes are expected to constitute Tier 2 Capital for Heartland Bank's regulatory capital requirements with a 10-year maturity date, but may be redeemed after 5 years or on any quarterly Interest Payment Date after that date.

The Notes are expected to have a credit rating of BB+ from Fitch Australia Pty Limited.

It is expected that full details of the offer will be released in mid-March 2023 and an interest rate above 6.50%p.a. is possible.

Please contact us if you would like to discuss any of the above investments.

Travel

Edward will be in Blenheim on 17 March, in Taupo on both 20 & 21 (AM only) March, and Wellington on 24 March. He will also be in Napier on 30 March (Crown Hotel) and 31 March (Mission Estate) and will be in the Wairarapa on 3 April.

Chris will be visiting Christchurch on March 22 (FULL), seeing clients at the Russley Golf Club. (Johnny is unable to travel for family reasons).

Chris will be in Auckland and the North Shore on March 27-29.

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

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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Market News 6 March 2023

Johnny Lee writes:

Investors will be spoilt for choice in the coming months, as long-awaited bond offers begin to come to fruition.

After a quiet January, the likes of ANZ, Wellington Airport, Summerset, Meridian, Kiwi Property Group and now Heartland Bank have all made their way into e-mail inboxes around the country, seeking to raise money from investors.

A number of rumoured issuers lie in wait behind this cohort, unconfirmed but likely, as interest rate swaps continue to creep higher.

There are a number of reasons why companies are rushing the market. Those fearing rising interest rates may accelerate or increase the size of issuance, while those repaying bonds may simply be raising money to replace this repayment.

There is something of an art when it comes to the timing of these issues. Multiple overlapping bond issues can introduce uncertainty and competition around demand, which in turn can affect pricing.

All of these recent bonds are not created equal, of course, as some are targeting specific investor demographics. Green bonds tend to find themselves in the hands a particular type of investor, while subordinated and unsubordinated securities each make their way into different investor types in turn. Managed funds may have certain limitations that govern which bonds fall into their portfolios.

A retail investor can make the same determination, selecting the bonds that best suit their needs. While the ''green'' aspect of these bonds is rarely a motivating factor for retail investors, bonds with fixed maturity dates and a fixed rate of return do tend garner more interest than the more complicated products.

Another point worth reiterating in regard to these bonds is tenor, or the duration until maturity, of the bonds on offer.

Meridian intends to offer a 5.5-year bond with a minimum interest rate of 5.70%. Summerset was a 6-year bond at 6.59%, while Kiwi Property Group will offer a 6.5 year bond (likely around 6.50%), and Heartland a 10 year bond (likely between 6.50% and 7.00%), with an option to redeem (at Heartland's discretion) the bond after 5 years. Investors will be familiar with this structure, and the various risks associated with it, following similar issues over the last decade.

Tenor will be relevant for those with a maturity profile that became imbalanced during the COVID pandemic. 2027 and 2028 maturities are generally plentiful across the New Zealand debt exchange, and investors who seek to balance their maturing money may be likely to prefer bonds that mature outside of their existing profile.

Investors also vary in desired tenor – some prefer shorter dated securities, others prefer longer dated securities. For longer dated bonds, liquidity becomes a factor – strong issuers tend to see greater liquidity in times of distress, while weaker issuers will see either no liquidity, or heavily discounted liquidity.

The Heartland offer, being listed, does offer liquidity for those concerned about the tenor. By contrast, SBS Bank, which is offering a subordinated debt issue to its customers at 7.50% at the moment, will be unlisted and cannot be bought through brokers. 

The SBS offer also carries a 10-year duration - redeemable after five years. The lack of transparent liquidity means that the coupon, or initial interest rate, needs to compensate by rewarding this added risk.

Bond issuance is beginning to pick up, and some signs are suggesting there is more to come. Interest rates are improving, leaving investors with the opportunity to lock in long term deposits at rates well in excess of the decade average. On the other side of the ledger, borrowers will now be facing a difficult choice. Borrow short – hoping that rates subside – or bite the bullet and lock in long-term, fearing further rises.

