Taking Stock 26 August 2021

WHEN Covid struck last year it left scars.

We know that:

- The tourism sector, then the biggest contributor to our economy, was eviscerated;

- The hospitality and entertainment sectors were badly damaged, in some places, like Franz Josef, irreparably;

- The government borrowed an extra $60 billion and printed a further sum, tens of billions, of ''funny money'';

- Hundreds of millions of dollars of potential export food was left to languish;

- Housing prices and rents soared beyond imagination, beyond affordability, creating ruinous increases in social division;

- NZ people reacted by going on a spending craze, further reducing the national savings pool of a developing country already short of capital;

- NZ house buyers added another $50 billion of mortgage debt to a country whose household debt was already stretched beyond safe levels.

We know all of this.

We also know that the sharemarket quickly recovered from the first lockdown and has moved on to unprecedented heights, boosted by foreign investors who judge our economy as less dangerous than others, presumably because our innovative farming sector provides essential food to those in the world who can afford high-quality food products.

What we do not know is the level of resilience in a debilitated economy which, as a result of consumer profligacy and some poor strategies in the past 17 months, must be fundamentally weaker than it was, less able to address decarbonisation.  The strength of our underlying economy reminds me of the truism that no structure was ever made stronger by an earthquake.

It is a matter of opinion as to whether the political governors of our country, and its public service, have the knowledge and experience to lead us into executing optimal solutions.  I guess we do know their people are more diverse so some may see this as of prime importance.

Financial market soothsayers, usually with no accountability for their guesswork, tell us that just as happened last time, consumers will keep racking up more debt to ensure that business revenues and profits will continue to grow perpetually.  Keep investing, without fear, they imply. 

In effect they argue that if number seven won race seven at the races last year, that proves that historically number seven wins race seven, so bet on it.  Their confidence in their logic will baffle some.

Guessing the behaviour of consumers is for brave people who should be personally able to underwrite their guesses when they are wrong. 

By contrast, my only advice to those who actually have wealth, rather than just talk about wealth, is to make the following judgement: if the potential upside of market prices is more important to you than the potential downside, cross your fingers and carry on.

If the potential downside from your already enhanced portfolio value could destroy your plans, then hold that thought while you review your plan.

If you have access to knowledge and advice, use it.

Ensure your portfolio matches your unique needs.

And, as the following Taking Stock items imply, those who allow others to be in charge of some or all of your money should be aware of the style and characteristics of those ''others''.

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AMONGST the most absurd practices of the financial markets, in which I have enjoyed my career, is the practice of claiming reward without risk.

The most obvious example of this is the ''bonus'' payable to a fund manager when the fund produces a bumper return, as all funds should, periodically.

The fund managers are paid extravagantly to manage other people's money, with fees set at extremely high levels relative to the value-add.

A fee of 0.2% paid to the likes of Simplicity, so it can shovel the money onto other fund managers, sounds modest but 0.2% of $2 billion is $4 million, an amount that far exceeds value-add.

Just as absurd is the 1.0% fee (per annum) paid to sharebroking firms and fund managers to employ research staff, marketing staff, and administration.

A fund that says it has $30 billion under management (for, say, 60,000 people or organisations) is being paid $300 million in fees, up front.

In the case of a sharebroking firm, it also earns sharebroking fees, new issue distribution fees, administration fees, and also earns fees for lending its clients' shares to those who short sell.

If all of these fees add up to less than another $300 million, I would be amazed.

How many staff would you need to employ to run such an operation?

Would 500 do the job? Well, $600 million of revenue would equate to $1.2 million per head.

Of course I am not suggesting that the tea lady is paid $1.2 million. Someone else is paid much more from her ''share'' of the pool.

And obviously there are costs other than staff. But my point is still valid, and it is well understood by regulators.

Put a ring around this, KiwiSaver bonus payments will soon be a concept that is both historic, and mocked, as being rapacious.

Expect there to be heavy conversations, this year, between KiwiSaver providers, the trustees who have allowed these fees, (unsurprisingly, given the Old Boys Network) and the regulators.

The discussion will not end just with KiwiSaver managers, and their fees, now generally accepted as being exorbitant.

There should be fury at regulator level about the $51 million bonus paid to those who own and manage the Money Managers- associated company NZ Funds Management (NZ Funds).

I am unsure what leads investors to NZ Funds, but it is not illegal or even unethical to offer to manage other people's money, and in such a lightly regulated sector there is great incentive to market one's willingness to take on this funds management game.

NZ Funds is interesting.

It had a close relationship with Money Managers and its founder Doug (Somers) Edgar two decades ago when Edgar was rivalling his distant cousin Eion Edgar, who died recently, having grown his organisation Forsyth Barr, eventually surpassing in profitability the empire of his unloved cousin.

Doug Edgar was often quoted as disclosing that he received eight basis points for all money that his organisation placed with NZ Funds.

He went into partnership with the insurance salesmen Gerald Siddall and Russell Tills, who had formed NZ Funds, where the three of them dreamt up the appalling contributory mortgage company/quasi finance company, First Step, which incinerated tens of millions of dollars of other people's money, while the owners were scooping out their fees.

First Step cynically marketed itself and its returns as being comparable with bank deposits, a comparison about as accurate as comparing the moon with a cheese factory.

Astonishingly even today such cynical and misleading advertising occurs with the mortgage trusts pretending that their returns can be measured with the term deposit rates of banks.

For clarity, banks have capital to cover occasional loan losses.

Mortgage trusts have no capital and, as we saw with the fund run by Canterbury lawyers (Canterbury Mortgage Trust), cause investor losses during deep property market downturns.

Well, NZ Funds - still owned 35% by Siddall and Tills - manages other people's money and in one fund last year it traded in bitcoin, and benefitted from the extraordinary rise in the volatile prices of these tokens.

