Market News 29 May 2023

Johnny Lee writes:

The market continues to debate the next move for interest rates, as it digests the Reserve Bank's statement made last week.

The Reserve Bank decision to raise the OCR from 5.25% to 5.50% was not necessarily unexpected, but has led the conversation to a new point, as discussion now turns to exactly how long rates will be required to remain at these levels before falling, and to what level they may fall.

This is meaningful for both borrowers and lenders alike. Investors looking to lend to companies will, of course, seek to invest at such a peak, and aim to maximise returns for as long as possible. Homeowners borrowing, conversely, will be seeking to borrow shorter-term, hoping for a reduction during that term, before locking in for a longer period. Market pricing will respond to these competing goals.

The Reserve Bank itself currently sees the OCR declining to a more ''neutral'' level in 2025 or 2026. A neutral level, in this context, is one where inflation remains anchored within the target range of 1% to 3%.

Of course, data will drive such changes. The May projection is already modestly different from the February projection, and no doubt the August projection will be different in turn. In a world struggling with disease, famine and war, projections are only as useful as the data they rely upon.

There are a number of reasons the Reserve Bank expects inflation to ease. Immigration is returning, easing concerns around an overly tight labour market. Indeed, unemployment is expected to rise as sharply as it fell, during the 2020 and 2021 years.

The construction sector is forecasted to decline, with building consent data suggesting a tough few years ahead, particularly for the residential building sector.

There are also a number of reasons the Reserve Bank expects inflation to remain high. Tourism is returning, and Government spending is marginally higher than early projections.

Immigration remains a double-edged sword from an inflationary standpoint. On the one hand, an increase in the labour supply should ease wage growth pressure. However, an increase in our population will likely see demand for services increase.

And, of course, there is the big unknown in terms of the impact of the Hawke's Bay rebuild. It is assumed that this rebuild will see a meaningful increase for the civil construction sector, both in terms of materials and labour.

For now, it seems that the intention is for rates to remain at current levels for some time, before gradually easing as, presumably, inflation wanes. The market has seen some modest repricing over the last week, but will likely remain volatile until it is clear that inflation is back under control.

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A string of corporate results has hit the market, as the May reportings come to an end.

Mainfreight reported record revenue, record profit and a record annual dividend, describing the result as satisfactory for its shareholders. The share price, however, declined on the back of its outlook for the year ahead.

The full year result displayed the usual blunt candour investors have come to expect, clearly outlining the areas of the business that are performing well – notably Europe – and those that are not – Asia and America. It is commonplace when companies report, for the reports to highlight positives within their business, and attempt to spin negatives in the most positive light possible. Mainfreight takes the opposite approach, describing its American business as ''performing poorly'' and outlining the steps it intends to take to rectify this poor performance.

Staff bonuses are down, reflecting the moderation of growth seen in the second half of the financial period.

The result was clearly one of two halves – with the second half seeing a sharp moderation as the post-COVID period of logistical shortages eased, particularly compared to the growth seen in the second half of the 2022 result. Largely, this slowdown has impacted the Asian and American operations.

The company moved into a net cash position, as it gears up for two years of increased capital expenditure. Its attitude towards this expenditure can be summed up by simply quoting the company – ''We are mindful of the current economic downturn and inflationary environment and therefore, will look for improved returns from the network rather than expansion for the sake of it''.

Mainfreight is not immune to these economic conditions, signalling that its performance since April – the period after this annual result – has been weaker. The company has been clear that its short-term performance will be challenging, with the focus remaining firmly on the longer-term performance.

Mainfreight next reports in November, but is expected to provide a trading update in the months ahead. 

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Infratil has also provided its full year result, as the share price approaches fresh highs.

The headline results saw a modest increase in EBITDAF from the previous year's result. Infratil remains cash rich and is still actively seeking and evaluating options for investing in its current high conviction sectors.

The current environment presents a unique challenge for companies like Infratil. Debt levels remain well below the target band, and its cash balance remains high at $600 million. Investment companies are not in the habit of placing term deposits, and are expected by shareholders to be taking opportunities as they arise or return cash to shareholders. The tremendous success of Tilt Renewables has placed Infratil into an excellent cash position, and its challenge now is to utilise the proceeds from this success intelligently and effectively.

To its credit, Infratil does outline its plan for spending some of its war chest. Data centres, radiography clinics and renewable energy projects will all require cheques of various sizes to be written, while the likes of Wellington Airport and Retire Australia will no doubt see some investment too.

Infratil also signalled its intention to amend the Management Agreement with Morrison and Co, in relation to the incentive fee it collects from managing Infratil. The net effect, for this year, will see reduction of incentive fees of almost $6 million.

Across the portfolio, data centres remain a favoured sector, and are indeed a very hot topic globally. While Infratil has four separate data centres in its pipeline, Amazon and Microsoft have both penned deals with electricity providers in New Zealand to build and power their own facilities.

The renewable energy sector continues to pick up steam, with politicians on both sides of the Atlantic increasing funding towards solar and wind developments. Through its holdings in Longroad Energy and Galileo Energy, Infratil will have a foot in both the American and European markets as the situation develops.

Both Pacific Radiology and QScan are both hoping for a stronger year, as COVID-related difficulties in the healthcare sector ease and Infratil looks to add capacity to the sector.

One (Vodafone) started the year promoting its tie-up with Starlink, providing another arrow in its quiver, as Chorus's fibre optic network, mobile broadband and now satellite broadband compete across the spectrum of New Zealand consumers. Whether this becomes a niche technology or more commonplace in New Zealand remains to be seen. Persuading New Zealanders to expand beyond Chorus's network will require a strong incentive.

