Taking Stock 29 August, 2019

Chris Lee writes:

The Hawke’s Bay residents who were limited to a minimal number of shares in the public listing of Napier Port are wondering who scored the huge allocations that enabled 11 million shares to be flogged off at handsome profits on the first day of the listing.

It seemed odd to them that shares wanted by people with long-term ownership aspirations were instead allocated to arbitrageurs overseas, who immediately quit, in favour of a 40 cent per share gain, implying that on day one four million dollars of profit was given to those who scored that allocation; given away, dusted, as the market vernacular would say.

There are a couple of points that must be made.

Issuers and organising brokers try hard to create after-listing demand, to ensure the float is recorded as ‘’successful’’, giving all investors a warm feeling and enabling the stock exchange to approach other deals with a handsome track record of pleasing its investors.

The easiest way to ensure success is to hype up demand and then deny real investors the quantum of shares they wanted by convincing usually offshore arbitrageurs to bid for big chunks, forcing the real investors to bid higher after the shares are listed. Sometimes the organisers even lend money to the arbitrageurs to facilitate this sort of deal.

There is the risk that the issuer of the shares, Napier Port, might be a tad tetchy about this tactic, especially if the listing price suggests the shares were sold off too cheaply.

But if the shares were sold at the top end of the issuer’s expectations, that tetchiness will be muted.

These sorts of dynamics apply particularly to the sale of public assets. Rarely do the governors of those assets, often people appointed by elected officials or by democratic vote, have much nous in such specialist processes as public share listings. Those people are unlikely to have much, perhaps any, experience in dealing with the smokescreens that shroud sharebrokers and so-called investment bankers.

And there is a new dynamic now, created by the robotic buying power of index funds, and even pension funds such as Kiwisaver, where their rules require them to buy at any price, so their funds match the composition of the index.

The likes of Simplicity Kiwisaver simply had to buy shares and had to offer whatever price was needed to shake out the shares from the arbitrageurs. Such funds have no need to assess fair pricing. They just buy; robotic, mindless but authorised by the deed their investors accepted when they chose to invest in index funds.

The Napier Port shares could have been sold twice over to real, long-term buyers without pandering to big-ticket, offshore clients, but that was not the point. You can bet that those allocated the shares sold them to the index funds through the broker who had set them up with the opportunity.

Anyone pondering this today should refer back to the issuance of Mighty River Power shares in 2013. The general public was scaled heavily, prevented from buying ‘’their own’’ asset while Australian and American corporate and institutional investors were allocated tens of millions, which they sold immediately, presumably to the New Zealand investors who really wanted the shares as an investment.

After those sales had sated the buyers, the price fell from its issue price by roughly 60 cents, meaning the cleverest of all kept their powder dry till the tardiest of the arbitrageurs had lost their patience (or their credit facilities).

Those at the Napier Port who oversaw this sale and public listing did the best they could. They selected investment bankers as best they could, and then achieved a price that clearly matched their highest expectation. Job done.

Now the Napier Port must execute its ambitious goals and prove that it is worth the handsome rating its price implies.   

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The best-selling American author and economic forecaster James Rickards has written several potboilers, including The New Case For Gold, The Death of Money, Currency Wars and more recently The Road To Ruin.

His successful strategy is to re-state what the market might describe as the ‘’obvious’’, provide detail on why various trends are entrenched, highlight the risks of these trends, and then offer predictions on what the outcomes of those trends might be.

It is fair to note that he has foreseen disasters that have not occurred (perhaps he would say ‘’yet’’) and cynics might say that the scarier the prediction the bigger audience he would have created, and the more royalties.

I regard his books as excellent examples of what I call ‘’airport’’ books, suitable for wiling away long-haul travel hours. They are entertaining and can add to one’s database as they always contain some information, as well as opinion.

The other best seller is Michael Lewis who uses the more difficult method of detailing why disasters have occurred. He wrote The Big Short, describing how an autistic fund manager forecast the sub-prime disaster, and made billions by ‘’shorting’’ the toxic securities that underwrote that market. He also wrote Flash Boys, which described how the ghastly American broking firms drilled internet cables through mountains to gain a nanosecond of advantage over their competitors, enabling the growth of day trading (nanosecond trading), a human activity about as useless for mankind as any imaginable.

Rickards has just written Aftermath, a forecast again of financial market Armageddon. The book is rare in that he records at least four recommendations against which he must ultimately be judged for his relevance as a financial market seer.

Rickards suggests investors ‘’avoid’’ (I interpret ‘’sell’’) Facebook, Netflix and Amazon.

Uncontroversially, he advises not to fall for the digital currency stuff, like Bitcoin.

He strongly opposes index funds and notes the somewhat obvious opportunity for active managers to ‘’short’’ the index funds.

He forecasts that cash will be king when market indices are falling by 50 per cent.

Aftermath will be a best seller, worth reading; but it is not the Bible.

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Johnny Lee writes:

August is now almost over and, with it, the reporting season for New Zealand’s largest companies.

Reporting season gives investors the opportunity to reflect, and review their investments, and ensure they remain fit for purpose.

The first half of 2019 was marked with trade wars, fluctuating consumer and business confidence, and falling interest rates. Corporate New Zealand, by contrast, has largely reported improving positions, benefiting from lower interest costs, and the associated lower costs of capital.

_ _ _ _ _ _ _ _ _ _

Heartland Group (HGH) has reported an increase to its dividend to 6.5 cents, bringing its total dividends for the year up to 10 cents. The dividend is fully imputed and represents a yield of approximately 8.8% gross at current levels.

Heartland’s double-digit growth in the reverse mortgage space continues, both here and in Australia, leading to a net profit increase of 9% to $73 million. It expects this momentum to continue, and is forecasting similar growth next year.

Banking sector share prices, both locally and globally, have underperformed relative to the broader market in 2019. Heartland has been a rare outperformer this year, paying strong, growing dividends on the back of earnings growth. It is proving to be innovative, launching new products designed to identify gaps in the market where the scale is of less interest to the larger banks. This is perhaps one of the larger risks to its model - other banks deciding to aggressively compete. It has also shown a willingness to scale back lower-value lending, particularly in the rural space.

Banking remains a sector under scrutiny, with the actions of certain participants casting doubt on the integrity of the sector at large. Heartland has not been included in this group, and its analysis regarding the implications of changes to capital requirements seem to suggest a relatively minor impact.

While these situations develop, Heartland shareholders will be quietly enjoying growing profits, growing dividends, and growing confidence in the direction the company is committing to.

Advised clients can find Kevin Gloag’s Heartland Group research article on the Private Page of our website.