The clients who allowed NZ Funds to play this game, and presumably other people whose funds NZ Funds manages, are now learning that the bumper profits will be debited by $51 million because of this windfall. NZ Funds will take the $51 million as a bonus. That sounds like $17 million for Tills and Siddall.

There is nothing improper about this.

Obviously the trustee for investors agreed a deed that allowed NZ Funds to offer these managed funds on the basis that bonuses could be paid, in years when windfall returns arrived. The concept might be nonsensical, but it is currently allowed by law.

You might ponder the credentials of New Zealand's trust companies, but all of this will have been disclosed. I personally regard trust companies as a close first cousin of the likes of NZ Funds and Money Managers.

My question is why the return from such risk is shared with the admin people who process these 'investments''.

Investors bear all the risk. In the case of bitcoin, the risk is indicated by the extreme volatility of an unproven concept.

The fund manager has no risk, other than reputational.

The fund manager's bonus is not reversible, and there is no top-up from the fund manager when speculative, or high-risk investments produce horrible messes, as they will, inevitably, sooner or later.

No risk? Then there should be no return, in my view. No bonuses. Full stop.

I am comforted by the thought that the market regulators will be contemplating these anomalies.

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LAST week I recalled the history of Radius Care, now a listed company, once a privately-owned company, built in part on the funds channelled to it by the dreadful Vestar group, founded by the late Kelvin Syms, to compete with Money Managers.

In the 1990s and the first years of the next decade. Vestar had persuaded investors to allow Vestar's untrained and often greedy advisers to direct the money of the investors into any venture that Vestar chose.  It generally chose ventures which paid double or triple brokerage.

Lovely people.

I do not know how much brokerage the Radius people paid Vestar.  Typically, it might have been five per cent.  One correspondent suggests eight per cent.

Radius Properties was thus funded by outside equity to buy what were essentially third tier rest homes.  Radius Care operated the rest homes, paying rent to Radius Properties. 

Some time after the global financial crisis, the American Sandy Maier Junior and his wife, Sherry, set out to buy the Radius Properties shares from the hapless investors that Vestar had herded into the company.

Their first offer was pitched at about 44 cents in the dollar.  Later offers, aimed at gaining total ownership, were nearer 55 cents and the last of the offers were around 75 cents, I think.  The Maiers succeeded. 

Wonderfully for the Maiers, the properties within a year were valued at more than a full dollar.  The investors had handed over wealth to the Maiers, whose previous venture had been the unsuccessful attempt to restore the value of South Canterbury Finance.  Maier and his wife had written a paper on SCF's problems which had resulted in Forsyth Barr recommending that the American be installed as CEO of SCF in December 2009, eight months before SCF collapsed into receivership.

To be fair, the list of organisations and people who destroyed a billion dollars of Crown money with SCF was not limited to Maier.  It included at least some of Maier, Forsyth Barr, McGrathNicol (receivers), the Securities Commission, the Companies Office, Treasury, John Key and his Cabinet, the Reserve Bank and, not to be overlooked, the braindead lenders at SCF, as well as the various SCF directors whose cerebral organs were equally incapacitated.

Within a year or two of the SCF disaster the Maiers had moved on to Radius Properties.

The Vestar-captured investors were the losers, the Maiers the winners.  How jolly.  Some will say there always have to be winners and losers.

I do not know who owns Radius Properties now but they most certainly will be grinning widely when Radius Care uses the money it raised last month from new investors to buy some of the properties held by Radius Properties.

There is no reason to expect the price to be discounted.  Someone is going to make tens of millions.

That beneficiary of the transaction will not be the Vestar investors.

I note that the chief executive of Radius Care resigned this week.

The man who founded Radius Care, Brien Crees, whose ownership has now been reduced to less than half, will again become chief executive until he finds a new person. 

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ANZ's capitulation over its threatened exposure to a judge's decision was signalled in Taking Stock July 29, four weeks ago.

Thanks to a litigation funder (LPF), the Key-chaired bank faced a court ruling on its accountability to ensure its clients did not openly misuse their banking arrangements at the expense of other people's money.

Such a ruling might have led to a tectonic change in banking governance.

To avoid such a ruling, ANZ has capitulated, agreeing to pay an unspecified sum to the victims of the ponzi scheme run by David Ross.

The sum is certain to have been in the tens of millions.

Confidential settlements do make commercial sense.

They also deny the public court law that could change behaviour to everyone's benefit, except, of course, the institution, in this case ANZ, that would have been exposed, should the judge have ruled against it.

We will never know. That is why the ANZ settled confidentially.

The victims of Ross will get a cheque.

Banks continue to behave as they have always behaved, denying accountability for those of their clients who cheat.

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Johnny Lee writes:

THE announcement released to market last week regarding a potential takeover of fuel retailer Z Energy confirms market rumours and presents an interesting dilemma for shareholders to consider.

The group bidding for ownership of Z Energy is Ampol – an Australian fuel retailer best known, locally, for its ownership of Z Energy rival Gull New Zealand (Gull).  The price offered of $3.78 a share is a modest premium to the current price, but a substantial increase on the 90-day average, suggesting people who have recently become shareholders will be well-positioned (and incentivised) to pocket a healthy profit.

This conclusion is not written in stone and may take a long time to reach.  A rival bid has been mooted by some groups, and two difficult approvals must be granted first – shareholder approval and Commerce Commission approval.

A rival bid is absolutely plausible.  Z Energy's share price has lagged for many years, before finally capitulating after the first lockdown to record lows.  However, it is profitable, a market leader and provides a service that will remain essential for many years to come.  A price tag of $2 billion will not be material to some of the largest fuel retailers who have yet to establish a presence in New Zealand.

Commerce Commission approval, based on the current environment, is more difficult to envisage.  No one believes our fuel retailing market has too much competition, with Mobil, Z and BP making up the overwhelming majority of sales in the market that Gull competes in.  However, Ampol has proactively stated it will consider selling Gull after the takeover to facilitate the approval, which should resolve these concerns.

Shareholder approval is more complicated.