Overall, Infratil will be more than comfortable with its cashed up position and has good reasons to be excited for its future. The market's reaction to the result was positive, and attention now turns to next steps as it invests further into its growth agenda.

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Fisher and Paykel Healthcare has reported its annual results, its profit down 34% as it continues to see a moderation in results following the extraordinary years during the global pandemic.

Its share price fell almost 5% after the announcement. The dividend was increased from 22.5 cents last June to 23 cents per share this year.

Hospital consumable revenue continues to be plagued by excess customer inventories. Fisher and Paykel's guidance, however, indicates that this has already begun to improve, with consumable revenues improving in the second half of the year compared to the first.

Expenditure remains high, following the initial settlements of the 105 hectares in Karaka announced late last year.

This $275 million dollar purchase is a major part of its growth strategy, expected to house a growing workforce across both R&D and pilot manufacturing. Development of the campus on site is expected to take many years, but concept imagery certainly paints a picture of a workplace that any aspiring engineer would find attractive.

The development in Karaka will be an exciting one for locals too, promising long-term jobs and a serious commitment for development of the area. An influx of highly paid, skilled workers is always a boon for local economies.

Fisher and Paykel split its annual results into halves, to help highlight the improvement seen in the second half of the financial year. Almost every sector saw improvement in the second half, with the decline in profit arrested almost entirely.

Forecasts for the year ahead include a return to historical (higher) margins, and revenue growth.

While the headline result was poor, and certainly a drop off from the COVID period earlier in the decade, dividend growth is continuing and the outlook for the next few years remains positive.

Seminars begin

Our seminar programme kicked off at 10.30am today at Southwards Car Museum, Paraparaumu. 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:

30 May Wellington – Wilton Bowling Club – 10.30am

31 May Lower Hutt – Little Theatre – 11am

6 June Christchurch – Burnside Bowling Club – 1.30pm

8 June Timaru – Sopheze on the Bay – 1.30pm

12 June Dunedin – Edgar Centre – 1.30pm

13 June Invercargill – Ascot Park Hotel – 1pm

19 June Palmerston North – Distinction Coachman – 11am

28 June Hamilton – Ventura Inn 1.30pm

5 July – Whangarei – Flame Hotel 10am

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

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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New Issues

BNZHA - BNZ Perpetual Preference Shares

The offer of Bank of New Zealand (BNZ) perpetual preference shares (PPS) opened today.

The PPS constitute Additional Tier 1 Capital for BNZ's regulatory capital requirements and carry a credit rating of BBB.

This investment is perpetual and may remain on issue indefinitely. However, under certain conditions, BNZ may redeem (repay) the PPS in six years' time.


The initial six-year interest rate has not been set, but based on the indicative margin range and underlying rates, we are expecting an interest rate in the vicinity of 7.50%.

The rate will be set when the offer closes on Friday 2 June.

Investors that would like an allocation will need to confirm the amount they wish to purchase no later than Thursday 1 June.

Mercury Senior Green Bonds

Mercury NZ Limited (MCY) has announced that it plans to issue a new 5-year senior green bond..

The initial interest rate has not been announced, but based on comparable market rates, we are expecting an interest rate of approximately 5.50%.

The green bonds are expected to be assigned 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.

At this stage it is likely MCY will not be paying the transactions costs for this offer, accordingly it is likely that clients will be charged brokerage. This will be confirmed in due course.

The bonds are expected to be listed on the NZX and more details are expected in the near future.

If you would like to be pencilled on the list for these bonds, please contact us promptly with an amount and the CSN you wish to use.

We will be sending a follow-up email to anyone who has been pencilled on our list once the interest rate and terms have been confirmed.


David Colman will be in New Plymouth on 9 June.

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 Auckland on 19,20 and 21 July- venues TBC.

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

Market News 22 May 2023


Johnny Lee writes:

TWO results to market last week - from Ryman and My Food Bag - both saw a positive response on the market. The two stocks were the strongest performers on Friday morning following the release of the news.

Ryman's result saw a new record in underlying profit – up 18% on last year's result – but down 63% on a reported basis. The difference was heavily influenced by the loss associated with the USPP repayment debacle of March.

The underlying result is usually preferred by investors and Ryman alike, as it better reflects the trading performance of the company and ignores one-off costs or unrealised movements on investment properties.  

Its Australian business is growing in prominence and made up 23% of the company's underlying result. This same figure was 14% two years ago. While Australia does offer greater opportunities for growth, diversifying out of New Zealand also protects the company from regulatory risk should any unexpected developments emerge as we near our election in five months' time.

Debt levels, the topic de jour for Ryman, are obviously lower following the capital raising. Gearing now sits around 33%, down from 45% from last September. With a targeted range of 30-35%, Ryman will be careful to manage its development programme with an eye to maintaining prudent debt levels throughout.

Dividends are back on the agenda, with the company issuing its intention to restore dividends by next year. This will be subject to change, as the market conditions continue to evolve. Any such dividend payment will need to account for the vastly greater number of shares on issue following the rights issue.

The development pipeline – usually a highlight of these reported results – saw far less emphasis. Over the next two years, seven developments are expected to be completed - four in Australia, three in New Zealand.

The flagged pivot towards ''low density townhouse style developments'' continues, as the company focuses on the greater cashflow seen from such builds. Ryman is also trialling new pricing models for its customers, as well as implementing a new technology platform for its staff. Details were scarce, but signal that the company is looking to innovate its revenue streams as well as its product development.

The past two years have been the worst in the company's history from a shareholder perspective, with a share price decline of over 60% from its peak. Ryman's share trading remains influenced by its recent capital raising, as some shareholders continue profit taking following the capital raise at $5 a share in March. Selling now would reap a return of near 20% after barely two months, an attractive exit point for traders who have no aspirations to be long-term shareholders of the company.

