Chris Lee & Partners Ltd

TAKING STOCK 27 AUGUST, 2020

Johnny Lee writes:

REPORTING season has begun, and company reports are arriving in inboxes around the country to peruse and contemplate.

Most companies are reporting on time. A few, including SkyCity and Heartland Group, have confirmed they will be reporting late, relying on a discretionary waiver granted by the NZX earlier this year.

Reporting late is uncommon, and in normal conditions would be perceived negatively, rather than positively. However, given the current environment, the delay does not seem unreasonable and should be judged at face value. Ultimately, the waiver existed to account for the very complications that the country now faces.

Full financial reports can be found on the NZX website.

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NZX Limited, the company which operates our Stock Exchange, has reported a 41% increase in profit for the half-year. The dividend has been maintained at 3 cents, with the company experiencing growth in virtually every metric that it measures. The share price jumped following the announcement.

Funds under management, primarily via its Smartshares product, have grown almost 15 percent, despite the New Zealand market growing at a slower rate. Part of these gains will be due to the prevalence of diminishing interest rates, forcing investors out of term deposits and into products further along the risk continuum. New funds have also been released, giving investors new markets and sectors to consider. These new products tend to be a slow-burn, perhaps reflective of the niche nature of them and the lack of historical performance.

Alongside these gains, the NZX has also experienced large increases in the number of on-market trades, as market volatility nudged people into action, either selling to de-risk, or purchasing to utilise excess cash. Companies are also raising capital, prompting more activity. The NZX has positioned itself to thrive in the environment, sending its share price to new heights, boosted by the increasing offshore interest in our sharemarket.

The company is now streets ahead of where it was during the early 2000s, an era which included efforts to diversify away from its core business, resulting in an unfortunate mess that was tidied up by subsequent management.

Today, the company appears focused, modern and connected to its customers. Strategies put in place over the past few years are beginning to bear fruit, proving the value of long-term thinking from its management team. Its challenge will be to maintain high standards, and ensure capital expenditure is targeted in a way that promotes sustainable, recurring income.

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AMP's decision to return $544 million AUD to shareholders, by way of a bumper dividend and re-purchase of its own shares, was a bold statement of confidence that has injected new life into its share price. The price briefly rose 10% following the announcement.

Long-suffering shareholders will recall that AMP chose to raise $650 million of new capital 12 months ago at $1.60 AUD.

While most companies in the sector are holding capital and bracing themselves for bad debts, reduced profits and lower margins, AMP is embracing its plummeting profits, down 42%, by returning surplus cash to shareholders.

AMP, which is currently facing legal action on at least four separate fronts, has struggled this year from every division within the group. The company is actively shrinking, seeking to position itself as a leaner, more agile business.

Investors should monitor the proposed buyback carefully. Very few companies in this sector are pursuing buybacks at this time, preferring to hold capital, either to weather the forecasted storm, or to acquire assets as opportunities present themselves. AMP clearly holds the view that the amount of capital it has currently accrued is in excess of the amount required.

Buybacks can have positive effects on short-term share prices, as the large, sustained buying enters the market. Such a share price gain can be advantageous relative to a dividend payment for tax purposes.

CEO Francesco de Ferrari's tenure has been, at best, chequered. No CEO wants to begin their new role with question marks over the excessive nature of their remuneration, which includes performance bonuses if, among other goals, certain share price levels are achieved. No CEO wants their company's focus to be on allegations of misconduct and legal battles. It is demoralising for staff and shareholders alike.

The next challenge will be to staunch the loss of customers and reset the company on to a path for growth. History suggests this challenge will be a tough one.

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A2 Milk has reported yet another year of growth in revenue and profit, with its enormous cash balance approaching a billion dollars. The share price fell on the back of the announcement, clearly underperforming someone's expectations.

For longer-term investors, the result should not be anything short of encouraging. The company continues to grow quickly across all its divisions and regions it operates within. Initially, some concerns existed as to whether demand for premium products would fall as the pandemic spread throughout the United States and global unemployment spiked. Instead, milk revenue in that region grew 91%. The company's extremely large marketing expenditure, almost $200 million dollars, appears to be justified.

The outlook seems positive, with attention now turning to how the company intends to utilise its capital and the cash hoard it has built so far, a hoard that grows by over a million dollars each day.

A2 Milk has reiterated that it is not yet its intention to distribute this to shareholders. Instead, it is looking to further fuel its growth. A2 Milk's announcement the following day that it intends to spend $270 million of this cash hoard in acquiring a controlling stake in Mataura Valley Milk from its Chinese owners puts an end to media speculation over the matter.  Such a move will increase its control over its supply chain and allow the company to better control costs and margins.

The company is in an enviable position – cash rich, with an enormous demand profile and opportunities to grow in several markets. The Mataura acquisition is clearly just a first step and shows that the company is operating with long-term goals in mind, with a desire to make the company as resilient as possible.

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FLETCHER Building, by contrast, has reported a loss of almost $200 million dollars, a well-telegraphed announcement that should shock no one. The share price fell slightly after the announcement. The share price is now at levels not seen since 2003. Dividends remain off the table, while debt levels are steady at a manageable level.

Once our largest company, Fletcher Building has struggled over the past decades through a combination of fierce competition, poor historical management, ill-timed acquisitions and, recently, broader factors beyond its control. No one was anticipating this result to be anything but gloomy – and no one was mistaken.