In a normal world, a company offering a 25% premium would succeed in swaying shareholders to vote in favour.  Z Energy has been at lower levels for over a year, meaning this offer represents value beyond which the market has determined to be fair, and the tens of millions of shares bought over this timeframe are now offered a handsome profit over a relatively short timeframe.

However, there is more context to consider.  There is a very large number of shareholders who have held for a longer period of time, having bought at higher prices and held their shares, believing a recovery in share price would occur.

Is the offer tempting enough to crystallise the loss?  Ampol is not buying this asset believing it would fall in value – it clearly believes that it is undervalued.  While the timing of the lockdown is coincidental – the takeover has been discussed internally at Z Energy for some time – it is certainly helpful for Ampol in persuading nervous shareholders to consider an exit.

There will also be shareholders attracted to the prospect of long-term dividends from Z Energy.  There is a value attached to this, although the prospect of an immediate sale will be enticing.

The offer is not hostile, meaning the Board has not rejected it. The Board was careful not to endorse the offer, but has provided a brief period of exclusive access to ''the books''.  The offer itself is non-binding, so the bidder may choose to withdraw if the due diligence produces an unexpected concern.

Another interesting component of the offer was discussions surrounding a dual-listing Ampol to bring it to the NZX, and in turn including a scrip component to the bid. This might mean Z Energy shareholders receive $1 a share, and 0.1 Ampol shares per Z Energy share held, for example. Shareholders will be careful to consider all factors, including imputation credits, if this comes to fruition.

For now, shareholders do not need to take any action.

Later this year, Ampol (or a rival bidder) will either present a binding offer or withdraw.  Z Energy's board will have the company independently valued to determine whether such an offer is fair, and advise shareholders accordingly.  Assuming legal approvals are met, shareholders will then vote, and if the vote reaches the necessary threshold, another household name and dividend-paying income share will disappear from our stock exchange.

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We have suspended our city visits due to the nationwide lockdown. We hope to reinstate these shortly.

Chris Lee & Partners Limited

Taking Stock 19 August 2021

RARELY has the global funds management industry drawn such different conclusions from the attempts to deduce future market behaviours after studying the scene of today.

The US monster players, Goldman Sachs, JPMorgan, and Citigroup are convinced that we are entering favourable times and they, and others like them, are more optimistic about sharemarket directions than at any time since 2002.

Essentially, they argue that real earnings now, and reliable estimates of future earnings, justify a forecast of a 10% rise in the US share indices in the next 12 months.

Their forecasts in the past have often been riddled with self-interest – talking their book, trying to grow their client base – and in many areas have been hopelessly wrong.

For example, their forecasts of ''peak oil'' 15 years ago had oil prices rising above US$200 a barrel. They soon after fell to less than $30 a barrel and at one period the futures markets were virtually giving oil away.

Likewise, their forecasts of the price of gold, silver etc have often been made to look amateurish.

Yet America salivates over the market tips issued by its investment banking giants, and it is still largely true that Americans regard it as their duty to underwrite perpetual sharemarket price increases, even more than it is their duty to build a stable economy.

While these heavy hitters are forecasting a year of triumph, others who have a different view are gaining audience size.

The US economist and commentator John Mauldin colourfully describes the US, indeed global, economy as a sandcastle on which every child is wanting to build more layers.

In his view the question is when, not if, the structure's inherent failures will appear.

He is joined in his view by Jeremy Grantham, the founder of the large global fund manager, Grantham Mayo van Otterloo (GMO), which earned such admiration in New Zealand when it acted decisively in the 1980s, after discerning the nature of those who were inflating our markets with their hollow promises and childish, selfish behaviour.

GMO reacted then by quitting our market and privately describing behaviour more suited to schoolboy bike sheds than to capital markets. In doing so, it earned great admiration from those who preferred to remain silent.

Grantham urges caution, is deeply suspicious about the growth of junk bonds, and seems to be indicating that a year or two of no gains but no losses might be judged favourably in years to come.

Yet he, too, is taking the risk of denying the momentum behind sharemarkets, powered by immense cash volumes that have yet to result in hyper-inflation, and yet to demean the currencies of those whose printing machines have worked hardest.

China, for example, seems able to print as many trillions as it likes, without any party being told how many trillions it is manufacturing. Nobody supervises the Communist Party and nobody demands details of money printing.

Yet its currency is stable, a hallmark historically earned by countries like Switzerland, where the printing of money is opposed.

China, it seems, can print as much as it likes, without any loss of buying power for its renminbi (or yuan).

Amidst all these confusions, a bunch of global fund managers recently went public, naming their secret picks for investing new money.

They included:

Industrial property

Residential buy-to-rent apartments

Construction companies to benefit from infrastructural spending

Health providers

Technology companies seeking to help climate change imperatives

Private companies, free of compliance costs

Their personal preferences all can make a case for investor support.

Yet all these people predicate their forecasts on exponential population growth and perpetual economic growth, presumably driven by the way wealth is distributed today.

Readers of Taking Stock can give thanks that I am not required to publish my prognostications, and that when I do lapse into this dangerous behaviour, I am constrained by advisor laws!

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THE sharp decline in the share price of sharemarket minnow, Radius Residential Care, would have been of no surprise to anyone who has observed the retirement village/health sector in recent decades.

Radius Care is managed and substantially owned by Auckland entrepreneur Brien Cree, whose beard and long hair belies the more corporate image of the major players in the sector.

Radius Care and its first cousin Radius Property were funded into existence in the early 2000s by the late Kelvin Syms, whose organisation, Vestar, was an early adopter of the financial advisory model that persuaded innocent investors to allow entrepreneurs without discipline to allocate the investors' money.

Syms and Vestar, employing untrained and often greedy sales staff, supplied investor money to the likes of Capital & Merchant Finance and Bridgecorp, in return for double brokerage.

Vestar also directed tens of millions into Radius, enabling it to buy rest homes, and possibly land, often in areas like Hamilton, or in smaller towns.