Overall, while last week's headline result was sharply lower, the underlying results impressed the market and rewarded those who took the risk to buy more in March. Dividends may be restored by next year, albeit at a level that reflect the increased number of shares on issue. Debt is at a percentage that the company regards as comfortable, and will be keenly monitored by management and shareholders alike, as the development programme adjusts to an appropriate level.

Ryman's next reported result is in November.

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MY Food Bag's result last week gave investors cheer, despite the decline in headline numbers, as the company has seen a better start to this financial year and is hoping for a return to dividends soon. The share price saw a modest bounce from near record lows.

Shareholders would be forgiven for a moment of panic as the company's first announcement – that it was delisting - was published. The company is delisting from the ASX but will remain listed on the NZX. The move is expected to save tens of thousands of dollars, an increasingly relevant quantum for a company reporting profits in the low millions.

Jobs will be cut and marketing costs will be examined with an eye towards ''efficiency'' – ensuring dollars spent maximise revenue. The company has pledged not to increase its marketing spend for the next year as part of its drive to control costs.

Revenue has slipped 10% and gross margin has fallen as the company embraces the move from its headline product to the cheaper ''Bargain Box'' product, acknowledging the strained wallets customers are facing.

My Food Bag has also pledged to maintain the pricing for its Bargain Box product for at least six months, trying to give certainty to customers fearing price rises and looking to tighten their belts.

From a numbers perspective, much of the news was troublesome – deliveries have fallen towards 2020 levels, with revenue declining alongside this. Food, labour and distribution costs continue to put pressure on overall margins, with hopes resting on new ''pick'' technology mitigating some of these impacts.

Debt has crept higher and cash levels have fallen, although the company also intends to reverse both of these trends over the next 12 months. Some of this relates specifically to capital expenditure, which spiked during the investment into the new distribution centre in Christchurch.

The pledge to resume dividend payments will be closely monitored and the company will be aware of its obligations should this intention change. The language used – ''The board expects to resume paying dividends in FY24'' – has set a clear expectation for shareholders.

With a share price below 20 cents, My Food Bag's market capitalisation has fallen below $50 million, well down from its near $450 million value of 2021. The trading environment remains challenging, as consumers remain nervous and cost-conscious. The company is fighting hard to retain these customers, pushing its ''value'' branded products as an alternative for those looking to cut costs. A return to dividends next year will no doubt be welcomed by shareholders, as it looks to navigate what is undoubtedly a difficult period for the company.

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David Colman writes:

THREE listed property companies, Argosy Property Limited (ARG), Goodman Property Trust (GMT) and Investore Property Limited (IPL) announced full year results for the year ended March 2023 last week.

The results provided an update on how parts of the sector impacted by property valuation declines, inflation and higher interest rates performed for the period. Argosy Property's Full Year results included the below highlights: - Net property income for the period of $112.8 million (up 7.3%) - Net distributable income of $64.2 million - Occupancy at 99.3% and weighted average lease terms (WALT) at 5.4 years - Annual revaluation loss of $146.6 million, down 6.4% on book value, resulting in a net loss after tax of $80.8 million - Debt to total assets ratio of 35.1% compared to 31.1% at 31 March 2022. - NTA per share of $1.58, down 9.2% - 3.6% annualised rental growth on rents reviewed; - Full year dividend of 6.65 cents per share (1.5% increase over FY22)

Industrial weighting has been increased to 53% and weighting to Office reduced. The Government is a major tenant contributing 34% of total rent across the portfolio.

ARG referenced CBRE research which indicated the Auckland Industrial and Wellington Office sectors, which it is involved in, remain strong. The Auckland Office leasing market was noted to have been more resilient than many expected.

ARG will continue to concentrate on sustainable buildings where they see the Auckland and Wellington market catching up with international trends for green rated buildings. The opening of its green development at 8-14 Willis Street with ambitions for a 6-star green built rating was noted as a highlight.

106 rents were reviewed with annualised rental growth of 3.4% for Industrial rent reviews, 3.5% for Office rent reviews and 4.7% for Large Format Retail rent reviews achieved.

65% of rents reviewed were subject to fixed reviews, 22% were market reviews and 13% were CPI (Consumer Price Index) based.

ARG sold 25 Nugent Street, Auckland, for $22.0 million (a 28% premium to the book value at the time) and plans to sell $66 million worth of assets that no longer meet its investment criteria.

Three developments including in Newmarket ($35 million redevelopment to be completed in June 2023), Mt Richmond industrial (in its planning stage), and Neilson Street (high stud office/warehouse building) are in the pipeline.

ARG's gearing of 35.1% sits towards the middle of its target gearing band of 30% to 40%, and well below its bank covenant of 50%.

ARG has extended its syndicated bank facilities with ANZ, BNZ, HSBC, CBA, Westpac NZ and ICBC by $20 million and increased facilities from $455 million to $475 million.

Its weighted average debt tenor, including bonds, was 3.2 years (3.5 years at 31 March 2022) with the nearest tranche of bank debt expiring in April 2025. Its weighted average interest rate was 5.39% (4.14% at 31 March 2022) which is a substantial increase.

ARG has less than 30% floating debt exposure and its board is comfortable that there is sufficient funding capacity for medium term development and any further property valuation declines.

To sustain earnings and dividends ARG plans to complete existing developments and lease them, commence new green industrial projects, and address any vacancies and near term expiries.

The ARG Dividend Reinvestment Plan (DRP) remains suspended.

FY24 guidance includes a dividend of 6.65 cps (unchanged from FY23).