Disclosure: I am a current shareholder of Heartland Group.

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A2 Milk’s (ATM) announcement prompted a large share price fall, with the shares dipping 15% on the back of its 47% growth in profit. Revenue growth of 41% was largely in line with the half-year forecasts from February. Clearly, the announcement failed to meet market expectations and the share price retreated.

ATM is currently sitting on a large war chest, with $465 million of cash on hand to fund its growth ambitions, including the push in to the US. US revenues leapt 161%, but this segment remains deeply in the red as ATM ramps up its marketing. Marketing costs across the group rose 84% to $135 million, a figure it would not have dreamt of five years ago.

ATM has been a terrific success story, akin to that of Xero, which also saw phenomenal growth from a clever idea. It is now our largest listed company, and holds a minority shareholding in Synlait Milk, another large New Zealand company. Although the shares would struggle to be defined as ‘cheap’, ATM is experiencing enormous growth both in revenues and profits. Although it seems the market had ‘got ahead of itself’, Jayne Hrdlicka and the rest of the management team deserve plaudits for the sustained performance of one of New Zealand’s fastest growing listed companies.

_ _ _ _ _ _ _ _ _ _

Sky TV (SKT) also saw a share price hit, after suspending the dividend as part of its refocus under new CEO Martin Stewart.

The report may look familiar to long-suffering investors, with satellite subscriber numbers down, profits down and programming costs rising. Advertising revenues continue to fall. The share price responded by sinking close to record lows, as investors hoping for a quick turnaround, or even signs of recovery, were told to keep waiting.

In one respect, the announcement was refreshing. The new CEO seems prepared to make the tough decisions that are clearly needed, including having directors cancel dividends and repaying debt. SKT has conducted significant analysis into customer habits and preferences, and seems willing to embrace a streaming-focussed model. The renewed focus on customer needs is exactly what was required.

Curiously, Sky TV has emerged as the buyer of the naming rights for the Cake Tin, Wellington’s premier sports venue, as part of its strategy to become New Zealand’s ‘home for sport’. Shareholders may be perplexed by this decision, but with the secrecy that surrounds these tenders, it is difficult to evaluate the worthiness of the expense.

Sky TV’s long-term plan to modernise and return to growth has only just begun, but I find the first steps to be encouraging.

_ _ _ _ _ _ _ _ _ _

EBOS Group’s (EBO) result was broadly flat, with a forecast that the next year’s result would include a ‘significant increase in earnings’. The dividend rose to a total annual dividend of 71.5 cents per share, and debt levels improved, as the company consolidated its position for future growth.

EBOS, one of the largest distributors of healthcare products in Australasia, is also reporting growing revenue from its recently-acquired animal care division. It owns 50% of the Animates pet stores, and owns premium pet food brands, including Masterpet. It is preparing to invest further in this space by way of acquisition, but does not anticipate this will drive debt to excessive levels.

Consumer spending on pets is a surprisingly large market. Americans spend over $30 billion dollars a year on pet food, a figure growing at about 5% annually. New Zealanders spend a similar amount per capita, with ‘premiumisation’, or a willingness of pet owners to spend more on products they perceive to be of a higher quality, fuelling this growth.

EBOS deserved criticism for its handling of its capital raising earlier this year. The Chairman has since announced his intention to retire, and the company is anticipating stronger performance over the next 12 months.

Disclosure: I am a current shareholder of EBOS Group.

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Steel and Tube reported both a return to profitability and a resumption of dividend payments. However, concerns around its rapidly diminishing margins remain.

The share price responded negatively and remains in the doldrums, as investors seem sceptical that the company can adapt to an increasingly globalised environment.

Project Strive, Steel and Tube’s flagship ‘turnaround’ programme, is continuing to find cost savings and help improve inventory management. Senior management are focussed now on driving margins higher, but acknowledge that ‘external factors’ are becoming headwinds, and a very long-term approach was needed.

Steel and Tube expects the rest of the year to be challenging, and hopes its extremely low debt levels will afford it time to reposition itself to what is proving to be a very difficult trading environment.

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Edward will be in Auckland (Takapuna) on 4 September, in Wellington on 12 September, in Napier on 16 September and Taupo, 24 September.

David will be in Lower Hutt on Wednesday 11 September and in New Plymouth on Thursday 19 September.

Kevin and Johnny will be in Christchurch on 5 September.

Chris will be in Christchurch on Tuesday 24 September and Wednesday 25September.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 22 August 2019

So New Zealand’s capital market leaders - bankers, fund managers, sharebrokers, economists and policy makers – now understand that the world is locked into a future of miserably low interest rates.

It was the Germans who foresaw this ten years ago, correctly analysing that the policy of solving the problem of excessive debt by creating even more debt could produce one of only two outcomes; either we would have social ‘’armageddon’’, leading to war, or debt servicing would have to be abolished. The latter was preferable.

The concept of ZIRP – zero interest rate policies – was better for mankind than currency wars, worldwide bank collapses, large-scale housing loan defaults, trade wars, island economies, and possibly resulting in worldwide military wars.

Zero rates, the Germans predicted, would be the way the poor borrowers would get even with the rich, so favoured by uneven policies, leading to the inequality gaps that are now mundane.

The rich with surplus money would receive no passive income from their deposits; hard luck, if you were a ‘’rich’’ saver.

Sadly, such distortions lead to other distortions.

The super rich realised they could borrow even more money to buy an even greater share of assets. Property prices, purchased with ever more debt, rose.

Those with power, like Putin, Zuma and dozens of others, simply stole their country’s assets, rather than buy them. So asset prices rose even higher, meaning the poor, and even the middle classes, were frozen out of any share of the assets.

Last month’s NBR Rich List, despite how gormlessly inaccurate it may be, still displays evidence of how poorly we have supervised our economy, yet NZ has among the mildest of policies.

If you want to see real inequality go to the poorest countries, like Venezuela, or the Democratic Republic of Congo, or even Myanmar, and observe the hogging of the nation’s wealth by a tiny number.

Until recent weeks, it has seemed to me that our capital markets were either in denial, or simply not understanding the high probability of an outcome of decades of ZIRP.

In almost each of the last years banks and economists have sought to convince the public that within a few months interest rates would rise.

I guess some borrowers were moved to lock up long-term debt at relatively hefty fixed rates.

There was precedence for this misreading of market trends.

In the early 1990s our largest company Telecom, under the urgings of a Reserve Bank governor and deputy governor (Spencer Russell and Rod Deane), sought and received hundreds of millions of debt at a fixed rate for up to 14 years, at 14%!

What a gift this was for investors, and what a stupid error by Telecom.