The investment was simply irresponsible, being illiquid, highly adventurous, and based on a business model that was unproven. Yet Syms included Radius in the portfolio of even the most cautious investors.

Later Radius Property fell into private hands, after a messy takeover offer.

Radius Care then leased its properties from Radius Properties, meaning Radius Care was simply arbitraging rest home care (paid for by Crown subsidies).

The major players in the sector chose to own the property and thus ride the waves of price increases in land and property. The major players also focused on areas where property prices were rising the fastest. They had no difficulty in raising capital from institutions.

Radius Care, therefore, was a privately controlled rest home provider. I do not know the outcome for the 2003-2007 Vestar investors who had been steered into Radius. One hopes their capital was eventually returned. Any of these investors is welcome to educate me on the outcome of this utterly inappropriate investment.

Just a few weeks ago Radius Care listed its shares, to make them liquid. It raised no new money, though its solicitors accepted shares as payment, and allowed those shares to offset their legal work at a swap rate of 80 cents per share.

A Radius-appointed valuer had come up with this value of 80 cents.

One imagines that the solicitors' shares were escrowed, and thus cannot be sold until next year.

With all this background, it was a highly intelligent decision by Radius Care to discount a share issue in recent weeks to raise capital to buy at least some of the property it operates.

The share price, after being valued at 80 cents, had risen to an absurd level, $1.70 for one moment of madness, presumably from a novice investor acting without advice.

It fell to a still ridiculous $1.00, at which point Cree made the excellent decision to raise tens of millions at 52 cents a share, still a price that I see as luxurious, a Belgian chocolate price for liquorice allsorts.

The offer was well supported, raised the capital required, and those who bought the shares are still able to escape with a profit, the last share price at the time of writing being 55 cents, down from around 60 cents, in the days after the new shares had been allocated.

Radius Care is nothing like the major retirement village players, nor will it be, unless it can convince institutions that it should be funded to buy back a fairly undistinguished property portfolio so that it is not paying rent to other entrepreneurs, themselves, in all probability, leveraged.

It would be interesting to know how many of its new shareholders received advice before buying the shares.

If they were simply betting on number seven in race seven, they might deserve to receive a bit of luck.

Footnote: Radius Care and Radius Property have no relationship with Radius Pharmacies, owned by Green Cross Health.

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Johnny Lee writes:

SO Covid has returned and New Zealand is back into a nationwide lockdown.

On the eve of the Reserve Bank's monetary policy statement, the discovery of the Delta variant throughout communities in the upper North Island has sent the sharemarket lower, popping the bubble of complacency and reminding us of the very real risks that still remain.

Traders have resorted to established patterns, with the likes of Z Energy, Air New Zealand, Sky City and Ryman Healthcare seeing a surge of sellers, while Fisher and Paykel Healthcare stood out as a beneficiary. At this stage, while uncertainty remains very high, buyers still remain at lower levels.

The Reserve Bank responded by sustaining our emergency-level Official Cash Rate. The accompanying statement made it clear that underlying conditions supported the expected rate rise, but uncertainty was simply too great to make a change at this point. The next meeting is scheduled for 6 October.

The decline in share prices so far has been modest, implying an expectation of a brief and effective lockdown. While this remains a possibility, such optimism would be best paired by preparation.

Most investors know the risk factors at this point. However, the lockdown order provides us with an opportunity to re-examine our portfolios, to ensure that these risks are within comfortable limits.

Broadly speaking, owners of assets have observed very strong increases in values over the past 12 months, and shares are no exception to this. The index has gained 8% over that time period, although there has been a fair share of winners and losers.

Between the start of 2020 and today, the New Zealand 50 Gross Index has traded in a range from about 9000 to 13500. Share prices had a particularly volatile 2020 and, if the situation is not contained, volatility will return to the market. Uncertainty breeds volatility.

Investors know that a prolonged lockdown will negatively impact companies that rely on freedom of movement.

The likes of Z Energy and Air New Zealand will be fervently hoping that New Zealanders are diligent in their efforts to contain the virus. Both companies suffered greatly during the extended lockdown of April 2020. Z Energy was forced to raise capital, while Air New Zealand resorted to borrowing money directly from a Government that has become increasingly reluctant in its support for the company over time.

At the start of the lockdown last year, one sector that struggled the most was our retail sector, which responded by cancelling dividends and shoring up balance sheets. This time around, our retail companies have well-established plans for dealing with lockdowns. Briscoes, Hallenstein Glassons, Michael Hill and The Warehouse have all developed processes for this outcome and will be better prepared to adjust their business models in the face of a potentially enduring lockdown. Remote working and virtual stores are not an option for the likes of Fletcher Building and Port of Tauranga.

While uncertainty and fear are rising, investors have been through this before. We know the companies and sectors that are likely to struggle. Many investors are still sitting on healthy paper profits, reflecting a stock exchange close to record highs.

The message is clear – the situation may worsen and investors must prepare for this eventuality. In most countries, Delta has spread very quickly and resulted in sustained lockdowns. We know what impact this has on investments, and both sides – buyers looking for opportunities and sellers looking to de-risk – should prepare accordingly.

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WHILE this situation unfolds, reporting season has begun.

This week saw updates from a number of companies, and already themes are emerging.

Half-year and annual results are prepared well in advance of their release to market, and are of course backwards-looking.

Spark has maintained its annual dividend at 25 cents per share – about 7.3% gross based on recent pricing. The company’s outlook for next year is at the same level. Its performance targets were broadly met, although wireless broadband is clearly struggling to grow at expected rates.

The company also highlighted that it was exploring alternative options in regards to the ownership of its infrastructure assets. Australia's largest telecommunications company – Telstra – recently announced its plan to sell a 49% stake in its Mobile Towers business, InfraCo. Spark operates 1,500 such ''Mobile Sites'', and stated that the towers are ''not considered a driver of competitive advantage'', and that ''discussions are ongoing in relation to potential shared ownership models for passive infrastructure assets''.