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Goodman Property's Full Year results included the below highlights:

- Operating earnings before tax of $126.5 million up 6.9% - $237.7 million reduction in the fair value of its property assets (down 4.7%) - Statutory loss of $135.4 million after tax - NTA per unit of $2.452, down 5.9% - Loan to value ratio of 25.9% and $739 million of available liquidity at 31 March 2023 - 6.6% increase in cash earnings to 7.1 cents per unit - 7.3% increase in cash distributions, to 5.9 cents per unit - Occupancy of 99.5% and a weighted average lease term of more than six years

Goodman Property has a $4.8 billion industrial property portfolio with over one million square metres of warehouse and logistics space.

Development activity includes $209.7 million in new projects in Mt Roskill and Otahuhu, with total project costs across GMT in development of $461.1 million adding over 110,000 sqm of logistics space. 95% of the mainly brownfield (90% of current projects are already owned properties) developments are pre-leased with average lease terms of more than 12 years expected.

$450 million was raised to support sustainable development by issuing green bonds ($150 million) and taking out bank loans. ($300 million).

Guidance for FY24 includes a further 4% increase in cash earnings to around 7.4 cents per unit and a 5% increase in cash distributions to approximately 6.2 cents per unit _ _ _ _ _ _ _ _ _ Investore Property Limited (IPL) year results highlights:

- Net rental income of $60.3m, up $2.0m

- Loss after income tax of $150.2m (FY22: $118.2m profit after income tax)

- Portfolio valuation of $1.1bn, down 14.9% or $185.2m - Distributable profit after current income tax of $31.0m, up $1.2m. - Distributable profit per share of 8.44 cents, up $0.33 cps. - NTA per share $1.84, down 20.7%

- Loan to Value ratio is 36.5%, up from 29.5% as at 31 March 2022

- 5.7% average portfolio market capitalisation rate. - Weighted average lease term (WALT) 8.1 years - 99.5% occupancy rate by area

Investore operates a large format retail portfolio and over the financial year acquired land in Kaiapoi (with construction of a Countdown supermarket underway) and acquired the balance of land in Papakura for future development.

IPL conducted 82 rent reviews resulting in a 3.3% increase to previous rentals. 33 of these were CPI-linked rent reviews resulting in a 7.0% uplift to previous rentals. 75% of leases by Contract Rental expire in FY30 and beyond.

   An agreement was signed with Countdown to expand Countdown Rangiora and extend Countdown Morrinsville's lease by four years to FY29.

IPL's Loan to Value Ratio has risen to 38.1% taking into account current commitments, including the developments above.

IPL's committed LVR is near the top of its target gearing range of 30% to 40% on a long term basis although it has a debt covenant of 52.5%.

The share buyback programme has been cancelled which had been paused since September 2022.

IPL's outlook includes selling $25m to $50m worth of non-core assets to repay bank debt and implementing a dividend reinvestment plan.

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MARKET volatility in the sector is evident, with Argosy shares down 12%, Goodman Property Trust units up 7%, and Investore Property down 6% in the last year.

The companies have limited correlation in regards to when the companies each reached all-time highs but are all well off historically higher levels seen in the past three years which has been a trend for the sector.

Share/unit prices continue to be well below net tangible asset (NTA) values which have fallen year on year which tends to indicate that the market expects the values of the properties used to calculate NTA are overestimated.

ARG peaked near the end of 2021 at $1.75 and is now $1.20 (31% below NTA of $1.58) IPL peaked near the end of 2020 at $2.30 and is now $1.45 (21% below NTA of $1.84) GMT peaked at the start of 2022 at $2.75 and is now $2.25 (8.2% below NTA of $2.452)

Industrial property appears to have been resilient and was noted by ARG management as having favourable forecasts into 2026. GMT management noted that limited new supply and high barriers to entry and customer demand for more productive and sustainable warehouse and logistics facilities are expected to support another strong operating result in FY24 for GMT.

Income from the companies in the form of quarterly dividends has not been disrupted and both Goodman and Investore have forecast increased dividends in the full year ahead.

Inflation and interest rates will continue to be a major concern for the commercial property sector and this is reflected in the declines of the property portfolio values held by the companies above and depressed share/unit prices.

Careful capital management will be essential as bonds issued in the last 5 to 7 years, at more favourable rates than available today, may need to be refinanced using new bonds (likely to be green bonds) or bank loans at higher interest rates than have been seen for many years.

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OUR seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 5 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

To register yourself for our free seminar, please click on the link below and scroll down to click on the relevant location:

Please note that I 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 meet with Chris during the seminar round.

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Chris will be in Arrowtown on 26 May and has one available time.

David Colman will be in New Plymouth on 9 June.

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).

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

Chris Lee

Chris Lee & Partners Limited

Market News 15 May 2023

Johnny Lee writes:

Steel and Tube (STU)  has provided an update to the market, highlighting the drop off in demand from the construction sector, as its earlier decision to shore up its balance sheet begins to pay dividends. The share price fell about 5% following the announcement. Its dividend yield – based on previous dividends – is now nearly 14%, similar to Fletcher Building's (FBU). 

The announcement provided a clear indication that the company was ''battening down the hatches'', as it looked to survive the anticipated downturn. New funding arrangements are in place, debt levels are now low, and the company is firmly focused on maximising cash generation.

The last five years has seen the company ''right-size'', as it shed staff and focused on minimising costs, selling assets, cancelling dividends and repaying debt. 

It did not rule out the possibility of extending itself to take advantage of growth opportunities, if they arose. Its competitors share the same economic environment, with the same challenges to face. 

Many companies across various sectors are eyeing competitor' balance sheets, as well as their own, as they look for opportunities to grow by acquisition. Well managed companies struggling with debt or cashflow may become targets from those with access to meaningful balance sheets.