Clients on our Investment Opportunities e-mail list will likely be notified by us soon.

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The Pushpay saga has devolved into a wrestling match, as investors line up with and against the board.

Pushpay is a New Zealand SaaS company – Software as a Service – valued at roughly $1.4 billion dollars, similar in market capitalisation to Kiwi Property Group or Heartland Bank.

Pushpay offers software solutions, primarily to American religious institutions, to assist churches and parishes with connecting with their members, facilitating services such as meetings, sermons and donations.

After years with a share price hovering around $4, the price doubled to $8 in 2020 before a 4:1 stock split saw it adjust down nearer $2. A gradual decline since then has led to a share price around $1.13.

The company then received a takeover offer – via a scheme of arrangement – valuing the company at $1.34 a share. The takeover offer was made by a consortium consisting of a global investment firm and an Australian private equity firm. The consortium, today, controls around 20% of the company.

In order for the scheme to be approved, it would need 75% of the so-called Second Interest Class, or those not controlled by the consortium already.

The directors of Pushpay unanimously recommended shareholders vote in favour of the scheme. Pushpay's largest shareholders (outside the consortium) – ACC, ANZ, Fisher Funds and Nikko – all publicly indicated that they intend to vote against the proposal. Together, these four were thought to control around 12% of the company total shares, or 15% of these Second Interest Class shares. The four funds would not be sufficient to turn the vote in their favour alone.

However, other investors joined the chorus, with sufficient proxy votes to exceed the 25% threshold needed to block the offer.

The company responded by sending a slew of announcements out to shareholders, before taking the unusual step of pre-publishing the received proxy votes ahead of the meeting.

To be clear, the majority of shareholders of both classes voted in favour of the scheme – but less than the 75% needed. The proxy votes received associated with the consortium were, as one would expect, 100% in favour. The votes for interests not associated with the consortium saw 56% in favour of implementing the scheme, 19% short.

The announcement on Thursday, one day before the vote, outlined – in great detail – the process to change one's proxy vote. Indeed, the sheer volume of announcements made suggested an air of desperation from the board. The meeting included a note that if the scheme is not approved by shareholders, ''Pushpay's share price will likely fall.''

Very little changed in the 24 hours between that update and the vote itself. The vote failed. The company will remain listed on the NZX for now, and the share price did indeed fall.

Now, there are three critical questions that must be answered.

The first is whether the consortium seeks to win over the 19% needed to secure the success of the scheme. Realistically, ACC, ANZ, Fisher and Nikko would need to be willing to engage and determine a valuation at which they would accept the offer. It is worth highlighting that the economic environment – especially for private equity firms – has evolved significantly since the offer was first published in October.

If the consortium does not pursue the matter further, the next two things to address would be the future of their shareholding, and the next step for the board.

The consortium already controls roughly 20% of the company, or 230 million shares. What does it do with these shares, if it is not willing to pay a higher price? 20% is not a majority of the company and, while it would have some influence, is not enough to control a vote. Private Equity are not known to be long-term investors in companies they do not control.

The board itself is in an unenviable position too.

The board has publicly stated that it believed that this offer was the best offer shareholders would see and welcomed a competing bid to disprove this. No such offer eventuated. $1.34 was the price.

A sizable minority of shareholders disagreed. The 75% statutory threshold protected their interests and ensured that the majority vote in favour of the scheme did not proceed.

The best course of action for the board at this point is debatable. No matter what way you count the votes, a majority of shareholders accepted the scheme and the board's view that the offer was the best value for shareholders. However, it is clear that a large number of shareholders hold a position directly opposed to that of the boards.

Trading after the announcement tells its own story. Shareholders who were willing to accept $1.34 have begun selling at nearby prices, while those who felt $1.34 was too low have yet to make their move. Will they purchase more, seeing as the price is even lower than their internal valuations?

One imagines the shareholder register will evolve quickly following the vote, as shareholders disagree on the long-term value of the company and take positions accordingly.