EBOS Group reported yet another record profit, with record dividends and another announced acquisition. Profit rose 14% across the group, with both healthcare and animalcare reporting strong growth.

EBOS announced plans for construction of an $80 million pet food manufacturing facility in Sydney – effectively internalising the manufacturer's margin – and announced the acquisition of Pioneer Medical, a New Zealand based importer and distributor of medical devices. EBOS also highlighted that another announcement was imminent, regarding a further acquisition.

Fletcher Building reported a return to profitability after last year's loss, and a final dividend of 18 cents per share. The company's focus on residential construction is clearly paying off, as the company finds itself close to a position of zero net debt.

Several property trusts have also begun reporting to market.

Vital Healthcare reported a jump in profit, dividend and net tangible assets, and is forecasting this to continue. Vital's strategy of development and asset recycling is adding value, and its development pipeline has reached record heights. Vital also stated that it intends to further diversify away from the hospital sector, towards both ''Aged Care'' and ''Life Sciences and Research''.

Precinct Properties had a similar result, in terms of profit growth, dividend growth and revaluation gains. Similarly, it sees development projects as its best pathway to growth. Precinct has enjoyed modest dividend growth for many years now, and forecasts yet another increase next year.

Further company results will occur over the next fortnight.

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We have suspended our city visits due to the nationwide lockdown. We hope to reinstate these shortly.

Chris Lee & Partners Limited

Taking Stock 12 August 2021

THE Commerce Commission's detailed analysis of our supermarket duopoly is being hailed as its finest ever work, though for that title I would add another contender if the time frame could be extended to the last two decades.

Certainly, the margins earned by supermarkets, for what is at worst a moderately risky business, seem high, exceeding 20%, and there is little doubt that Britain's lords were careless when they allowed Progressive Enterprise's purchase all those years ago to lead us to today's duopoly.

One suggestion is that the ownership of the likes of Countdown, Big Fresh, Pak n Save, and New World would best be spread amongst four entities, at least one of which being a listed company.

Such a listing occurred when Dutch-owned Shell became NZX-listed Z Energy, and provided users of fuel with the satisfaction of buying shares in ZEL, creating the opportunity to shop at one's ''own'' company.

The enquiry into the duopoly seems to have been comprehensive.

Should any ideological, inexperienced, socialist government ever use the findings as an excuse to enter the business, such a response would be a signal that rank amateurs have no place in government. I am sure that will not happen.

However we should applaud the conducting of a full enquiry if the result is a shaving of margins and far friendlier behaviour towards suppliers.

Even if this happens, the outcome in my opinion would not compare in its importance with what the Commerce Commission achieved a decade or more ago when it investigated some appalling practices in the privileged world of financial markets, where standards then were excruciatingly bleak, and exploitative.

I refer of course to Credit Sails, a fund designed to insure various global bonds held by institutions. It aimed to pay retail investors around 8% for their underwriting provided the failure of bonds was minimal. It was an extremely complex issue.

The fund was designed by Calyon, a subsidiary of French bank Credit Agricole, and was marketed in NZ by Forsyth Barr, the Dunedin retail fund manager/sharebroker.

Inexplicably, between the date the investment statement was published and the date when the money was collected, several of the better-rated bonds named were switched from major organisations to Icelandic banks, on the brink of collapse in coming years.

The hapless trustee, the only party which was mandated to protect the retail investors, stupidly failed to veto these switches. Nor were the changes widely notified to forewarn investors.

The complex, changed offer was not withdrawn as its immense offer documents allowed such changes to be made, a prospect few, including me, thought could happen without the full blessing of an inquisitive trustee.

It has never been explained why the offer, restricted to professional investors overseas, was designed here, with the approval of regulators, to target amateur investors.

The Commerce Commission enquiry later discovered that Forsyth Barr had referred in inter-departmental memos to investors as ''flies around a honeypot'', and proceeded with the issue, perhaps not recognising the changes as posing greater risk.

When the fund failed, investors faced a virtual total wipe-out, despite Credit Sails being marketed as an AA-rated investment. Forsyth Barr disclaimed any responsibility, its chief executive, Neil Paviour-Smith, denying accountability, but pledging to help with a $1 million voluntary contribution towards investor losses that were nearer $90 million.

The Commerce Commission flexed its biceps, threatening charges that might have included stints in a cell, for those who created and managed the proposal.

Ultimately, Calyon, the trustee, and Forsyth Barr decided to dredge up around $61 million, possibly helped by insurers, though for a good while the insurers were resisting any contribution, probably debating whether the errors were caused by negligence, human error, stupidity, or something else.

The $61 million settlement was a wonderful rescue of investors, created solely by the excellence of the Commerce Commission's thorough work and its refusal to be distracted by spurious issues. Its implied threat of jail clearly captured the attention of the errant parties, and their insurers.

By my assessment, this might have been the Commerce Commission's greatest moment, but that opinion does not denigrate the value of its analysis of today's supermarket duopoly.

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RECENT discussion on the dreadful practices that have blighted insurance companies' reputations focused on the deceptive behaviour by which claims are declined and the failure to honour discounts for loyalty.

What was not discussed in Taking Stock was the practice of churning, the sales practice of persuading people to switch from one insurer to another.

When this switch happens the salesman gets another huge commission cheque up front, at the cost of a tiny ''trail'' commission from the discarded policy issuer. The big commission cheques are always from the first year's premium and might be refundable for a claim after just one year, but the refund threat disappears soon after a year.

Churning, as I recall, began about the time the mainly foreign-owned insurers were leaving NZ following the 1987 sharemarket crash, after which demutualisation was being mooted by the biggest three players then, AMP, National Mutual, and Tower.

The mutuals (co-operatives) had been hopelessly governed, lacked transparency, lacked accountability, and were able to hide idiotic decisions in slush funds, often identified as ''general provisions'', a code for stuff-ups. National Mutual used this method to hide losses totalling hundreds of millions.