Fletcher Building would not be alone in struggling with the current environment within the construction sector. Diminishing margins appear to result in a battle for survival, one that Fletcher Building has decided to no longer compete in. Following a ''reset'', the company is now choosing to accept only business with higher margins attached, potentially resulting in less, but more profitable, activity.

Construction would be one of the few sectors in our country that is faced with significant demand, yet cannot seem to operate, consistently, at a profit. Perhaps the model needs reshaping. The tendering system has perhaps delivered lower costs for the customer but has hurt sub-contractors (and shareholders) whenever the tender has proven to be poorly costed.

Fletchers CEO Ross Taylor’s challenge will be to maintain shareholder confidence that its strategy is the correct one, and that patience will be rewarded. The tumbling share price, however, will be testing even the most patient believer.

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A PAIR of announcements, from Hallenstein Glassons and Michael Hill, told two separate stories with more than a few common themes. Michael Hill's share price fell, while Hallenstein's soared.

Hallenstein, which suspended its dividend in its half-year report in April, has announced a 15 cents per share dividend payable next month. Following on from this, it will make a subsequent announcement regarding its final dividend, typically paid in the December month.

Revenue for the group is tracking at similar levels as the previous year, although profit is likely to be slightly lower.

Meanwhile, Michael Hill has suspended its dividend, as revenue and profit dropped sharply.

Both are experiencing a surge in online sales, apparently enduring beyond the lockdown period. This has some implications for landlords in the retail sector. If the nature of consumption is shifting to an online channel, a physical presence will have less benefit. Retail companies will also be more resilient if nationwide lockdowns are re-introduced.

Both companies are focusing their efforts on cost control, conserving cash reserves and maintaining appropriate levels of inventory.

The retail sector's story is still developing, but the early moves to restructure their models seems to be paying off. The two questions moving forward will be whether further outbreaks can be endured by the sector, and how consumers choose to react once (if) ''normality'' resumes.

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EBOS Group has delivered yet another record profit, with revenue up another 27% and profit up 18%. Dividends have increased and net debt has fallen. The share price shot upwards following the announcement.

EBOS had indicated in April that the result would be strong, and it did not disappoint. Both the Healthcare and Animal Care divisions saw double-digit growth in revenue, as its network of pharmacies continued to perform well.

The Animal Care division, a small part of the overall EBOS business, saw continued growth and increased market share. Its premium pet food brands, some of which retail at more than $150 a bag, continue to gain traction within the pet-owning community.

Question marks remain over the intentions of major shareholder Sybos Holdings. Sybos Holdings acquired a 40% stake in the company in 2013, as part of its settlement following EBOS’s acquisition of Symbion, an Australian pharmaceutical wholesaler and distributor. With the share price having now more than doubled since that time, Sybos has been gradually reducing its holding, selling to traders and investors through various placements to market.

Sybos had an agreement with underwriter Citigroup not to trade its remaining shares, about 30 million shares, until the release of these results. Now that the agreement has ended, the short-term share price will be responding to this dynamic as it plays out.

Longer-term, EBOS continue to go from strength to strength. It remains well capitalised and has ample financial headroom to take advantage of opportunities as they arise.

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NO ONE should be surprised by Auckland Airport's sharp decline in profit for the year and the cancellation of its dividend. The share price traded fractionally lower following the announcement.

Reported profit fell 63% in what was inevitably going to be a year of two halves. The second half of the year, which included the full brunt of the pandemic, set the gloomy tone for the announcement.

Staff have been let go, some capital expenditure has been curtailed and growth strategies are on ice. Bright spots are few and far between.

Auckland Airport notes that it disagrees with Standard and Poor's view of a three-year timeframe for a global recovery in international travel. It believes it will take longer than this, but is hopeful that domestic travel will recover more quickly and help mitigate the impact of this, and that a resumption of trans-Tasman travel will occur next year.

In the absence of any actual revenue generation activities, the company is choosing to focus next year on upgrading its facilities and infrastructure. Recently raised capital will provide the company with enough liquidity to manage this expenditure.

Ultimately, Auckland Airport's fortunes are largely out of its hands. It will be relying, firstly, on the pandemic being managed effectively, followed by a rebound in economic growth, then finally a return to consumer behaviours that will include large-scale tourism and international movement. No one knows how long these changes will take, and recent events do not help dispel the gloom over the sector.

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DURING our seminars over the past month, cut short by the re-introduction of restrictions on large-scale gatherings, reference has been made to ''FANG'', an Australian-listed ETF. The stock code on the ASX is FANG.

FANG is a commonly used acronym in equity markets, used to denote four particularly large, well-known US companies – Facebook, Amazon, Netflix and Google (now called Alphabet). Variations include FAANG and FAANGM, which include Apple and Microsoft. These six stocks, collectively, make up about a quarter of the S&P 500 and are worth trillions in value. The six stocks in question have undoubtedly been a core driver of the US market's recovery.

The FANG ETF includes these four companies, as well as six others. These are Tesla, NVIDIA, Twitter, Alibaba, Apple and Baidu, the latter sometimes described as ''the Chinese Google''.

The technology sector is one that few New Zealand investors have exposure to, due to our market's tendency to favour utility shares, such as Spark and Genesis. The largest companies on our exchange are Fisher and Paykel Healthcare and A2 Milk. Following the departure of Diligent and Xero, technology stocks are few and far between, with the likes of Pushpay and E-Road being rare examples.