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Heartland's result has been announced to market, as the company's expansion into Australia continues. The share price rose slightly after the announcement was made.

The dividend of 5.5 cents was maintained, representing a gross yield of near 8.5%. Net profit after tax reached a new record, while return on equity and net interest margins both fell.

The product mix is changing as the receivables book grows. Home loans, reverse mortgages and motor vehicle financing are all growing in size, while livestock and business lending saw a net reduction. Heartland makes the point that it experienced the highest growth rate in retail deposits this year of all domestic banks, a statistic perhaps reflecting the size of the base it began the quarter with.

The net margin on each of these products is different, reflecting the risk to Heartland of bad debts. Indeed, the motor vehicle book saw a slightly elevated level of arrears over the last six months. Motor finance actually saw a decrease in operating income, despite the growth in the book.

Motor finance is one area of expected growth, after a sluggish first half result. While the impact on this market from Cyclone Gabrielle is still uncertain, it seems likely that we will see a rebound in motor vehicle sales in the second half of the year.

Heartland continues to digitise its offering, moving new and existing customers away from a phone call and towards the mobile app. This improves its capacity to upscale the business, as labour availability becomes less of a factor as they expand across Australia.

Indeed, the pivot to Australia is ongoing, with the Challenger Bank and StockCo acquisition progressing over the period. Heartland is confident that the Australian market – particularly in the rural and livestock sectors – is the best opportunity for growth moving forward.

Guidance for the full year remains intact and, if it eventuates, will represent another record year.

The dividend is maintained, and a record result is produced, as the product mix shifts and the margins move alongside this shift. The next step will be completing the subordinated notes issue, which is expected to progress over the next two weeks.

New Issues

Meridian Energy Green Bonds Meridian Energy Limited confirmed today that it is offering up to $150 million (with the ability to accept oversubscriptions of up to an additional $50 million) of 5.5 year unsecured, unsubordinated, fixed rate green bonds (Green Bonds) to institutional and New Zealand retail investors.

The Green Bonds are expected to be assigned an Issue Credit Rating of BBB+.

The Interest Rate for the Green Bonds is subject to a minimum Interest Rate of 5.70% per annum but may be set higher.

Meridian's existing (MEL030) bonds mature on 14 March 2023 so MEL030 bondholders are expected to receive the proceeds from the maturity of those bonds before the expected Issue Date of the new issue. This allows MEL030 bondholders to use money repaid on the 14 March for the new issue.

Clients pay brokerage on this issue.

Please contact us on Wednesday 8 March at the latest if you would like to seek an allocation of the bonds above. Kiwi Property Group Green Bonds

Kiwi Property Group Limited (KPG) today announced an offer (Offer) of up to NZ$100 million (with the ability to accept oversubscriptions of up to NZ$25 million at its discretion) of 6.5-year fixed-rate senior secured green bonds (Green Bonds) to institutional and New Zealand retail investors.

An interest rate above 6.00%p.a. is expected for the BBB+ rated issue. Offer is expected to open on 14 March and close on 17 March. Heartland Bank Subordinated Notes

Heartland Bank Limited is considering making an offer of up to $75 million (with the right to accept oversubscriptions of up to an additional $50 million) of unsecured subordinated notes.

The Notes are expected to constitute Tier 2 Capital for Heartland Bank's regulatory capital requirements with a 10-year maturity date, but may be redeemed early in some circumstances. Heartland Bank may redeem the Notes after 5 years or on any quarterly Interest Payment Date after that date. The Notes are expected to have a credit rating of BB+ from Fitch Australia Pty Limited (Fitch). It is expected that full details of the offer will be released in mid-March 2023 and an interest rate in the vicinity of 7.00%p.a. is possible.

Please contact us if you would like to discuss any of the above investments.

Travel

Edward will be in Blenheim on 17 March, Taupo on both 20 & 21 March, and Wellington on 24 March. He will also be in Napier on 31 March (Mission Estate) and in the Wairarapa on 3 April.

David Colman will be in Kerikeri on Thursday, 9 March and Whangarei on Friday, 10 March.

Johnny will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

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