At that time Sovereign Insurance, a New Zealand company, entered the sector, incentivising salesmen to join the company by paying commissions for all new business, apparently unfazed by the opportunity this provided to salesmen who might churn their clients, for example from National Mutual to Sovereign.

Sovereign grew swiftly, developed a link with the ASB Bank, and its various chief executives were lauded for their growth achieved by a NZ-based insurer. I am not so sure that Sovereign enhanced the world. It made a great deal of money for its founders, and the salesmen, but has done little to improve outcomes for the public.

Churning within the industry no doubt had been practised before Sovereign's days, but the prevalence of churning grew rapidly, and has been slowed only in recent times by the financial markets regulators which now demand evidence that the salesmen's advice is in the best interest of the client.

In my view the praise of those who created new channels for salesmen needs to be moderated by first establishing which of the newcomers maintained effective controls to ensure that churning was not just a bonus for salesmen and a means of capturing instant market share for the insurance company.

Presumably all such start-ups today would grow slowly, needing a point of difference, rather than relying on greedy salesmen switching their clients to the newcomer, in return for immediate personal commission gain.

I applaud the Financial Markets Authority for identifying these issues.

I am not too sure that there has been much honour involved in the development of such crude selling techniques.

The old-fashioned, decent, ethical salesmen, of whom I know a few, will be joining in with my applause.

 _ _ _ _ _ _ _ _ _ _ _ _

ANOTHER modern practice to require review, is that of crowd-funding.

There are several organisations approved by the FMA to build a platform through which any investors – small or large – can invest money in companies that have no other avenue to raise debt or equity funds.

In a sense these companies tap into the same generation that will buy meme stocks. GameStop in the USA is an example of a meme stock. Here in New Zealand the marijuana start-ups might also be meme stocks.

Some might even say Air New Zealand is a meme stock, acknowledging the certainty that it will make huge losses this year, and next, and the further certainty that it will not pay dividends for many years, and may never again pay significant dividends, given the improbability of it ever again being a gold star international airline. Domestic airlines can, and should, make small profits but at least for now the future of international travel is clouded. My sense is that climate change imperatives will diminish the desire to travel, at least in the minds of those with decades yet to live.

Crowd funders are restricted in how much they can raise but are not accountable for the losses created by the start-ups they promote.

One well recalls the Auckland shoe shop which raised and immediately lost the thick end of a million, attracting hapless investors by displaying sales and sales projections that, to be polite, were improbable, or more likely came from the sort of imagination that visualises unicorns grazing in the garden.

Those who build the platforms are no doubt well-meaning, but the concept is drowning in risk, the documents offered to investors are often amateurish, and I have doubt about the skills and experience of those who circulate the offer. They are the only people involved certain to make profits from this practice.

The Financial Markets Authority may be slightly comforted by the generally tiny sums offered by individual investors, suggesting that the naïve investors will lose only buttons, rather than the whole waistcoat.

Yet for many such investors, a few hundred dollars is money that was saved with discipline. Instant loss of such money might re-set investment confidence and savings habits.

If I were the boss, crowd funding would be restricted to charity, like helping people who had had bad luck, rather than be open for aspirational start-ups to raise money that no professional, and no banker, would ever provide. Crowd funders, by definition, have little access to professional investors, and are quite different, and much less discerning, than angel investors or venture capitalists.

 _ _ _ _ _ _ _ _ _ _ _ _ 

THE damning report into the locker room culture of MediaWorks will not make the television and radio company unique.

The media newsroom culture has for decades been similar to that of the foreign exchange and broking trading desks so often illustrated in movies, so visible in the USA and UK in recent decades. These are workplaces that are honeypots, for flies, far too often.

When the target is fast money, or ego trips, rather than excellence or sustainability, there is an inevitable risk to company culture, the most frequent victims being those who are at the lower rungs of the pyramid, and desperate to be one of the boys.

Just eight years ago, MediaWorks had selected women as the Chief Executive, the head of television, the head of radio, and in various other senior roles.

IN 2014 the CEO Susan Turner was replaced by the recently enriched former head of the NZX, Mark Weldon, an appointment made by the American hedge fund, Oaktree Capital, which had most unwisely bought the company.

Weldon's swimming successes at an earlier age had not transferred to social or management skills and by any definition his stint as CEO of MediaWorks did little to improve the outlook for the company. His retirement to a block of land in central Otago was a display of wisdom.

The most surprising aspect of the QC investigation into MediaWorks culture is that the environment for women seems not to have benefitted from the long period when women held the most powerful positions in the group.

Perhaps MediaWorks might be a company that might benefit from the style of leadership that focuses on excellence and comparative advantage, rather than rewarding those whose setting is on quarterly results, monthly surveys, celebrity status with teenagers, personal wealth, and a focus on the lowest common denominator.

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Johnny Lee writes:

The vote by New Zealand Refining shareholders to transform the company has passed, overwhelmingly, as the company now plans to move in a new direction.

Shareholders have voted in favour of shifting the business model from an oil refiner, to an importer of refined oil, meaning New Zealand will import all its petroleum needs from overseas-based refineries.

The three largest shareholders of the company – Mobil, Z Energy and BP - predictably all voted in favour of the proposal. The issue would never have reached the point of a shareholders' vote without their support and their drive to make this change.

New Zealand Refining currently operates New Zealand's only oil refinery, the Marsden Point Oil Refinery in Whangarei, which produces a majority of New Zealand's refined oil needs. It was constructed in the 1960s, a few years prior to the Tiwai Point Aluminium Smelter, and has seen multiple upgrades over its existence. It was later privatised and sold to investors, predominantly the international oil giants.

In more recent times, the company has struggled to compete with the mega-refineries across Asia, as economies of scale drove down margins for the relatively tiny New Zealand oil refinery. Plummeting demand in the face of Covid, both in terms of petrol consumption (lockdowns and fewer tourists on the road) and jet fuel consumption, put further pressure on the company from its shareholders. 2020 saw throughput decline around 30%.