Diversification is one of the best tools an investor can use during times of uncertainty. As we have witnessed during the unfolding Tiwai Point situation, no sector is immune to volatility and no sector is immune to downside risk.

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TRAVEL

Kevin will be in Christchurch on 10 September.

Please let us know now if you would like an appointment in your town.

 

SEMINARS

These have resumed under Level 2 restrictions.

If you have registered to attend our seminar in Palmerston North on Monday 31 August (which is now full), please allow time to sign in, either using the Covid app or at reception. Chairs will be spaced to allow for distancing. Please do not attend if you are feeling unwell.

Napier - Port Ahuriri Yacht Club (some seats still available)

Tuesday 1 September at 1.30pm

Nelson - Beachcomber Motel (some seats still available)

Monday 7September at 10.30am and 2.00pm (please indicate which one suits)

 

Chris Lee & Partners Ltd

 

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Taking Stock 20 August 2020

IF the somewhat arcane theories of academic economists and central bankers converted into successful plans, New Zealand might now be on the cusp of a spending boom, based on funny money and consumer debt.

Ah, if only such theory converted into the desired outcomes.

A spending boom would restore jobs, maintain the status quo with fragile businesses, bolster GST returns and income tax receipts for the government to spend, and might allow Jacinda to make progress with social issues like mental health, child poverty, drug abuse, social housing and the 'big gorilla', inequality.

Sadly, economic theories, dreamt up by policy-makers, are subject to Murphy's laws – they never work as intended.

The theory was that when the central bank created money, the banks (in our case, the Australian banks) would be swamped with cash and would lend it to anyone or any business that needed cash.

What is more, the central bank elected to underwrite 80% of the risk, meaning the Australian banks gained virtually all of the lending return, for only 20% of the lending risk.

With all this funny money circulating freely, households would spend, businesses would be propped up, and tax revenues would be replete.

In the dry terms of economists, the velocity with which money circulates combined with the artificially high volume of money, would be the solution to looming recessions or depressions.

Now, pause.

What say the banks would not accept even 20% of the risk of lending to embattled households or small businesses like retailers, cafes, moteliers, tourism operators, concert promoters, commercial property landlords or hospitality providers?

Instead the banks lent only to those where there was virtually no lending risk.

They would lend to the wealthy, to people well able to supply real security like debt-free houses, or solid investments portfolios.

Because money would be so cheap, those wealthy people could borrow, take a degree of risk, and buy assets that were intended to earn a nice margin over the cost of the debt.

Perhaps they might buy rental properties or shares in the power companies or commercial properties to be leased out to the blossoming corporate sector.

Those borrowers might feel they were being ''given'' their margin, further enhancing their pile of money, which they could count each night if they wished.

Perhaps the money would be lent to the corporate world, where the likes of Warren Buffet, the legendary billionaire sage in America, borrows to buy back his company’s shares, and is now buying gold, selling bank shares and in so doing is breaking all his own guidelines to successful investing.

If the banks lent only to the wealthy, there would be little risk of lending error, minimal or no bad debts, and banks fuelled by funny money could survive, indeed flourish, feeding dividends to their wealthy owners, and infinite absurd bonuses to the gnomes who run them.

Ah, but what about those who the governments had decided needed loans to survive?

If the banks will not lend to them, let the government lend directly.

So the government awarded $10,000 loans to any small business, interest-free.

Watch every small business line up for that sort of gift.

Maybe the small businesses use the $10,000 free loan to repay bank debt, previously costing 10%.

Maybe small businesses use the money as a deposit on a new ute or pass it on to the business owners.

Has any of this behaviour served its purpose, which was to crank up the velocity of money, saving jobs and rebuilding activity that leads to GST and tax revenues?

I would suggest that the dry theory is already disproved.

The funny money ends up in the pockets of the wealthy and has the nett effect of growing the gap between the haves, who make up the wealthiest 10% of society, and the have-nots, who make up the other 90%.

Where does that lead us?

I guess the good news is that our own central bank (the Reserve Bank) is headed by a character, Adrian Orr, who is by nature prickly, unafraid and worldly.

If he had complete freedom to do what he might think was right, he would be planning some forced changes on the Australian banks.

He would be planning to use the fit and proper person provisions to expel from bank governance and executive management those creeps who use their roles for selfish, egotistical, greedy, or political purposes.

He might be planning to ''tax'' the banks by demanding they increase their capital bases, and demand that the risk weighting of the lending be calculated externally, instead of allowing banks to self-calculate.

He might be planning to introduce punitive negative rates, otherwise known as an unofficial tax, on all hoarded bank cash.

If the banks declined to recycle funny money, as a punishment let them pay the central bank a negative interest rate on their hoarded cash.

Would that be negative one per cent? Four per cent? Ten per cent?

At what point would the banks give in, and lend begrudgingly to the recipients intended by the arcane academics?

Would the banks pay the negative interest rate ''tax'' or, instead, would the banks respond by lending all the hoarded cash at nil per cent to the wealthy, thus avoiding the ''tax'' of negative rates, and further ingratiating themselves to the wealthy, who would use the money to even further grow the gap between haves and have-nots?

Would Adrian Orr then respond by imposing new conditions on the new Labour policy of providing a retail deposit Crown guarantee, for deposits of perhaps $50,000 (maximum) per depositor?

Would he offer this guarantee at a price to the banks graduated by each bank's individual behaviour?