Heaven knows how many tens of millions of unnecessary interest expense that those offers to the public cost Telecom.

In more recent years even the Federal Reserve of the USA has appeared to be a denier, raising (and then rapidly lowering) its rates, an error replicated by the European Central Bank.

An overload of debt can be handled only by a cold turkey period of extreme austerity, or by becoming debt free. Austerity would create fiscal surpluses and allow debt reduction, an option politicians regard as vote-damaging and, anyway, painful for the citizens.

We are now seeing countries like Switzerland and Denmark charging people to store their cash, and lending it at negative rates, in effect paying qualifying borrowers to borrow money.

Find that behaviour in a 1960s or 70s textbook at Victoria University!

Distortions flow from that.

Home ownership perversely flows into fewer people, the rich able to persuade bankers to lend them money to buy portfolios of houses which are rented out to those who cannot borrow, perhaps lacking a deposit.

This behaviour is replicated in many countries.

Little Malta, whence I have just returned, has had to bring in policies, described in the item immediately below this, aimed at making rental property a more socially acceptable activity.

Other distortions include the reckless, I would say, stupid, concept of allowing an intermediator to arrange direct lending (Person to Person, P2P), from the rate-chasing public to unknown borrowers.

Crowdfunding has become a reckless form of investing, allowing people to invest in start-up companies, usually of no or miniscule substance. It astonishes me that the regulators allow this high-risk programme to be marketed to retail investors.

Risk-averse long-term savers are being herded into aggressive funds, one such US mutual allocating 11% of its funds to Argentinean corporate bonds, which vary in value by 30% in one week, a percentage similar to the vagaries of the Argentinean Peso, which periodically collapses.

Most recently the Peso collapse has resulted from the expulsion of its leader by an electorate which prefers an anti-business leader to a more commercial fellow. The currency fell 30% in days, bringing inflation up to 60%.

Of course there is no greater potential distortion than the enormous sum – trillions – attracted to higher risk assets via exchange traded funds, which invest on the theory of buying everything in a sector, good or bad.

Pension funds dump their clients’ money into these ETFs and into the hands of the bonus-chasing private equity funds, and charge fees for this unthinking behaviour.

We are locked into an experiment, or a series of experiments, of which negative interest rates are the most bizarre, and robotic investing the most undiscerning.

The goal of negative rates is to bring forward tomorrow’s consumption to bolster today’s business results at the expense of tomorrow’s consumption and tomorrow’s results.

Can the earth withstand such a misuse of resources?

Does anyone care about tomorrow?

We do live in ‘interesting’ times.

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Observe a small country, with a low sovereign debt, a rising population, sought after by immigrants, an inability to build enough houses, and therefore facing rising rentals and rising house prices.

Watch the reaction of its government. It might be useful. Let me describe it.

Its government set out to improve stability of tenancies aimed at reducing uncertainty and insecurity.

It sought to use tax breaks to encourage property landlords to behave more generously.

It sought to limit the percentage of income that the poor had to spend on shelter, and it set about building low-cost modest, but usable properties, to sell to first time buyers, most of whom have indicated that they do not need big houses; they will not be breeding as prolifically as their parents.

It reached these conclusions after extensive public consultation.

These were its decisions.

1. Tenancies must be for a minimum of one year.

2. Tax credits would be greater for longer tenancies, the biggest tax breaks for five, ten and twenty year agreements.

3. Rental agreements would be registered.

4. Tenants must give notice of one sixth of the length of the tenancy.

5. Landlords must give three months’ notice.

6. Rental increases were restricted to a Rental Property Index with an absolute ceiling of 5% in any year.

7. Those on a benefit received additional benefits if the rent exceeded a prescribed percentage of household income.

The small country, of course, was Malta.

I have written before that NZ should visit Malta to observe its tourism programme.

Perhaps it should also meet with those who administer its housing programme.

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One of the pleasures of travel in Europe is reading the financial analysis available in quality newspapers, often in articles written by market participants, such as central bankers, sharebroking analysts and fund managers.

Of course we can read the Financial Times online in New Zealand but rarely is there time to read daily the likes of The Times, The Guardian, The Observer and even the Daily Telegraph, all of which have a global coverage of financial and social issues.

One matter that seems to be challenging the minds of many market participants is the future of annuities.

Because annuities must have liquidity they must invest in cash deposits, bonds and Treasury notes, none of which offer any meaningful return. Indeed some returns are negative. There are now US$13 trillion of bonds being traded at negative rates.

Annuities are based on high fees (at least 1% pa, in the case of New Zealand, 2%), yet their commitment to monthly payments to their hapless investors requires the annuity fund manager to earn 5% after tax, per annum (in NZ) or thereabouts, globally.

An annuity fund with 20% of its money invested in cash or bonds for no return, and 20% in property at current returns after tax of 3%, require the remaining 60% of its funds to earn 7.3% (approx.) to achieve an overall return of 5%.

How on earth does an annuity obtain sustainable returns of 7.3% (after tax) from securities such as shares?

Take into account the costs of the fund and the target for shares is nearer 9%!

The reality is that annuities promising monthly returns now cannot, and do not, work, other than by investors eating their own capital at increasingly destructive rates, while fund managers are fed a fee that does not relate to investment skills or performance.

Annuities are not the only investment class that should be exited immediately.

Also damaging investors’ capital are the managed funds and Exchange Traded Funds (ETFs) that invest in cash, bonds and Treasury notes.

These funds have produced yields that mislead new investors. They are not worth buying in today’s environment. Buyers are subsidising sellers. Why?

The funds mark to market, meaning they value their bonds not at what interest they are paying, or what the bond issuer will repay on maturity, but on what they are worth today.

An imaginary fund invested in five-year bonds bought with a 5% per annum interest payment would after one year be worth a lot more than par, as interest rates fall, making the 5% p.a. interest payment attractive to buyers.

Imagine that bond now sells at 2%.

With four years until maturity the portfolio would be worth 12% (approximately) more than par (3% p.a. interest gain, times four years), but the gain disappears.

After three years the portfolio would be ahead by 9%, ($1.09) after two years 6%, after another year 3% and ultimately the issuers of the bonds repay par, meaning the fund gets back exactly the original cost.

The unit price of $1.12, $1.09, $1.06, $1.03 and then $1.00, must fall each year unless the fund is able to make similar paper gains each year.

The new buyers, paying $1.12, would get back $1.00 without the gains. The clever investors are those who sell at $1.12.

Gains occur only when interest rates fall. If interest rates took an (unlikely) path upwards, the mark-to-market valuations would require write-offs, not write-ups, making the situation worse for the buyers.