Steel and Tube now expects volumes to drop over 10% in the second half of the financial year, compared to the first. Although revenue grew over the last year, costs also rose, with net profit expected to be down once audited.

The impact of the cyclone rebuild is something of an unknown but is anticipated to be a key driver of steel demand in the medium term. It will be interesting to observe how much of this anticipated demand translates into actual revenue. Perhaps the annual Government budget, due to be presented this Thursday, will give an insight into this.

Steel and Tube is bracing itself, as it anticipates an increasingly challenging environment ahead. Decisions made over the COVID environment to re-position the company will keep its bankers relaxed, as eyes now turn to the cyclone rebuild.

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The Warehouse Group (WHS) has also updated the market, with its third quarter sales coming in 3.8% higher than last years. Its share price rose after the announcement. Gross profit was lower, with year-to-date results virtually flat so far.

Similar to its last update, the only bright spot was The Warehouse (the ''Red Shed''), with Warehouse Stationery, Noel Leeming and Torpedo7 all continuing their negative trajectory.

There seems to be little short-term optimism for these three, with consumers reluctant to commit to larger purchases in this environment. Rising interest rates are making consumers cautious, with consumer confidence surveys showing few households are considering making major purchases until the economic picture becomes clearer.

The retail sector in general is reporting similar results, with sales and revenue stronger, but costs rising, putting pressure on profit growth. Briscoe's result earlier in the month saw similar trends.

The Warehouse share price has had a horrid first five months of 2023, and is amongst the worst performers on our market so far this year. Its dividend was cancelled, its net debt is rising and consumer wallets are feeling an increasing pinch from the supermarket. While this trading update was better than expected, it is clear that the ''value'' end of its group is performing much of the heavy lifting.

Long-term investors in the retail sector will be familiar with the way the sector responds to the economic cycle, but the shorter-term picture is certainly one of difficulty. 

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Shareholders of Santana Minerals (SMI.ASX) have been invited to participate in a Share Purchase Plan, as the company looks to raise more cash to continue its drilling programme.

A Share Purchase Plan differs from a Rights Issue, as all investors are invited to subscribe up to a specific amount. Large and small shareholders alike will have the same opportunity to bid for the maximum amount.

Only existing shareholders will be allowed to participate. The shares issued under the SPP will be newly minted shares, and do not represent a seller of existing shares.

The offer allows these existing shareholders to buy additional shares at the same price as the recent share placement at 62.5 Australian cents. Shareholders can invest either $2,000, $5,000, $10,000, $15,000, $20,000, $25,000 or $30,000 Australian dollars.

Shareholders have until the 2nd of June to make their decision.

The price on offer is similar to the current market price as at time of writing. As always, those who wait until nearer the date have the advantage of certainty of relative value.

It is important, however, to ensure documentation is in order. The process for applying for these shares is more complicated than New Zealand rights issues. It is briefly outlined below.

The money raised will be used to fund continued exploration and drilling, amongst other corporate needs (such as funding the offer itself). These exploration activities are expensive, but the $3 million raised via the Share Purchase Plan and the earlier $15.5 million Institutional Placement will provide the company with enough cash to ''continue deep into 2024''. Santana does reserve the right to increase the size of the offer at its discretion, meaning that the $3 million may be higher.

The share price will be interesting to observe without the overhang of an anticipated capital raising. The short-term share price behaviour will likely be dominated by profit taking, if such opportunities present themselves.

This capital raising may mark the last such raising for some time. $15.5 million has been confirmed already from the private placement, with a potential $3 million (or more) arriving from this share purchase plan. Santana's job moving forward will be to continue exploring, with an aim of fully understanding the size of the resource, and then evaluating the next step after this is complete.

Note: Shareholders of Santana who wish to participate would be wise to familiarise themselves with the process for applying for these now. There is a ''Miraqle'' website, linked on the announcement, that must be used. It will require your SRN (Securityholder Reference Number) and your registered address. From there, it will lead investors to a personalised ''Application Form'', which must be completed and e-mailed to the share registry. At the same time, investors need to submit payment in Australian Dollars, either via BPay or via an International Payment from a New Zealand Bank. Investors will need the recipients bank account details, which are listed on the right-hand side of the Application Form. Most banks charge a fee ($5-$10) for International Payments.

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Food price data last week shows a major source of our inflationary woes, as supermarket bills continue to climb.

April saw another month-to-month increase, while the annual rate remains in double digits.

There is virtually no escape from these rises. Fruit, vegetables, meat, dairy and breads are all higher than last year, with eggs dramatically higher.

Further abroad, Italy is making headlines worldwide after its Government convened ''crisis talks'' following an 18% rise in the cost of pasta. Even the most basic foodstuffs seem to be soaring in cost.

An alarming trend in the wake of these rising prices is the increasing use of ''Buy Now, Pay Later'' schemes. Statistics show an increasing number of people are relying on these services to fund basic spending (food, nappies, toilet paper) and an increasing number of them are falling into arrears.

It is difficult to see a happy ending to this trend. Businesses are stating that access to these services are necessary for their survival, while consumers are falling further into debt to purchase these basic items. The next step will be to observe the level of bad debts held by these BNPL providers.

While the rate of inflation is easing generally around the globe, food prices remain a concern, even amongst basic products. Ultimately, consumers will prioritise this spending above almost all else. The question will be what spending must be cut to accommodate this expenditure.


Our seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 5 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

To register yourself for our free seminar, please click on the link below and scroll down to click on the relevant location:

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Johnny will be in Christchurch on Wednesday 17 May (FULL).

Chris will be in Christchurch on 16 May (morning - FULL) and Ashburton (afternoon only) and in Timaru on 17 May (morning only). He has two available times in Timaru, and one in Ashburton.

Chris will be in Auckland (Ellerslie) on 22 May and in Takapuna on 23 May (FULL).