Imagine if Kiwibank was behaving nicely, calculating the risks of its loan portfolio carefully and honestly, lending small sums to struggling people and small businesses, and paying no bonuses to its well-paid executive.

Might Orr offer Kiwibank the guarantee at a price of, say, 0.1%?

Might he offer the guarantee to any ugly bank at two per cent, or five per cent, to encourage co-operation?

Could a bank attract the obligatory level of retail deposits if it could not offer the Crown-guaranteed deposit while its better-behaved competitors were able to access this guarantee?

Watch this space.

I expect some bank governors to retire, no longer able to impose their selfish or political agenda on the central bank's plans.

If Orr prefers not to label such plastic people as unfit and improper for their governance role, he has other tools with which to encourage their retirement.

The Australians did not call him ''ginger'' because of his hair colour. They identified ''ginger'' as his nickname because he will fire up their nasal passages if they underestimate his power and defy him.

At a time of economic and social crisis, with inequality threatening to spark up uncomfortable dissent, New Zealand needs a ginger to fight with the feudal lords.

Full speed ahead please, Mr Orr.

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OF COURSE the Australian banks are not without some retaliatory powers.

For example, they cannot be forced to lend to our agricultural sector, on whose productivity we depend.

As the banks produce their reports watch out for references to the lower levels of lending to this sector.

As much as anything that would be a dual-fingered response to Mr Orr.

In stressed times, poor behaviour breeds freely.

Might the government be forced to reinvent the Rural Bank?

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INVESTORS in the leading technology stocks now make up a tidy percentage of the new wealthy, many of these people having enjoyed a painless process to extreme wealth.

Imagine one was a Macquarie executive in the early 2000s, when the Australian bank was at its greediest level.

Even mediocre people were fed millions in bonuses during this period when Macquarie was making enormous profits by developing investor pods, directing money into individual assets like water treatment plants, or toll roads or airports. Thames Water in London might have been such a pod.

Beguiled investors allowed Macquarie to charge absurd fees for directing investors into such pods, the investors hoping to achieve high returns for what might have seemed like low risks.

The investors took the risk but Macquarie had no risk, as it clipped tickets, built up a sales force to sell its lucrative schemes, and gained the moniker of ''the millionaires factory'' by dishing out enormous bonuses to people who were little more than car salesmen, or loud singers at the company's prayer meetings.

Distinctly ordinary people, already generously paid, were uplifted by bonuses of five or ten million dollars and became rich-listers during this era, whether they were managers or salesmen in the likes of Macquarie, Goldman Sachs, Merrill Lynch, Lehman Bros, Barclays, or Deutsche Bank.

Armed with this ''free'' money, those people then watched on as the likes of Apple, Facebook, Google, and Amazon prepared to list their shares.

Those nouveau riches had privileged access to these issues. There were no limits on the allocations available to them. They were in the right seat when the jackpot bells rang.

Sometimes to avoid scrutiny, they appointed mates to be managers of their new money, in what we might today call ''blind'' trusts. Such a strategy shrouded the reality. They directed money into technology start-ups.

Let us guess their mates put their bonus millions into the new issues of Apple, Amazon, Facebook etc.

A few million invested in those stocks would today be worth many tens of millions, perhaps close to a hundred million.

A salesman or a senior manager of such a bank, whose bonuses were directed into such shares, might now be projecting himself as a ''high-achieving'' corporate whiz-bang performer, and might be feted for his money pile, adored by the media as Eric Watson was, before his money skills unravelled.

In truth, the merit of many was on the same level as a Lotto winner, yet they were feted by the media as though they were corporate heroes.

The common denominator in all this rapidly acquired wealth has been the technology sector, the growth in the prices of shares like Apple and Amazon having elevated many distinctly ordinary people into the category of feudal lords.

Apple took more than 10 years to reach a market capitalisation level of one trillion dollars.

A year after it last reached a market cap of one trillion its market cap is on the verge of two trillion.

Its current share price of nearly US$500 is now so far ahead of its natural current value that Apple may soon arrange a share split, restoring its price perhaps to US$100, so others can join in the fun.

Amazon's share price now sits above US$3,000, having all but doubled in the past few months, a hideous period dominated by the Covid-19 coronavirus.

The often grubby folks, living in overseas banks where dealer room behaviour would be regarded by decent 12-year-olds as ''childish'', have bought their ''hideaways'', filled their garages and their hangars, snapped up their Picasso artwork and, if they are wise, retired behind locked gates, policed by security guards.

Life's real achievers, those who make their money by adding value and quite properly being well rewarded for their contribution, are probably too busy to care.

In New Zealand the real achievers like Stephen Tindall, or Nick Mowbray, or Greg Tomlinson are today's equivalent of Woolf Fisher, or Jim Wattie, building businesses that enrich the country.

The technology share price phenomenon cannot be ignored, however.

Apart from any other consideration, we all benefit from the astronomic price rises because the likes of the NZ Super Fund, the ACC, and the pension funds all have been boosted by the price rises of those stocks.

Some will argue that at today's level, the technology stocks are beneficiaries of the ''bigger fool syndrome'', priced so high, yet yielding in dividends so little, that the only motivation to buy must be the expectation that a bigger fool will pay even more tomorrow.

The explanation for the price rises is more likely to rest with the domination of sharemarkets by fund managers, and particularly robotic fund managers, whose commitment is to replicate share indices, investing other people's money.

If Amazon's share price rises, all such funds have to buy, generating further share price rises, ad infinitum.

Yet there is some logic in the enthusiasm for the sector.