The conclusion is that holding money in bonds through managed funds or ETFs is logical only if interest rates (not theoretical valuations) return reasonable sums.

They do not. Nor are they likely to do so, maybe for decades.

The European analysts who are not dependent on selling those funds conclude that, as with annuities, the wise investor is escaping, not entering, financial products that are not suited to today’s market conditions.

One hopes our advisory industry is paying attention.

New Infratil Bond

Infratil have notified the market that they are issuing two new bonds to raise up to $300 million.

Infratil are offering a choice of two new terms:

Fixed Rate Bond - 7 year maturity (2026) with a fixed interest rate of 3.35%; and a

Floating Rate Bond - 10 year maturity (2029) with an interest rate that changes annually. The interest rate will be fixed for the first 15 months, and will then reset on 15 December 2020 and on 15 December of each subsequent year over the 10 year term subject to the following:

- the interest rate on the floating rate bonds until 15 December 2020 will be 3.50%

- for each subsequent year, the interest rate will be the sum of the one year bank swap rate plus a margin of 2.50% p.a. subject to a minimum interest rate of 2.50% p.a.

The offer is open now and closes on September 20 with an option for Infratil to close it early. The application form is now available on the Current Investments page of our website.

Infratil will be paying the brokerage on this offer, accordingly, clients will not have to pay brokerage.

If you would like a firm allocation for this bond offer, please contact Penelope on penelope@chrislee.co.nz with an amount and email us a signed copy of the application form.



Edward will be in Auckland (Takapuna) on 4 September, in Wellington on 12 September, in Napier on 16 September and Taupo, 24 September.

Kevin and Johnny will be in Christchurch on 5 September.

Chris will be in Blenheim 13 September. He will be in Auckland on Monday 16 September (Albany), Tuesday 17 September (Mt Wellington), and in Christchurch Tuesday 24 September and Wednesday, 25September.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 15 August, 2019

Johnny Lee writes:

The Reserve Bank’s decision last week to cut the Official Cash Rate by 0.5% has raised eyebrows, especially following the muted response to fixed mortgage rates by our major retail banks.

Seventeen economists were polled for their expectations of the Reserve Bank prior to the announcement. Sixteen predicted a 0.25% cut. One guessed it would stay the same. Zero expected a double cut. For many years it has been a strategic preference of the central bank not to surprise the market. Orderly markets are good for financial stability.

The announcement was followed by a rather impassioned plea from Governor Adrian Orr, who expressed his hope that New Zealanders would ‘wake up and go and spend’. He would rather deal with reining in inflation than trying to stoke it.

Orr, who is quickly proving himself to be a straightforward and honest communicator, has made it clear that he wants the banks to pass on the cuts, to aid in his efforts to stimulate the economy and prevent the committee from failing to meet its medium-term inflation targets. He recognised the role of financial advisers, warning people that they need to put their money to work, investing productively, as opposed to over-investing in low-yielding products.

One need only glance at the nation’s Kiwisaver asset allocations to see his point. New Zealanders tend to invest with a defensive mindset, with large allocations in cash (returning close to nil) and fixed interest (where returns are falling), some of which is invested abroad, for returns lower than local rates, and carrying foreign exchange risk.

Orr has also made it plain that monetary policy ‘needs friends’. The Government 10-year bond rate, at 1.75% only two months ago, now hovers a fraction above 1%. The cost of borrowing will not be a factor in the Government’s thinking. Perhaps next year’s election will spur a more aggressive approach.

The retail banks’ decision to largely leave fixed term deposit and mortgage rates alone, indicates that the OCR may be nearing the end of its useful life. The Reserve Bank intends to publish research disputing this, believing instead that OCR cuts maintain usefulness even as the rate approaches zero.

Zero should not be considered a limit, as Orr has publicly stated that sub-zero rates are within his scope and under serious consideration.

Negative interest rates hit the headlines again this week, with Danish bank Jyske Bank introducing a negative interest rate mortgage product, effectively paying people to borrow money from the bank on a ten-year term. How this works in practice is that the bank reduces the principal owing by a greater amount than paid by the customer.

On the other side of the coin, Swiss bank UBS was reported to be charging savers for deposits, charging up to 0.6% for deposits above a certain size. Readers would have spent most of their lives with these dynamics reversed, with savers rewarded for depositing funds, and borrowers charged for the privilege of borrowing money.

Negative interest rates may seem paradoxical but are ultimately designed to change consumer behaviour. Savers will face a stronger incentive to spend, and borrowers will be more willing to take on debt to buy assets.

Savers may view the security of a low-risk, negative return as preferable to the alternatives. Lenders may see value in capturing the business of a borrower, as well as stimulating an asset class to which they are overexposed. The alternative to lending at a negative rate may be an even lower rate of return.

In New Zealand, we still enjoy some room to manoeuvre before reaching these levels. Mortgages and bank deposits, for now, are mostly (just) north of 3%. However, signs are continuing to emerge that interest rates could continue to be driven lower.

ASB Bank recently completed a $600 million capital raising of five-year money at only 1.83%. Westpac’s $900 million haul last month at only 2.22% shows that markets are moving, and not to the benefit of savers.

New Zealand Refining raised $75 million in December last year at 5.10%. Today, people buy those same bonds at 3.30%. Most senior bonds trading on the market are now yielding well below 3%. Some are below 2%.

Globally, we are seeing changes designed to affect behaviour, largely to stoke inflation both generally and in the housing market.

Investors who have maintained long-term, liquid portfolios will be largely inoculated against these impacts, but should remain vigilant as bonds approach maturity to ensure their investments are still fit for purpose.

_ _ _ _ _ _ _ _ _ _

The Napier Port offer has closed, and will list on the stock exchange next Tuesday (20August). Demand for stock will likely be strong.

As expected, allocations were extremely modest, with levels of scaling that were described as ‘extreme’. Residents of Hawke’s Bay have largely reported that allotments were filled, with scaling only being applied to larger investors.

Coupled with a higher-than-normal minimum for the broker offer (2,500 shares, or $6,500 worth) most investors outside Hawke’s Bay will be disappointed with the crumbs left behind, perhaps contemplating the secondary market to acquire a reasonable holding.  Investors would be wise to closely monitor the listing price on Tuesday, as the market will likely be excited and, possibly, irrational, in respect to an asset that is largely an unexciting and rational one.

Barring any chaos in financial markets, it will likely enjoy a reasonable bump upon listing, perhaps more a reflection of supply and demand, rather than any particular increase in the value of the assets themselves.

Scaling of this magnitude inevitably leads to questions around the pricing of the issue.