These issues were further exacerbated by rising costs, with electricity, carbon emissions and shipping costs also being blamed. Environmental concerns also played a role, although ultimately any emissions we have reduced from the refining element have simply been outsourced to another country.

For investors, these pressures meant no dividends in 2020 and a falling share price, although the last few months have seen a modest recovery in the lead up to the planned transformation.

The shareholder vote is not the final step. There are a few more conditions to be met, including board approval and agreements to be formed with its major shareholders. However, barring outside intervention, this appears to be a ''done deal'' for shareholders.

As was the case for the Tiwai Point Smelter closure, outside intervention – meaning taxpayer support – has been mooted by some political figures. The discussion around the strategic value of a country having its own refining capabilities is an intriguing one, but it seems unlikely to change the trajectory of the current plan.

Does New Zealand need an oil refinery, for reasons of national security or strategy? The arguments put forward so far centre around a scenario where a war or other unlikely catastrophe – perhaps a natural disaster or a logistical one - prevents the long-term importation of refined oil. The refinery is not currently equipped to process the oil produced from our Taranaki wells, resulting in the current environment where New Zealand crude is sent to Australia, and Middle-Eastern crude is brought here for refining.

Some countries mitigate the threat posed by this scenario by maintaining strategic reserves. In the US, there are enormous underground caverns specifically created to fill with unrefined crude oil. As part of our obligations to the International Energy Agency, we maintain a similar reserve, although ours is a virtual reserve through the use of ''tickets'' – effectively an options contract that provides us with ownership rights for storage held abroad. A 2017 review conducted for MBIE concluded that this arrangement was the most cost-effective approach to meet these obligations.

Demands that New Zealand Refining maintain and staff the facility ''just in case'' have been firmly rebuffed by the company. One imagines that such a demand would need to be compensated by a handsome contribution from the taxpayer.

Such a decision cannot be reversed. There is no doubt that if the proposal succeeds, the expertise currently employed will move on, hindering any ability to quickly reverse the decision in the future should such an emergency occur. The 240 people forecast to lose their jobs following the refinery closure will provide their skills elsewhere.

The company has left the door open to continuing operations at the plant, perhaps in the biofuel or aviation fuel space. However, these conversations remain firmly in the realms of the theoretical, and for now at least, appear to be secondary to the current focus of confirming and implementing the change in business model.

Oil refining is of course not the only industry facing these pressures. Sectors including milling and steel manufacturing have been vocal about rising costs and overseas competition. The strategic elements surrounding security of petroleum supply change the tone of the debate, but there is no doubt that the refinery faced a bleak future, and its major shareholders – its owners - wanted change.

The transition will result in a company with far more predictable revenues and costs, and a much simpler business. The company will import refined fuel – likely from Asia - and store and sell the same product to its major customers (also shareholders) to distribute around the country. The large tax loss accruing from the write-offs will reduce several years of tax obligations, accelerating the pathway to sustainable, low-level dividends for its shareholders.

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David will be in New Plymouth on 19 August.

Johnny will be in Tauranga on 26 August.

Michael will be in Hamilton and Tauranga in September.

Chris will visit Christchurch on 17 August (afternoon) and 18 August (morning) and in Auckland on 25 August.

If you would like to make an appointment, please contact our office.

Chris Lee & Partners Ltd

Taking Stock 5 August 2021

THERE has sometimes been debate over whether commercial property should be valued solely on rental yields, or whether a value should take account of replacement cost.

This is not a new debate but clearly those buying industrial property in Tauranga at yields of 2.5%, or student flats in Dunedin at yields of 4%, must assess the debate differently.

The Tauranga investors must believe the (much higher) replacement costs justify breathtakingly low rental yields.  In Dunedin many student flats could be replaced to the benefit of tenant comfort by bulldozing the existing dwelling and replacing them with a $10,000 abandoned shipping container, gibbed and fitted out for $40,000. Owner and tenant would win.

Replacement value there would often be a cheap option, and not add to any valuation.

The argument about what is a fair yield for property investors has again surfaced, and will be worrying retail investors, as the dangerous practice of low-yielding, fee-high, illiquid, unlisted property syndication grows, at what might be precisely the wrong time.

As an aside, I have often noted that the powerful listed property trusts have usually declined the offer to buy the properties that one sees being syndicated at premium prices, weeks later.

What one observes now may be the dying sentences in the last chapter of current syndication offers.

Syndicators are offering returns ''estimated'' to be 5% - 6%, seeking investor money to convert an option to buy into a confirmed purchase of the property.

Often these offers are ''wholesale only'' offers, meaning they can be accepted only by wealthy, experienced investors willing to proceed without the protection of the regulations and regulators, whose target is limited to retail offers.

I want to explain today why these wholesale offers, or indeed any unlisted offer, needs to change if they were to attract my money.

The benchmark for retail investors in commercial property must be the readily available listed property trusts (LPTs) that anyone can buy in pretty well any volume, on any given day.

The likes of Precinct Properties, Properties for Industry, Argosy Property, Goodman Property or Stride Property, usually offer investors cash yields, after tax, of between 3% and 4%.

If the yield were 3.6% cash after tax to the investor, for investors exploiting the PIE cap to tax rates (28%), the 3.6% yield would equate with a 5% gross rate, exactly the rate a current unlisted syndicate is offering.

The LPT investor enjoys:

1. A diverse portfolio of properties.  One tenant failure is not calamitous.

2. Liquidity.  The investment can be sold, virtually whenever the NZX is open.

3. Transparency.  The managers are subject to NZX rules, including the guarantee of symmetry in market disclosures.

There are two other important benefits.  The listed property trust has access to new capital, and new investors, via rights issues, and LPTs generally have lower debt levels, and lower debt costs, than syndicates.