There is no doubt that governments will print trillions of funny money in pursuit of solutions for the carbon problem, which threatens our planet.

The most comfortable dream to sell to voters is that technology, not behavioural change, will reverse the carbon levels and allow sea temperatures to fall, climate patterns to revert to comfortable cycles, and ecologies to be restored.

So governments might dump billions into hopeful technology companies just as they have filled the coffers of dozens of companies which seek a treatment or cure for the coronavirus.

When governments dump money into any sector, investors are wise to align their selections with where the money is headed.

It might be distasteful to be a part of a movement that further enriches those unadmired bank salesmen, but that malodorous moment will pass.

Money begets more money. Until it does not.

The rise and rise of the technology sector does not have a visible end.

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OUR seminars are a level one activity.

We will return to those areas like Timaru and Auckland, where the seminars have been deferred, hopefully in mid-September.

I will be travelling under level two to Tauranga, where any client or investor is welcome to arrange personal meetings on August 25, at the Armitage Hotel.

I will hold a seminar in Tauranga, at a date set when the relative peace of level one is restored.

The Palmerston North, Napier and Nelson seminars are unchanged in the hope that level one is restored before the meeting dates.

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TRAVEL

Kevin will be in Christchurch on 10 September.

Please let us know now if you would like an appointment in your town.

 

Chris Lee

Managing Director

Chris Lee & Partners Limited

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Taking Stock 13 August 2020

IT is now a decade since South Canterbury Finance collapsed, leading to public sector and political blunders that cost investors and taxpayers more than a billion dollars.

The cost was unnecessary and highlighted the worst aspects of public, corporate and political behaviour.

Yet one might ask a decade later - what behaviour has changed?

Recently an experienced journalist, Matt Nippert, was interviewed on National Radio to recall his investigation into one of several dozen examples of the disrespectful and illegal devices used by the late Allan Hubbard and his directors to circumnavigate the law.

Nippert exposed a deal involving related party lending, hidden by the cynical decision to use a non-related member of a director’s family to avoid the appearance of related party lending.

Nippert's work was useful, an uncommon example of a journalist being granted the time to untangle corporate chicanery. Probably it helped the regulators to focus on one of the strange smells under SCF's deck.

However, the example was just one of a large number of deceptions and in the context of the SCF saga, little more than a page in a book, evidence of one of the mildest viruses that infested SCF.

Ten years after it lapsed into the hands of the most incompetent and over-priced receivership I have observed, SCF's demise has led to at least some useful change.

Yet the most remarkable outcome is that not one of the culpable protagonists in this debacle still retains the position from which they created the mess.

Eighteen of the people whose decisions and errors led to the internationally humiliating outcome have handed in their rifles.

To be fair, the returned artillery varied from howitzers, in the case of Key and his governments, to muskets, to pop guns and to cap pistols in the case of, for example, Samford Maier Junior, whose firepower was barely discernible.

The cynical Key resigned from politics, as did Bill English and Simon Power, the three politicians whose decision making and behaviour was most culpable.

In the public sector, John Park, John McPherson and Jane Diplock have exited their positions in Treasury, the Company Office and the Securities Commission, McPherson after what was hitherto an eminent career. The report on Aorangi compiled by McPherson and his team, including the Grant Thornton partner Graeme McGlinn, was either pre-ordained, or involved the lowest-imaginable level of intellectual analysis.

Andrew Harmos and Neil Paviour-Smith, who were both advisers (either to SCF or to Hubbard during the crisis), resigned from their NZX directorships. NZX was a regulator of SCF.

The lamentable receivers of SCF and Aorangi Securities, Kerryn Downey and McGlinn, retired immediately after their receivership roles ended. McGlinn believes that some of the evidence used to criticise his performance was ''invented''. One imagines the peer review of his work would not have been a career high point.

Ed Sullivan and Allan Hubbard have died.  Stu Nattrass and Bob White retired when the tanks were rolling into town.

The SCF lending supremos of Lachie McLeod and Peter Bosworth were terminated, and now are not visible in financial markets. They drove the lending that made SCF so vulnerable. They appeared clueless about the risks they were creating.

Eion Edgar has retired as chairman of Forsyth Barr and those of his network who governed SCF in its last year have handed back their water pistols, ending a most unimpressive period of governance.

All the evidence of the appalling behaviour of the politicians has been buried, leaving it unavailable to Official Information Act discovery.

SCF asset manager Ian Thompson today sells real estate, and most of the dreadful SCF branch lenders no longer are invited to practise money-lending, nor should they be.

No doubt many have deleted their errors from their memory.

One hopes those who still participate in the financial market sector have written off their errors to ''learning on the hoof'' and are now less likely to repeat those errors.

That might be one good outcome of the now 10-year-old disaster.

It is now too late to make accountable any or all of the miscreants.

Key, of course, was principally responsible for the destruction of tax-payer money as he had the authority to prevent it, and had neither the wit nor the substance to choose the right strategies. Those who admire American-trained banking mentality may retain their respect for him, despite his unforgivable decisions.

Hubbard, of course had the view that, given time and the freedom to make decisions, his assets had the inherent value to avoid losses. He would have justified his view, had he not lost his mojo by taking every shortcut available.

He blew his chance and his credibility when he opted for a Forsyth Barr plan that was predicated on Forsyth Barr's ability to sell its improbable solution to its clients and the market generally.