Considering the duration of the listing process, the pricing of the shares should delight Hawke’s Bay Regional Council.  Similarly, the lead managers will be pleased to see this outcome, with the result being a bumper return for their client (the Regional Council) and still maintaining enough public interest to induce strong demand.  Staff will own an asset likely to be worth well in excess of what they paid.  Ratepayers will be able to choose whether they want to continue ownership of the port, or to de-risk by selling.

The process was a political one, favouring locals and staff, a courtesy deemed necessary for the listing to achieve public approval.

The listing will be the conclusion to a process years in the making, and the NZX’s first major listing in years. One hopes that its success will help illustrate the key role capital markets can play in bringing together businesses in need of capital, and investors willing to invest.

_ _ _ _ _ _ _ _ _ _

One sector that has seen phenomenal performance this calendar year has been the Listed Property Trusts (LPTs).

LPTs are often used as the first step fixed-interest investors take when migrating away from fixed-interest portfolios towards direct ownership through the purchase of shares.  LPTs tend to pay stable dividends, reflecting the predictable nature of their revenues, being long-term leases.  LPTs often carry the advantage of being a Portfolio Investment Entity, reducing the tax due on distributions for some investors.

Another characteristic of property trusts is that they often perform best when interest rates are falling, similar to bonds.  LPTs deliver leverage to this through lower cost of debt and a higher relative reward.

The LPT sector is comprised of four major players, being Goodman Property Trust (GMT), Precinct Properties (PCT), Kiwi Property Group (KPG), and Argosy Property (ARG).  All pay quarterly dividends, except KPG, which pays semi-annually.

All four have seen record share price performance this year, benefitting from both the long-term nature of their leases and falling interest rates.  The best performer, GMT, has seen terrific returns for investors this year.

All four companies invest in different sectors and markets, giving investors a range of different investments to choose from.

Goodman’s focus remains on Auckland industrial sites, both developing new land and leasing existing space.  Goodman previously had exposure to the Christchurch market, but has since divested itself of this.  Goodman has very low debt levels, modest dividends and a development pipeline expected to drive improving returns over time.

Precinct is mostly invested in Auckland office space (about 70%) with the remainder of its assets in Wellington.  Most of its leases are for very long terms, with a weighted average lease term of more than eight years.  This gives it certainty of revenue, which in turn can give greater certainty to unit holder distributions.  Precinct also has an investment in the co-working (‘shared office’) sector, a growing movement among mostly young entrepreneurs, where permanent office space is unnecessary.  Like Goodman, PCT has very low debt levels, but does expect to take on more low-cost debt as it expands its development portfolio.

Kiwi Property Group specialises in the retail sector, with a third of its $3 billion property portfolio value tied to the Sylvia Park development in Auckland.  Leases tend to be shorter, reflecting perhaps the volatility of the retail sector. However, KPG continues to enjoy very high occupancy rates as it consolidates its portfolio towards the higher returning assets and builds towards a ‘mixed use’ model, where commercial, retail and entertainment facilities exist in the same space.

Lastly, Argosy maintains a diverse portfolio of retail, commercial and industrial properties, with most of its assets focussed in Auckland and Wellington.  Argosy has also been gradually reducing the size of its large portfolio, as it focuses on higher value tenancies.  With 60 properties currently in its portfolio, Argosy’s diversity gives investors a broad spectrum of assets under ownership, both in terms of geographic spread and the sector the property is exposed to.

Outside of these four, Property for Industry (PFI), Vital Healthcare (VHP), Stride Property (SPG) and Investore Property (IPL) make up the balance of the listed property sector.

Listed Property Trusts form a key part of income portfolios, combining regular, predictable dividends with high liquidity, while investing in physical assets with an easily understood business model.  Property will always feature in an investor’s portfolio allocation, and the LPTs are an easy option to review and consider.

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Kevin will be in Christchurch on 5 September.

Edward will be in Auckland on 4 September, in Wellington on 12 September, in Napier on 16 September and in Taupo on 24 September.

Anyone who wishes to make an appointment is welcome to contact us.

Taking Stock 8 August 2019

It is now three months since the book The Billion Dollar Bonfire was published.

It was written with two overriding objectives.

1. To prove the case for compensating the South Canterbury Finance Preference Share investors, who were undeniably cheated.

2. To add momentum to the case for reform of our financial market practices and culture.

It seems polite to report on progress but for the benefit of those who have not read the book it might be sensible to outline what the book unveils.

Fairly intense research and my own knowledge, I having been close to Allan Hubbard and SCF, combined to prove that SCF fell into disrepair because of woeful governance, inept leadership, margin-chasing property development lending, mismatched lending and funding cash flows, and uncontrolled, excessive growth.

When the company began to suffer severe indigestion it self-medicated to cover up errors, it concealed problems, it broke the law repeatedly and it left its future at the mercy of Hubbard’s other assets and in the hands of selfish, incompetent politicians and greenhorn public sector staff who had no clue how to minimise the damage of the scheme that guaranteed SCF’s depositors.

SCF could and should have been revived by a combination of time, Hubbard’s long-term assets, and some public sector and political skill.

To achieve this the National government’s political leaders needed to accept that the poorly designed guarantee had put the Crown on course to lose the thick end of a billion dollars. Treasury told them of that likely outcome a year before SCF was put into receivership.

If the politicians had prioritised their fiduciary duty to protect taxpayers’ money they would have done “whatever it might take” to avoid extreme destruction of Crown money.

The way out was not without risk but the path to success was well lit and was being designed by better minds than  were available from those left in charge, the SCF board, its advisers, public sector mandarins and, as the book displays, politicians much better at talking than at solving problems.

So the Key government and the Crown allowed SCF to apply band-aids to broken limbs and deep cuts, solutions administered by those who were they rugby players, were not likely ever to have attracted the attention of provincial selectors, let alone the All Black panel.

Yet even then a credible solution arrived, involving a subsidised sale with potential upside, a stop-loss guarantee and a recovery plan for the deceived preference share investors.

Excruciatingly, that plan was sabotaged by a concealed, egregious error by an investigative team appointed by the Companies Office.

After the most skittish investigation the team wrongly reported that Hubbard had illegally purloined tens of millions from one of his publicly funded companies. Further the investigators reported (inexplicably) that Hubbard did not dispute that utterly incorrect allegation. Worse, when the error was discovered fifteen days later the public were not told.

All of this information was accepted in a peripheral court case in 2018.

It is not disputable.

The errors led to a series of consequential blunders by Key’s government, beginning when the then Commerce Minister Simon Power, without confirming the allegations, labelled Hubbard a fraudster, ending any hope of a successful rescue of SCF.