Chris will be in Arrowtown on 26 May and has two available times.

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).

David Colman will be in New Plymouth on 9 June.

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

Chris Lee & Partners Limited

Market News 8 May 2023

Johnny Lee writes:

Stronger than expected data from the labour market has reinforced expectations of an interest rate hike this month, as we saw the unemployment rate stay firm at historically low levels. 

Economists continue to hold the view that unemployment will rise sharply over the next year or two. This is partly fuelled by a return of immigration, but also rising concern with a growing number of sectors showing clear signs of distress.

One such sector is the construction industry, which continues to see declines in both building activity and building consents. Our building sector is something of an outlier, with deep pessimism of its short-term prospects.

The tight labour market will add weight to the probability of a rate hike later this month when the RBNZ convenes. Internationally, rate rises are continuing as Central Banks manage expectations with their public messaging.

The US Federal Reserve made its own announcement last week, unanimously voting to raise interest rates by a further 0.25%.

A subtle change in its wording, and comments made by the Chair subsequent to the announcement, also confirmed that the Central Bank is contemplating pausing further hikes, marking an end to the current cycle of rising interest rates.

Of course, pausing rate rises is not the same as cutting them. So far, there has been no indication that this pause will mark anything but a lengthy plateau, with changes being made as new data is released.

The European Central Bank also lifted rates last week, although President Lagarde was explicit in stating that there would be no such pause – it viewed European inflation as more stubborn, and needing clearer signals that rates would go higher yet.

Each region has unique challenges to deal with, but New Zealand appears to be nearing the end of its tightening cycle. This month’s announcement will give investors further clues as to the committee’s thinking, and the possible pathway to a lower rate in the future.

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One trend that is emerging this year is that of companies needing capital, or approaching levels of leverage that begin to force their hand in such a decision.

With asset values declining, and debt costs rising, a number of companies have found their balance sheets stretched. Lenders seeing the equity value of their loans diminish begin to feel uncomfortable, and put pressure on borrowers to put more of their money at risk.

Synlait Milk has been at the forefront of public scrutiny in this regard. Its share price has fallen sharply this year, as traders weigh the possibility of the company issuing shares to shore up its balance sheet. It has debts to repay, and its bonds now trade at 90 cents in the dollar, despite being – theoretically – repaid in December next year.

During the early period of the COVID pandemic, Sky TV saw its bonds fall to near 50 cents in the dollar, as investors feared default on the debt. At this time in New Zealand, live sport was unimaginable, pubs were closed, and its major shareholders had disastrous problems of their own. It was firmly in ‘’punt’’ territory, with meaningful buy volumes rare.

Obviously, Sky TV did not default, and the company exists to this day. Indeed, Sky TV is now paying dividends to its shareholders. The company survived because investors were willing to take a risk that management would successfully navigate what was a highly uncertain time in its history.

All bondholders received their principal back, including those who bought at 53 cents in the dollar.

While Synlait bonds are nowhere near such prices, it is clear that buyers are pricing in some chance of failure. Its shareholder meeting, later today, will address some of these concerns.

I expect a number of companies will be forced to address their capital levels in this environment. Indeed, I expect share prices will weaken if the mere perception of a likely rights issue appears, as traders wary of dilution take steps to avoid any such shareholder commitment.

There are various options for tackling such a problem. A capital raising – such as a rights issue or share purchase plan – is the obvious one. These allow shareholders to directly inject capital into the business, diluting those who cannot or will not participate.

Companies that pay dividends could scrap dividends temporarily, or offer discounted dividend reinvestment plans, effectively pocketing the cash they would otherwise have paid to shareholders, and issuing scrip.

Asset sales are also an option that those who hold tradeable assets could consider. The Listed Property Trust sector is a good example of this, with a number of them downsizing or scrapping assets earmarked for future development.

Negotiating friendlier terms with their lenders is another trend that is becoming more common. 

Some companies will likely leave our exchange altogether. Already this year, we have seen Embark Education - formerly Evolve Education - leave our exchange, following Smith City and Auckland Real Estate Trust in the delisting process. Embark is heading to the Australian market, to focus on growing its Australian business with Australian investors.

Smaller companies looking to save costs will be running the ruler over such expenditure in this environment, or pursuing options to rebalance entirely. A capital raising is one such option, and one that will look increasingly attractive in the months ahead, as the cost of debt mounts and lenders become nervous. 

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Very few New Zealanders would own shares in Chegg Incorporated, a Californian based company listed on the New York Stock Exchange.

The company provides online tutoring, textbook rentals and assists students with homework. Chegg originally spawned from the idea that asking students to purchase expensive textbooks for one semester was unnecessary and a barrier for students who struggled with the cost of such a purchase.

Chegg became topical last week when the share price fell 50% in a single day, after the CEO warned that technological advances from ChatGPT and other Artificial Intelligence platforms were heavily impacting revenue and profit growth. Students were using free services to assist with their homework, rather than paying a monthly subscription service for a real tutor.

Microsoft co-founder Bill Gates has also been vocal in his beliefs that Artificial Intelligence will continue disrupting the education sector, acting as ‘’teacher aides’’ to help kids learn to read and write, with the technology being an affordable and accessible solution for some.

These programmes do not sleep, are never unwell and do not strike or move on to other roles. They have perfect recall, and scale infinitely to one’s needs.

The point of all this is to highlight the potential for industry disruption to the service sector, as this technology continues to evolve. Already, our news organisations are beginning to incorporate them into the published media, using it to improve writing styles, check for errors or summarise data. Other industries exploring its usefulness include the real estate sector, film making industry and travel agencies.

Regulation will need to catch up at some point, with concerns being raised around its use in healthcare, research and in financial markets, where veracity of information is more critical. 