Hubbard had an alternative that was much more credible but chose the Forsyth Barr plan because it left him with more ability to be a part of the decision-making. The Dunedin sharebroking firm was clearly underpowered and out of its comfort zone in tackling the recovery challenge.

Even after Hubbard's poor decision, a possible recovery was possible, with minimal loss to tax-payers and to SCF preference shareholders. However, the politicians and the public service facilitated a dreadfully inaccurate Companies Office report and even after it was shown to be demonstrably and childishly wrong, it was still allowed to shroud the truth, enabling the politicians to bury their, and the Companies Office, errors.

As a chapter in New Zealand's corporate history, the shameful SCF debacle will be still smouldering in future decades, the bonfire of a billion dollars (and some), a legacy of some dreadful behaviour and decision-making.

A decade later, I look for signs that the outcome next time would be better.

There is now some reason to hope that the fit and proper person enquiries might shut the door on weak and unskilled executives and governors in the future, and to have a higher bar for those seeking a role in the rescue team.

Surely in future there would be more supervision of receivers, denying amateurish practitioners to discount state assets.

No investor is ever again likely to believe that trust companies are effective guard dogs.

The Financial Markets Authority is clearly now a much better regulator than the ineffective group who led the Securities Commission.

The Reserve Bank is now building regulatory competence, and is less likely to be bullied by Treasury.

Auditors are now far less likely to sign off accounts without challenging odd-looking transactions.

And one has to hope that the public sector will make much more use of competent, experienced private sector people before taking on responsibility for funding private sector assets.

I also hold some hope that credit rating processes that are flimsy, lead to accountability for the raters.

It is important to record what happened and what needs addressing, because there will be repeats, probably in large numbers, given the chaotic state of the world.

Failures may be in banks, in funds management, in trust companies or with insolvency practitioners or property syndicators.

As the stresses of Covid-19 lead to hardship or losses, weak, unfit, improper people will cover up their errors or misdeeds, rather than accept the responsibility of fixing the problems.

Selfish, greedy people always try to avoid accountability, and will take risks with other people's money to evade detection. Their backbone is amoeboid.

The SCF disaster ultimately was proof that the public sector needs to have effective laws and be supervised by skilled people to deter the selfish and greedy.

It would be a disgraceful outcome if all the blunders that created the SCF disaster were not being addressed, one by one.

Those whose job it is to frame these repairs should fall back on a simple solution – make detection of poor behaviour a certainty, take from the offenders their personal and family trust assets to reimburse the cheated, incarcerate them, and deny offenders the licence to practise in capital markets. Is that too hard to understand?

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SUPERVISION of receivers and liquidators might also be a simple matter.

Imagine if a receiver had to account to all shareholders and creditors for every item sold; the name of the buyer, the price achieved, the name and credentials of any valuer or intermediary, and the itemised details of each transaction.

Shareholders and creditors would know when the processes and prices were unreasonable.

When McGrathNicol were (wrongly) awarded the SCF receivership, the Treasury was advised quite specifically that the receivers must be supervised and must refer significant sales to Treasury. After all, the money was owed to tax-payers represented by Treasury.

The source of the advice was a major accountancy company with a large receivership division.

The Minister in charge of Treasury (Bill English) was told of the advice and supported it.

Inexplicably Key and his government decided no supervision was required, despite being told that not to supervise would lead to hundreds of millions being unnecessarily lost.

Unsupervised, McGrathNicol engaged nearly 100 SCF staff and contracted them for one year, with a promise of a bonus and guaranteed salaries.

McGrathNicol must have had these SCF people sign as though they were employees of McGrathNicol, as the ultimate receivership charge for those staff was at hourly rates several times the actual rates paid to the staff.

Of course if the SCF people were by then McGrathNicol contractors, there was no transparency of the hourly rates paid to the staff. There was just a charge to the receivership by McGrathNicol of the hourly rate it nominated. The total cost of a two-year receivership exceeded $50 million.

In effect the staff cost was arbitraged.

Asset sales then went ahead at prices that were later seen to be absurd.

It was in anticipation of that absurd fire sale approach that Treasury and the Key government were told to dictate that sales should be deferred until distressed markets had recovered.

Because Key and his government over-ruled that advice, McGrathNicol was free not just to charge hideously high staff rates, but was also permitted to sell assets at fire sale prices.

Ultimately the buyers of the cheap assets have benefitted by a billion dollars or more. The tax-payers have borne the cost.

There can be no debate about this.

It happened.

The SCF receivership, and indeed the receivership of its related company Aorangi Securities, provided irrefutable proof that all receiverships should be overseen by an independent panel.

In my opinion that panel should include representatives of the unsecured creditors and the shareholders.

If that sounds simple then why has the troubled Ministry of Business, Innovation and Employment not drafted new law?

Covid-19 will cause hundreds, probably thousands, of businesses to fail.

The lack of supervision of receivers will again lead to nausea at our Old Boys Networks, and raise doubts about the processes followed when the assets of the failed companies are sold.

In recent months a High Court has twice ruled that receivers have charged excessively, and forced the errant receiver to reduce his bill.

But excessive charges are the lesser of the two problems.

The more significant matter is the maximising of sale prices.

Unsecured creditors and shareholders would endure losses because of both these loose practices.

Why is the MBIE and the Ministry of Commerce indifferent to this matter? Is no one paying attention?

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OUR seminar schedule is deferred, for obvious reasons. We will be in touch with enrolled people as the current situation changes.