The ultimate result was that Key’s government and the public sector made sequential commercially inept decisions, eventually allowing an appalling receivership process that swapped taxpayers’ dollar notes for fob pocket coins from random passers-by.

The preference shareholders, deceived initially by all the disclosure failures, were ultimately unrepresented by anyone and were separated from any hope of recovery.

The errors and the seemingly indifferent, indeed carefree, behaviour of the politicians cost the preference shareholders the rights that were there in law.

You might surmise that the theft of these rights to make informed sell or hold decisions would make an obvious case for compensation.

Most certainly I reached that conclusion, as did a QC investigation.

So the book makes it difficult to imagine that a current government could ignore the facts produced in the 2018 court case. The crass errors and the crass political behaviour need correcting, even all these years later. Maori land claims can be sorted out a century later.

The investors claim, by comparison, seems like a claim from last week.

I hope the current government will see the injustice. Certainly, Winston Peters provided hope when he proclaimed on radio that the media should read The Billion Dollar Bonfire to the very last page.

The second objective, of course, was to highlight the poor law, poor practices and poor culture that allowed all of this to happen, virtually without accountability. The only exception was that one director, lawyer Ed Sullivan, was constrained to the comforts of his Timaru house for his role in shrouding the realities of SCF’s behaviour.

The book uncovers poor law and ridiculous practices, demonstrating in detail how poor operators could enrich themselves without accountability.

So compensation is still a live issue.

I expect to meet with the Minister of Finance Grant Robertson when I return from Europe.

Compensation might cost ten or twenty million but would be a cleansing act, especially if accompanied by an official acknowledgement of the errors of the Crown and of Key’s government.

It is fair to assume that the book has been widely read by politicians and public sector officials as well as by the protagonists, including bankers, advisers, lawyers and business leaders.

The feedback has been encouraging. There can be no hiding from the facts.

At the outset experienced publishers recommended that 5000 books be printed. A few hundred remain unsold in book shops and my office has a box of 24 books still unsold. There is no plan to reprint. The book was not written with best-seller ambitions, a “best seller” in NZ in non-fiction being a book that sells 4000.

It was written to achieve the two objectives outlined earlier.

Obviously it had to have colour to be readable. Because it tackled dreadful and sometimes illegal behaviour from a wide range of people and organisations it had to be carefully researched and documented.

It has faced only the feeblest of challenges, one from a nouveau lawyer whose histrionics must have led to someone paying to tidy up the wet tissues thrown about, the other from a lawyer who struggled to understand that the compensation obligation was not related to the legal guarantee of the Crown but to repair other illegal behaviour.

Reform is underway.

The Financial Markets Authority and the NZX are addressing some of the issues. They may well have been on to the need for this before the book appeared.

I have come to admire the implied vigour of both these organisations, having met with their senior people. It is clear that the SCF saga has not passed unnoticed.

It is likely that neither the FMA nor the NZX would have known about the extraordinary errors of the Companies Office investigative team and thus could not have linked the errors of the Key government to those errors.

The Reserve Bank now supervises the banks and the non-bank deposit-takers. That is progress.

Its vigour has been most impressive in recent months.

It invited submissions during a consultative process. Mine has been acknowledged.

There is no merit in my publishing the submission until it has been considered, discussed and either included, or not included in new regulations.

Of prime importance will be the strident use of the “fit and proper” person process which requires the Reserve Bank to decline to accept into leadership positions any unfit or improper people. Many such people appeared in the SCF saga. The Reserve Bank will need a wider market network to be effective in this role.

Of equal importance will be the need for much more prescriptive trust deeds. They should be approved by the regulators and overseen by much more skilled people than ever emerged from the SCF era, when Perpetual, NZ Guardian Trust, Covenant and Trustees Executors were so culpably ineffective.

Personally, I would bar these operators from corporate trust work until satisfied that they had acquired the resources to operate at a much higher level than I observed a decade ago.

The Reserve Bank will be considering a wide range of submissions within the next few weeks.

Its Governor Adrian Orr and deputy governor Christian Hawkesby are not disposed to accept the status quo and are not the sort of people who would be frightened off by those whose media skills far exceed their business acumen.

There is one major issue that must be rectified.

Recently passed by Parliament, the Insolvency Practitioners Act must be repealed and rewritten. 

It was prepared without submissions from the victims of poor work by insolvency practitioners and thus is a somewhat arcane piece of legislation that does not address the real problem, that being the ongoing indifference shown towards unsecured creditors, most easily illustrated by the primary duty to restore money quickly to the secured creditors.

The new Act reads as though lawyers and trustees and bankers and receivers drafted it.

It should be rewritten now to include a provision for the compulsory representation of unsecured creditors in an overseeing committee which should sit over every receivership, liquidation and statutory management.

The insolvency practitioners themselves are facing a crisis, as their senior people now become greyer and have few younger people stepping up. There are insufficient women in the sector, and it has unjustifiable, unbridled power.

The argument that the banks oversee the recovery process is glib. If banks can restore their money immediately, there is no incentive to achieve fuller prices to cater for unsecured creditors and shareholders, who have no advocates and no effective access to mediation.

There is a little used channel by which receivers can be made accountable but generally the access to the courts is expensive and intimidating. 

My view is that if the law is not rewritten to provide help to the unsecured creditors there will be many cases being referred to litigation funders.

The SCF receivership, run by McGrathNicol, produced the worst receivership outcome I have ever seen. Details of it are recorded in The Billion Dollar Bonfire. They should be widely published.

There have been many, many other outcomes of receiverships that were unfair on unsecured creditors and shareholders. Suicides have resulted.

The balance of power needs regulatory intervention.

The latest Act requires insolvency practitioners to register with the Companies Office and to pass a “fit and proper” test but the Companies Office has then handed back to the insolvency practitioners the responsibility of regulating themselves.

Throughout the whole of my career I have not observed behaviour in this sector that justifies such a privilege.

Nor should these people be allowed to act unilaterally. The McGrathNicol people, according to Treasury, were not answerable in any way to Treasury yet the assets the receivers were selling were in effect Treasury’s assets.

Treasury urged the National government to install an independent supervisory committee to sit on top of McGrathNicol but inexplicably this request was ignored, another of Key’s government’s crass errors. Did that government have no commercial skills?

A supervisory committee comprising independent professionals and representatives of the unsecured creditors should be imposed every time on receiverships and liquidations.

I will update progress on this site and on other issues raised in the book, before year end.

May I record my profound thanks to the senior journalists, my legal and publishing advisors, bank directors, investment bankers, family and friends, as well as my research assistants, who have created the momentum that has led to The Billion Dollar Bonfire penetrating the offices of regulators and politicians. One bank bought a copy of the book for each of its directors!