But for now, the rise of these technologies is a blessing for some and a headache for others. For the likes of Chegg, the challenge will be to demonstrate its value-add to its customers, as more companies begin to utilise AI to disrupt industry.

Investment Opportunities

Auckland Airport is offering a 5.5-year senior bond. The interest rate will be set around 5.20%. This issue closes 9am, Wednesday 10 May. More details can be found on our website.

The Bank of China is offering a 3-year floating rate senior note which closes tomorrow at 12pm. The interest rate will change regularly, and we would expect the first interest rate to be set at around 6.50%.

It would suit those who hold the view that interest rates are likely to continue rising. It will have a strong credit rating of A. More details can be found on our website.

Anyone who would like an allocation should contact us now.

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Our seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 5 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

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

_ _ _ _ _ _ _ _ _ _ __



Johnny will be in Christchurch on Wednesday 17 May, meeting at the Russley Golf Club Boardroom, and has one appointment available.

Chris will be in Christchurch on 16 May (morning only) and Ashburton (afternoon only) and in Timaru on 17 May (morning only). He will be in Arrowtown on 26 May and has two available times.

He will be in Auckland (Ellerslie) on 22 May (one appointment left) and in Takapuna on 23 May (one appointment left).

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).

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

Chris Lee & Partners Limited

Market News 1 May 2023

Johnny Lee writes:

Air New Zealand has provided an update to market, upgrading its guidance, as it continues to enjoy a surge in demand across the country. The share price reaction suggested cautious optimism as shareholders largely continue to sit on the sidelines.

The company is also receiving some assistance by way of an easing jet fuel price. While the weakening New Zealand Dollar has been unhelpful, the decline in this key input has outweighed the loss of value in our currency.

Merely a year after raising over a billion dollars of capital in a rescue plea to shareholders (including the Government), the company is now well ahead of its initial forecasts from that time and on the path to recovery.

While it would be overly optimistic to declare a return to normality - particularly in light of the fragility of the global economy - domestic volumes are returning towards pre-Covid levels.

Certainly, recent experiences with Air New Zealand have indicated a company struggling to adapt to the sudden surge in demand. Staffing clearly remains an issue, as Air New Zealand competes for labour alongside many other employers across the country.

The lack of real domestic competition will give it time to solve these issues. Globally, airlines are not yet making motions to expand into markets of 5 million people in the corner of the globe.

The next question facing Air New Zealand will be the impact of an economic slowdown on the business, especially from overseas travellers. Air New Zealand needs to consider its short-term staffing needs, as well as the likely longer-term needs.

Air New Zealand was one of the most impacted companies during the Covid pandemic. After a period of heavy losses it is now in a position where it is considering paying dividends to shareholders once again, years ahead of the initial timetable it presented to shareholders. 

Last week's update strengthens that case and sets the scene for a more positive annual result come August. 

With the arrival of May comes an important period of time for investors, particularly those exposed to growth-oriented stocks.

Amongst the larger companies expected to announce results are Infratil, Ryman, Mainfreight and Fisher and Paykel Healthcare.

For Ryman, the announcement will mark the first result since the company was forced to approach shareholders cap in hand, raising money to repay a debt facility and the penalty fees associated with the repayment.

Ryman has already indicated that dividends were likely off the table in the short term, a logical response after raising hundreds of millions in new equity. Nevertheless, shareholders will want some clarification on the timeframe for their return. 

For Fisher and Paykel, shareholders will be expecting a result in line with its most recent guidance - revenue of approximately $1.6 billion, another modest decline following the exceptional results seen during the pandemic. An update regarding demand from China will also be warranted.

Fisher and Paykel Healthcare has been one of the best performing shares this year. It is clear that the market is anticipating continued growth in the long term as it builds on the momentum generated over the past few years.

Mainfreight has also had a reasonable start to the year, its share price up 9%, rebounding from a poor December. It remains well off its highs, when traders pushed it near $100 a share.

Mainfreight has been diligent in keeping the market informed, providing regular updates and ensuring there are no surprises for shareholders.

Previous guidance suggested that New Zealand and Australia were both performing to plan, while Asia and the United States lagged behind.

Asian underperformance was expected to see a turnaround following the re-opening post-Covid from China. There was also optimism that Mainfreight would begin operations in India this year, another market with potential. More details on these developments may come with the May update.

Infratil will also be publishing its results to market in May.

The Infratil Market Day in March presented a company with ample access to capital and a smorgasbord of options to consider - including both organic growth and ''attractive adjacencies''. 

Its debt levels remain well below the target range, and the team clearly remain very bullish on long-term infrastructure. Between renewable energy, data centres and diagnostic healthcare, the company will have several areas to direct capital. The issue will be timing and determining the most appropriate avenue for investment.

Infratil is not one for sitting on its hands. The last few years have been busy, and this month's update will be an opportunity to further explore these three exciting areas of growth.

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David Colman writes: Barramundi Warrants

Barramundi Limited (BRM) sent letters to holders of Barramundi Warrant (BRMWG) holders on the 14 April to remind them that the warrants' exercise date is fast approaching.

The listed fund managed by Fisher Funds has issued warrants to shareholders of its listed funds including Barramundi, Kingfish and Marlin consistently for many years.

In this case the warrant exercise price of $0.83 cents is currently well above the $0.70 that the Barramundi shares are available at on market, so in theory nobody would pay 83c for something they can buy for 70c.

The warrants have an exercise date of 26 May 2023.

BRM shares would need to rise by over 13cps (18.6%) in less than a month to match the exercise price.

The letter identifies three choices for warrant holders: - do nothing and choose not to exercise - sell or transfer the warrants - exercise some or all of the warrants

Warrant holders who need help in deciding what to do are encouraged to speak to us.