As of today I have NOT deferred the Auckland meetings, but that seems likely.

Anyone intending to attend a seminar who has not notified us should do so now, enabling us to update anyone enrolled to confirm arrangements.

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Travel

Kevin will be in Ashburton on 19 August.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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Taking Stock 6 August 2020

THE return of the Bank of New Zealand to NZ ownership and an NZX-listing may be the spark needed to reignite cooperation between our banks and our Central Bank (the Reserve Bank), and to lift banking behaviour at governance level.

Currently the situation is grim. Cooperation is low.

The Reserve Bank has effectively created $60 billion of ''funny money'' (quantitative easing) to restore struggling businesses, to slow down job losses and to maintain the velocity of money (consumer spending confidence). It expects the banks to lend this money to those in need.

But the banks have reacted by hoarding the cash, or by lending it only to the wealthiest of its clients, nullifying the purpose of quantitative easing.

Just last week the deputy governor of the Reserve Bank, Geoff Bascand, used corporate-speak to jolt the banks into changing their behavior.

His only tool other than talk is negative interest rates, effectively a tax on banks that do not cooperate, but simply stockpile cash or lend it to the rich.

So one wonders if the impasse would be broken only if National Australia Bank (NAB) announced that it would sell the BNZ by way of a public issue to New Zealanders.

There is no certainty that this will happen but in banking circles it is widely expected. Such a sale might prompt a change in the mindset of banks on many fronts.

Certainly the NZX and many of the public would be delighted to receive confirmation that this would happen.

So too would the Reserve Bank, which has been thwarted for years by the attitude and behavior of Australian bank directors, who regard their businesses as being Australian, subject to the aspirations and culture of Australians, not New Zealanders. New Zealand is ''East Tasmania''.

The Australians appoint to their NZ sub-boards people without grunt, people unlikely to challenge the Australians. Often their banking intelligence is low.

Australian financial market behavior and culture is far closer to what many might regard as ''Goldman Sachs'' standards than the more conservative and polite (but still greedy) British model that New Zealand has followed.

The return of the BNZ, with its market share here of around 15%, might just be the opportunity for New Zealanders to vote with their wallets.

Success would require a rather different approach than the example that led to the BNZ collapse in the 1980s, which resulted in its sale to the Australian bank NAB.

That failure stemmed from greed, dopey management, goofy governance, and political naivety, resulting in governance being passed to the likes of Fay Richwhite and Brierley Investments, in an era when business and personal behavior was often shameful. Neither Brierley nor Fay Richwhite today would pass Fit & Proper Person scrutiny, at least not if the decision was mine.

At one stage the corporate asset trader, Ron Brierley, chaired the BNZ, appointed by a Labour government with so little understanding of Brierley or banking that it imagined that without a day of experience in building real businesses, he would restore a multi-billion dollar bank.

The man was an asset trader, a deal-maker; not a banker, not even a clever strategist. One still wonders how that appointment was ever made. He had very limited social skills or wisdom, as we are now seeing.

If NAB does list BNZ here, it is to be hoped that the politicians have no role in directing the bank.

Bank governance ought to be reserved for the wisest people with both social and business skills, transparent and developed. I see little of that now.

Indeed the politicians should read a recent Deloittes report which, hidden behind its groveling, Old Boys Network language analysed the dreadful behaviour of ANZ towards central bank and NZX regulators.

Deloittes, like all the major accounting firms, receives its thickest gravy from the government and the banks. It produced a report that simply had to acknowledge the ANZ's dreadful attitudes but dared not to say so, without risking offence to a major client, in a lucrative sector. It used weasel words to ensure it offended no-one.

It assessed ANZ's behaviour on a manufactured scale, from one to five.

In my words, not theirs, the report assessed this behaviour, with one being outright refusal to acknowledge the RB guidelines, two being a disdainful attitude towards them, three being a denial that the rules applied, four being acknowledgement that the rules existed, and five being compliance.

I interpreted the report as suggesting the ANZ drifted between two and three, dragged closer to four only when there was no room left to argue after the RB bared its teeth.

The Deloittes report could hardly be cited as an independent and crisp review. It was solid evidence of our still dominant OBN. It was gobbledegook, written to a code that negated its value.

At a time of a pandemic, with awful consequences for the economy and our people, the last response a government would envisage would be selfish and intransigent bank behaviour.

Should BNZ be re-established as an NZ entity, the people of NZ would hope that it would offer companies and the public a clean, cooperative, commercial model, governed without shallow, greedy, egotists but by highly competent, genuine, social, business leaders, with an agenda that includes sustainability as well as necessary profitability? It would give NZ an avenue to ward off Australian arrogance. The governors would not be chosen for telegenic reasons but for their social and intellectual intelligence, as well as their relevant knowledge and experience.

Clearly Kiwibank lacks the capital and scale to shoulder its way into a leadership role, even if it were to merge into its operations Heartland, SBS, The Cooperative Bank and with more resistance, TSB, as it should.

As Kiwibank seems to find that route impassable, we will need the NAB's discussion to abandon BNZ to create the opportunity for an NZ bank to compete effectively with the Australians.

Now might be the optimal time to arrange this.

We will soon have a Crown deposit guarantee for retail bank deposits, perhaps at $50,000 per deposit per depositor.

Might this be an opportunity to introduce a pricing mechanism for the guarantee to be paid by the banks at variable levels, reflecting their behaviour?