There are many who want to see reform, who are disgusted with the culture of entitlement that led to such vulgar behaviour, for example, by certain law firm partners with female staff. They want to see a legal and moral response to the recorded errors that have so demeaned our country. We want to see unfit and improper people removed from a very privileged sector.

 _ _ _ _ _ _ _ _ _ _ _ _

For people like me who have had a long career in capital markets it is natural to focus on the evolution of those markets, even when on leave.

But more pressing issues facing the globe are demanding attention.

I wrote recently about right-sizing, a topic that by definition refers to the preservation of necessary resources.

Poland, a country of 38 million and a huge exporter of fruit, especially apples, is facing a catastrophe because of changes in rainfall. Hundreds of small rivers have literally dried up and major waterways are at unprecedented shallow levels.

Last year Poland received barely two thirds of the rainfall it needs to provide just its people with their required daily quota.

One city, roughly the size of Hastings, is now delivering 10 kg plastic bladders of potable water every day, its water infrastructure unable to achieve the rationed amount required. 

Grumpiness prevails.

European authorities claim that this year, on July 29, the world consumed all of the resources that can be produced sustainably in the calendar year: food, water, clean air etc.

Twenty five years ago the sustainable resources were consumed by October 21, 16 years ago by Sept 22, and two years ago by August 2.

The world now has 7.5 billion people. When I was born in 1950 the world population was two billion.

Britain seems to be acknowledging this with its policy that denies benefits to those who live on benefits if, after 2017, they produce more than two children.

In 2035 the world population is expected to hit nine billion.

These topics seem to be arising daily in conversations and in the European media.

Will there be enough doctors willing to take on more patients, enough carers for geriatrics and enough people willing to serve as teachers or policemen or nurses, enough tradesmen? Or will every young person be practising on his screen, hoping to win millions on screen games?

Capital market people everywhere, including NZ, might be wise to be listening. Investment patterns may change involuntarily. Already we are seeing sin taxes applied to air travellers and tourists. It is said in Europe that the cruise ships entertaining their tourists around Europe, produce more toxic by-products than Europe’s entire car fleet.

The unsustainability of those companies servicing today’s rich may require capital market participants to be wary of seismic change around the next corner.

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Travel (by airship, maybe!)

Kevin will be in Queenstown on 23 August and in Christchurch on 5 September.

Edward will be in Auckland on 4 September, in Wellington on 9 September, in Napier on 16 September.

Chris Lee


Managing Director

Chris Lee & Partners Limited

Taking Stock 1 August 2019

Johnny Lee writes:

Napier Port’s product disclosure statement (PDS) is now in the public domain and able to be pored over by the public.

At eighty pages long, the PDS would struggle to meet any conventional definition of ‘light reading’, but those contemplating investing in the port will find it thorough and readable. It provides both a snapshot of New Zealand’s logistical framework, and the Hawke’s Bay local economy, making for good reading.

Assuming a price towards the upper end of the range offered ($2.27 - $2.60), this will place it towards a Price to Earnings multiple north of 25, and a dividend yield of around 4% gross.

Port of Tauranga, by far New Zealand’s best and biggest port, pay a similar dividend yield, albeit one temporarily bolstered by special dividends that may not occur beyond next year. Napier Port’s dividends can, and should, grow over time.

The money being raised will primarily be used to repay debt and return a handsome sum to the council’s new Investment Company (HBRIC). Once this has occurred, it will provide some flexibility for the Port to borrow funds to construct a new wharf, budgeted to cost almost $200 million.

The key risks to the business are outlined in the document. Other than acts of God, the risks can be summarised as cost management of the new wharf, economic risks, and biosecurity risks for the products it exports. There is also some detail around the specific risks of majority shareholder interference, but owners of New Zealand’s major electricity companies will be familiar with the Mixed Ownership Model and the risks this imposes on the minority shareholder.

The new wharf, named 6 Wharf in the document, is estimated to cost almost $200 million and take two years to construct. While under construction, other areas of the business will be impacted, as the wharf is located at the end of the container terminal, reducing the usable space of the area. The construction is being managed by HEB Construction, which is one of the major subcontractors for Transmission Gully.

The Port derives the majority of its revenue from Container Services and Bulk Cargo – with the remaining amount (about 5% of total revenue) sourced mostly from the Cruise Ship industry.

Container Services, primarily marshalling, crane operating and stevedoring, makes up the bulk of its revenue. The Port has invested heavily in to refrigerated containers, allowing them to properly service perishable goods such as pipfruit (apples and pears) and meat.

New Zealand anticipates the planting of approximately a million apple trees this year, with two thirds of those being planted in the Hawke’s Bay. Napier Port will be the closest port to these growers.

The Port has recently implemented a strategy to connect further with importers, to try to increase the number of full containers arriving. At present, a significant proportion of containers that arrive are empty, to allow exporters to use them for their products. By bringing in containers full of imported goods, they increase the overall value of the goods handled at its port.

Bulk Cargo refers almost exclusively to logs – trees felled in the Hawke’s Bay region, then exported, primarily to China. The Port handles the transport on to the boats, as well as offering fumigation services.

Log prices were experiencing bumper prices for most of the last few years, but have slumped in the last month following ongoing concerns around the Chinese-US trade discussions. This has led some forestry firms to halt harvesting, which impacts the Port.

Log throughput is not easily predicted – as harvesters will ultimately respond to market pricing – but analysis of forestry planting can hint towards export numbers. The Hawke’s Bay saw a boom in the planting of saplings between 1993 and 1997. These trees, mostly Pine, are now coming to maturity for export. This boom is expected to last a few more years before returning to long term averages.

Cruise Ships represent the Ports biggest growth opportunity, and perhaps most predictable source of income. Cruise lines determine and book their stops about two years in advance, giving ports transparency around demand. At present, the Port is restricted by the lack of space available, but the construction of the new wharf will help alleviate this.

The Port saw around 70 cruise ship visits last year, and expects this figure to substantially grow over the next few years.

Napier Port employs around 300 staff, most of whom are subject to collective agreements with a union. About half of them will be negotiating a new agreement to come into effect in October this year. Although the Port has not seen industrial action in over a decade, the greyer-haired readers will be keenly aware of New Zealand’s history with port workers and collective bargaining. However, around a third of its staff have worked at the Port for over a decade, and the listing includes generous loan terms to staff to finance the purchase of shares, giving workers an additional incentive to ensure the Port is efficient and productive.

Dividends, initially, will be lean. The Port forecasts a dividend of about 2.5 cents in December 2019, with future dividends being paid in June and December months, with a 40/60 split, meaning December dividends will be marginally higher than the mid-year payments. The Port’s forecasts include an expectation of a 3 cent dividend next June, and an approximately 4.5 cent dividend in December 2020. Full imputation is likely.