Please contact us if you hold the warrants and would like advice regarding your choices.

I would be shocked if anything other than the first choice was selected, after discussing with us, due to the shares trading well below the 83c exercise price and due to there being no likely buyers for the warrants.

Sometimes doing nothing, in this case to allow the warrants to lapse, is a logical choice.


Synlait Milk NPAT Guidance Update

Synlait Milk (SML) released an update to its full year 2023 (FY23) guidance on the morning of Wednesday 26 April after its shares (SML) and bonds (SML010) had been in halt since Friday 21 April.

The halt came less than a month after previous guidance was provided as part of the half-year 2023 results.

The news on Wednesday was disappointing, with the company updating its FY23 guidance range to a new range of between a $5 million net loss and a $5 million net profit. This is a full $20 million lower than reported in the half-year results when the guidance range was still only $15 million to $25 million.

Synlait blamed the new guidance range on a reduction in advanced nutrition demand. A single unnamed customer has reduced their demand for consumer-packaged infant formula and base powder which made up $16.5 million of the revision to net profit after tax (NPAT).

The other $3.5miilion reduction in NPAT was attributed to higher financing and supply chain costs. Synlait was quick to indicate that the Chinese re-registration process (State Administration for Market Regulations (SAMR) re-registration) is still on track with site audits completed and expectations that the company will be approved and commence production in the fourth quarter of FY23.

The company also noted that future demand from their, as yet unknown, multinational customer will help deliver growth in advanced nutrition in full year 2024. This will be produced at Synlait's Pokeno plant.

Other parts of the business such as the Ingredient, Food service and Consumer businesses are expected to have no demand changes.

Year end performance could still be impacted due to the following: - SAMR re-registration and any activities delayed by the time frame to get approval; - challenges that may arise with the onboarding of the multinational customer at Synlait Pokeno; - UHT volumes; - labour shortages; - inflationary costs.

For now Synlait's banking support remains strong and bank covenants for the rest of FY23 have been arranged but may be tested.

The covenants include the following unchanged conditions: - Total shareholder funds of greater than $600 million at all times; - Working capital ratio of greater than 1.5X at all times.

New conditions include:

- Interest cover ratio of no less than 2.25x as at 30 April 2023 and 31 July 2023 test dates (previously 3.0x); - Leverage ratio of no greater than 5.5x as at 31 July 2023 test date (previously 4.0x); - Senior leverage ratio of no greater than 3.5x at as 31 July 2023 test date (previously 3.0x).

The key financial covenants will revert to their prior levels for test dates after 31 July 2023.

Synlait is reviewing its capital strategy to ensure funding is available for the years ahead but somewhat surprisingly the review is primarily looking at debt. The company has ruled out an equity raising.

Some shareholders may question why Synlait didn't announce a capital raising such as a rights issue before it came out of halt.

Such a capital raising could have offered shares at a discount with reference to the last traded share price of $2.16 on the close of trading on Thursday 20 April before the halt. The shares ended last week at $1.61 (down 55c or 25% in a week). The negative $20 million NPAT revision resulted in a $120 million fall in the company's market capitalisation after the halt was lifted.

SML's 2022 annual report indicated that Chinese company Bright Dairy and NZX listed A2 Milk Company are the two largest shareholders of Synlait, holding 39% and 19.8% respectively.

A2 Milk Company (ATM) was quick to respond to SML's announcement with a note of surprise as to the size of the guidance reduction.

ATM announced that SML's guidance revision would make no material change to ATM's FY23 outlook.

ATM revealed it was the SML large customer with lower demand for English label consumer-packaged infant milk formula (IMF) specifically in the months March, April, May and June 2023 but it  calculates its lower production needs are less than 5% of Synlait's reported advanced nutrition sales for the 12 months ending January 2023.

ATM is still seeing weakness in the Australasian Daigou/reseller market and referenced cumulative delays in IMF deliveries from Synlait with concerns that a material amount of product will arrive over a short period of time. ATM also referenced its distribution model that was increasingly supplying customers and distributors directly out of China and Hong Kong.

ATM, like SML, pointed to risks to its business with a thorough list of risks that could materially impact expected revenue and earnings outcomes including: - Covid-19 impacts on supply and demand; - SAMR re-registration approval and GB registration process timing and associated inventory transition; - volume impact of price increases; - cross border trade; - foreign exchange movements; - interest rates; - commodity prices; - regulatory environment.

The two companies were described as in discussions regarding the allocation of certain one-off production/supply chain and other related costs between the two companies so it seems there will be more news ahead from both companies in this aspect.


New investments opportunities

Kiwibank Bank – Subordinated Notes

Kiwibank Limited (KWB) has announced that it is considering an offer of tier 2 subordinated notes.

The notes will have a 10-year maturity date but may be repaid after 5 years if certain conditions are met. The notes are intended to be listed under the code: KWB1T2.

At this stage the interest rate has not been set but based on comparable market information it may be around 6.50%p.a., fixed for the first 5 years (with interest paid quarterly). After 5 years the interest rate will be reset to a new interest rate (unless the Notes are repaid on this date).

More details are available on our website and further information will be released tomorrow morning.

Please contact us if you are interested in this new issue and we will pencil you on our list pending the final interest rate/confirmation of the terms tomorrow.


Our seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 3 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family, and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

Our booking system details will be notified soon.


Edward will be in Auckland on 4 May (Ellerslie) and 5 May (Wairau Park).

Johnny will be in Christchurch on Wednesday 17 May, meeting at the Russley Golf Club Boardroom.

Chris will advise dates next week for his next visits to Christchurch, Auckland and Timaru.

Clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Limited

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