Might the absurd bonuses, the opaque attitude towards reimbursable expenses, and accuracy in reporting standards, be criteria that guide the variable cost of the guarantee?

Might this be the opportunity for the market regulator, the Reserve Bank, to apply Fit & Proper Person criteria to ensure much better standards are required of bank directors?

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Johnny Lee writes:

NEW Zealand is home to many special companies, some of which are listed on our stock exchange.

Shareholders in many of our companies have enjoyed terrific returns, employed thousands of people, and created stable incomes for those who rely on dividends to improve their standing of living.

We have companies helping the fight against bladder cancer, caring for our elderly, feeding the world, and servicing the exports of thousands of New Zealand businesses.

One special company listed on our exchange is Mainfreight.

Mainfreight, headed by Bruce Plested and Don Braid, is a very well-known transportation and logistics provider and one of our ten largest listed companies.

Mainfreight shareholders have enjoyed growing profits, growing dividends and a growing share price, virtually since the day the company was listed. Grumpy shareholders would be few and far between. The grumpiest, I suppose, would be those who sold too early.

It would be easy for a company like this to rest on its laurels, boast about its achievements and grow simply by riding on the coattails of its already established market dominance.

Instead, Mainfreight strives for further excellence, rewards the staff who drive that excellence, and focuses on the long-term. Mainfreight is one of the very few companies, globally, that bases its decisions around a 100-year plan.

Mainfreight's recent Annual General Meeting (AGM) highlighted this level of forward thinking. Instead of discussing avenues for short-term growth, Plested spoke at length about the efforts of the company to preserve water, utilize rainfall and the importance of water self-sufficiency. He spoke about the importance of social housing and his belief that the need for shelter among the desperate, and the lack of tourists occupying our motels, could meet the others need.

The leadership team understand that the company cannot thrive in a fractured economy, or one crippled by resource shortages. Last year, Plested discussed the importance of paying income tax, and even featured a small film review. Its record dividend was barely mentioned.

This is not to suggest that the company is all talk. Between solar panels, electrification of their fleet and even vegetable garden initiatives, Mainfreight are making real investments towards its 100-year goals.

There are tangible benefits to these investments. The direct financial benefits from investing in rainwater collection and solar power may not be immediately apparent, but both international and domestic fund managers are increasingly focusing on ''ESG'' – Environmental, Social and Governance - factors when determining asset allocation. Greater numbers of ''Socially Responsible'' funds are emerging, and companies are keenly aware of changing societal norms and the need to maintain access to capital by adopting these standards.

Very few AGM's would ever be described as inspiring. Most are fairly drab affairs, designed to give shareholders an opportunity to meet and talk to the company management about its strategic direction, with the odd member of the public enjoying a free lunch.

But Mainfreight are different. With an audience of some of the wealthiest New Zealanders, the company chooses to instead commend its staff, and express its commitment to addressing some of our most intractable national issues.

They deserve recognition.

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Chris Lee writes:

THE stricter close-down of Victoria in Australia, for the next six weeks at least, will provide a new insight into the confidence of consumers and investors.

Close-downs are synonymous with lower consumption, less travel, slower velocity of money, lower household incomes, fewer jobs and lower tax obligations.

The perverse outcome in NZ will be explained at our seminars but does not point to any sustainable trends, unless governments continue to helicopter money to households just as the Americans did in April, paying every adult US$1200, whether they were in need or not.

New Zealand's helicopters delivered wage subsidies, more generous dole payments (temporarily) and support for stricken sectors, just last week announcing hundreds of millions for marooned tourism operators.

What Victoria will do is as yet unstated, but the Australian state will provide us with a close-to-home example of a response, and the expected (or unexpected) ultimate outcomes.

If the outcome is yet more money pouring into the thrill-a-minute shares of hopeful companies, the decision-makers will have failed. Helicopters are not usually able to deliver targeted results.

The Victorian experience highlights the fragility of any smugness here and is a timely reminder of the need for investment strategies to consider tectonic changes to the underlying economy, brought about by the pandemic and the huge increase in debt, everywhere in the economy.

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Seminars

Our seminars for clients and investors are now underway, with one-hour sessions planned for Timaru and Christchurch next week.

The 30 pages of statistics which underpin our thesis will be on display at each seminar and will be on the client pages of our website, under ''Research''.

At the conclusion of the six-week programme, a video of the Kapiti seminar will be available to clients.

The title for the Seminar – No Hiding from Risk- will be explained with some thoughts offered on how one can deal with the contrasting risks facing investors, requiring opposite solutions.

Registrations at our remaining meetings in Christchurch, Timaru, Takapuna, Mt Wellington, Tauranga, Palmerston North, Napier, and Nelson are still open.

Clients wanting to meet with advisors after each seminar would need to arrange this as soon as possible.

Venues and times are:

Christchurch - Burnside Bowling Club

10 August at 11.30am

Timaru - Sopheze, Caroline Bay

12 August at 1.30pm

Takapuna - Fairways Conventions

18 August at 11.30am

Mt Wellington - Mt Richmond Hotel

19August at 11.30am

Tauranga - Armitage Hotel

24 August at 11.30am

Palmerston North - Coachman Hotel

31 August at 11.30

Napier - Port Ahuriri Yacht Club

1 September at 2.00pm

Nelson - Beachcomber Motel

7September at 10.30am (Fully Booked) and at 2.00pm

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Travel

Edward will be in Napier 13 August.

Kevin will be in Ashburton on 19 August.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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