The Port are upfront about dividend growth in the short term. The construction of the wharf, expected to complete in 2022, will lead to a build-up of debt that will diminish its ability to grow dividends.

Although access to the float is likely to be scarce, the chief executives recent comments suggesting a desire for a mix of investor types, implies that secondary market trading will be healthy, with opportunities for investors to purchase stock after the float. Surprisingly, the Initial Public Offering is subject to a minimum investment of 2,500 shares – approximately $6000 worth.

Investors could expect to view this as a long-term growth asset, with growth coming from a variety of sources, including increasing cruise visits, increasing apple production and, depending on log prices, the tail-end of a boom in forestry. The Port will also be implementing strategies to make the port more efficient, including the importation of more goods to reduce the number of empty containers brought to the Port. In the short-term, the Port intends to spend substantial sums on the construction of a new wharf, leading to an increase in debt levels. This new wharf should allow it to increase the Ports throughput.

The listing is expected to occur on the 20th of August. Our list for Napier Port is closed, and expectations for allocations (if any) should be modest.

David Colman writes:

The value of New Zealand electricity share prices have increased by an extraordinary amount in the last year with data from Tuesday, 30 July shown below:

CEN - Contact Energy Last traded at $7.83 +38%

(+44% including dividends of 35c)

GNE - Genesis Energy Last traded at $3.48 +39%

(+46% including dividends of 17c)

MCY - Mercury Energy Last traded at $4.68 +40%

(+45% including dividends of 15.3c)

MEL - Meridian Energy Last traded at $4.83 +54%

(+60% including dividends and special dividends of 19.5c)

TPW - Trustpower Last traded at $7.60 +27%

(+40% including dividends and special dividends of 74c)

The NZ50 gross index (which includes capital gains and dividends) increased by approximately 21% in comparison to 10,860 points from 8,920 a year ago.

To help understand a price increase like the above involves an exploration of various aspects of the electricity industry and market forces.

Electricity demand is certainly nowhere near growing at rates comparable to share price performance.

Demand for electricity is growing at about 1.5% per annum. Commercial consumption is increasing by approximately 1.2% per annum and residential consumption is increasing by approximately 1.7% per annum.

Increased power demand from population growth obscures the fact that per household electricity consumption is falling, from an estimated 7500kWh per annum in 2013 to 6997kWh per annum in 2018.

Much of the drop in household power use can be attributed to greater use of LED lighting and more energy efficient appliances. Current trends show dishwashers, refrigerators and clothes washing machines are consuming much less power from year to year with use of clothes dryers and televisions consuming more power.

Data for average annual Auckland household electricity costs going back three years show electricity bills have increased on average in the vicinity of 1.5% per annum (roughly in line with inflation) despite less electricity consumed per household.

Estimates of the average annual rates for a 3 to 4 person household are shown below:

CEN - Contact Energy $2,062 up 0.6% per annum annualised over 3 years

GNE - Genesis Energy $2,433 up 3.6% per annum annualised over 3 years

MCY - Mercury Energy $2,264 up 0.5% per annum annualised over 3 years

MEL - Meridian Energy $2,278 up 0.9% per annum annualised over 3 years

TPW - Trustpower $2,126 up 2.1% per annum annualised over 3 years

Trustpower (provider of both electricity and broadband services) released their annual report in May and included net profit of $93 million (down 18%), operating earnings of $222 million (down 9%), earnings per share of 29c (down 19%), an increase of utility accounts of 1%, $64 million in retail earnings (up 8%). In other words, figures that hardly correlate to the increase in share price.

Further annual results for the industry are due this month and will contain useful data to evaluate the companies once released. Annual results release dates are as follows:

12 August: Contact Energy

20 August: Mercury NZ

26 August: Meridian Energy

28 August: Genesis Energy

Borrowing costs as a result of the continuing downward trend for interest rates have alleviated some costs for electricity providers, which is a somewhat significant factor in recent share price trends.

For example Trustpower issued 7 year senior bonds in 2014 at an interest rate of 5.63% (TPW140) compared to a 7 year bond Trustpower issued in July this year at 3.35% (TPW180, which have already traded, notably on its first day of trading, at a yield of 3.00%).

The reduction in borrowing costs for $125 million worth of bonds is $2.85 million per annum. If reduced interest rates, based on current market rates, were extended to all of Trustpower bonds worth approximately $500 million, the borrowing costs would be potentially lower by over $10 million per year – the equivalent of a 10% increase in company profit.

Lower interest rates for the companies above explain perhaps some of the share price rises but I theorise, as many would, that much of the share price increases have been driven by lower interest rates available to institutional and retail investors which is affecting market sentiment.

Parties involved in the hunt for yield such as Kiwisaver providers, fund managers and retail investors have targeted electricity shares for obvious reasons.

Electricity companies are seen as quality, established essential companies with assets that are expected to produce for decades. Electricity companies are easy to understand, and have proven over the years an ability to provide reliable dividends.

It is a reasonably competitive market but dominated by the companies listed above.

New entrants to the market are unlikely to emerge to challenge the existing companies due to the high cost of entry, including difficulties imposed by the Resource Management Act. It would not be cheap, or easy, as a brand new company to establish electricity generating infrastructure in New Zealand, particularly given only small increases in demand expected.

Evidence strongly indicates that electricity stocks have not risen in price due to the fundamental demand and supply influences for electricity use. Lower costs to borrow have freed up capital and customers consistently paying month after month ensure excellent cash-flow, but on balance I conclude much of the recent share price increases have been and continue to be driven by the exodus of money flowing from fixed interest investments to shares that offer more attractive dividend yields, than ever lower yields achievable with bonds.

A strategic shift to buy shares in quality companies that have long-term prospects (such as electricity generators and others) that benefit from lower borrowing costs has become widespread.

Ever increasing contributions to Kiwisaver, managed funds (including Exchange Traded Funds), and investment of money from maturing bonds, seem likely to continue to support shares in the electricity industry and other industries, with the listed property sector being another sector experiencing very similar share price movements in the last year.

Electricity gentailers (generators and retailers) have performed well, with shares prices increasing dramatically of late, and even though prices may continue to rise it may well be time for investors to evaluate their exposure to particular sectors as should be done from time to time.

If values of specific investments have increased beyond target ranges within an investment policy of your own, we would encourage advised clients to contact us to discuss.


Kevin will be in Queenstown on 23 August.


Mike will be in Tauranga on 7 August.

Johnny Lee

David Colman

Chris Lee & Partners

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