So the LPT investor is receiving better returns for lower risk, by choosing an LPT over the current unlisted syndicates offering 5% gross.

An astute investor might buy into an unlisted syndicate if he knew the property, trusted the syndicator, knew the tenants AND crucially, was amply rewarded for foregoing the benefits listed above - diversity, liquidity, and transparency.

An adequate reward would be cash returns much higher than an LPT.

My own formula before investing in unlisted syndicates is as follows:

- I need at least 1% more return to counter the diversity argument.

- Another 1% to offset lack of liquidity.

- Another 1% to counter syndicator lack of transparency.

- Another 1% to counter the risk of higher debt costs.

So a syndicate that plans to be unlisted would need to pay 9% to produce the same return for risk of an LPT offering 5%, in headline terms.

The property syndicators are not all the same.

Those based on real estate salesmen, such as those linked to Bayleys, Colliers, or Augusta, would need to pay a further 1%, to offset the incentives they have to sell, and the various intermediation costs they extract.  Their incentives to create a syndicate would not align with my incentives to buy into the syndicate.

Some years ago, a Wellington syndicator, The Wellington Company (TWC), approached me wanting to syndicate rental apartments in central Wellington.

I responded that we would not help unless they provided guaranteed liquidity (at purchase price) for investors.  To the credit of The Wellington Company, that liquidity was provided, supported by a legal guarantee.

The TWC syndicates have functioned well, sometimes boosted by rental price increases.  The units trade freely through our trading platform, whenever they become available.

Other syndicates will also have done well, some spectacularly well, given the scarcely credible rise in rentals, and fall in debt cost.

Those investors with the wealth to invest in a range of wholesale syndicates will have achieved some diversification.  An investor who put $500,000 in ten different syndicates might have done extremely well, especially if he has used this strategy for a decade or more.  The odd ''dud'' will not have ruined his returns.

But I caution investors about the potential cost of waiving the support of regulations and regulators when accepting a ''wholesale'' offer.  Not every investor is likely to excel at conducting due diligence.

Properties are now selling at yields unimagined in previous decades, some offers dredging up the line that properties should be priced at ''replacement value'', a strategy used by self-focused characters during the worst years of property excesses, when charlatans stripped the public of their money.

So unlisted syndicates offering 5-6% are a poor option, the risk for return equation easily favouring LPTs, in my opinion.

 _ _ _ _ _ _ _ _ _ _ _ _

THE decision of two well-heeled former Mainfreight executives to take on the project of restoring the small New Plymouth based, NZX-listed company, TIL Logistics Group Ltd, has the potential to provide a great boost for TIL shareholders, but the plan of the two newcomers simply must have a second leg.

The first leg was injecting capital and joining the board of directors.

For step two, one of the newcomers must take on the role of chairman, allowing the current chairman, Trevor Janes, to retire.

It seems certain that the two new investors would understand this.

Janes was used by the Key government as a director in organisations like Mighty River Power (Mercury) and the ACC, but he has no history obvious to me in guiding companies forward.

Indeed at Abano Healthcare, where his chairmanship was undistinguished, his board cost his shareholders an immense sum.

Fist the board rejected a takeover offer at around $10 per share.  Later it recommended a takeover at little more than half that sum.

In between, the directors sold a key asset at a price that proved to be absurdly low, after the new buyers re-sold it recently for a gain in a brief period of tens of millions.  Abano's shareholders have every reason to question the skill of Janes' board and his chairmanship.

Of Janes' chairmanship of the appalling finance company Capital + Merchant Finance (CMF), the less said the kinder.

Suffice to say other directors went to jail for their governance failures, committed when Janes was chairman.

If there were just three finance companies whose atrocious governance and management was blindingly obvious to any discerning onlooker, those three would have been Capital + Merchant Finance, Lombard, and Bridgecorp.

In each case criminal charges followed, during the Key government reign.  Quite why Janes ever elected to accept a role in CMF is an unanswerable mystery.

Former cabinet ministers, like Graham and Jeffries, were guilty of incompetence in governance at Lombard.  The same unanswerable question could be asked of them.

Guilty of dreadful management at those three companies were the likes of Petricevic, Tallentire and Reeves, the latter two intellectually as well as morally challenged.

It was an awful era, with CMF as authentic as a finance company as plastic roman sandals are to mountain climbers.

Janes, in my view, should have retired graciously, after the authorities during the Key reign accepted that he should not be included with the directors who were prosecuted.

TIL Logistics, with new capital and two sets of experienced, competent, new directors, must immediately appoint one of them as its new chairman, even if such haste might seem vulgar.

TIL might become a significant company in coming years, especially if hydrogen becomes an available fuel for the transport industry and for heavy equipment like bulldozers.  (JCB, in the UK, already has made advances in commercialising heavy vehicles running on hydrogen and has prototypes.)

TIL will never be another Mainfreight but under expert governors with genuine knowledge of the sector, and with both monetary and intellectual capital to offer the company, its prospects look interesting.

Editor's note: TIL Logistics Group Ltd was renamed on the 4 August to Move Logistics Group with a ticker code change to MOV.

 _ _ _ _ _ _ _ _ _ _ _ _

THE shareholders and lenders to Villa Maria Estate will be comforted by the conditional agreement to sell to New Zealand's biggest wine exporter, Indevin Group.

Indevin, Marlborough based, also bought the Montana Group when that was sold many years ago, and is a company led by strategically smart people, with access to genuine capital, and a clear, logical plan to lift the whole wine industry for the benefit of New Zealand.

Indevin owns vineyards in Hawkes Bay and Marlborough, and has developed crucial sales channels in Britain and other major countries that import high quality sauvignon blanc wines, like Australia and the USA, sensibly side-stepping the more fickle Asian markets.

It has been careful, innovative, and has retained a focus on the long term, largely because of its access to real capital, its principal shareholder, Greg Tomlinson, one of those who builds companies rather than arbitrages assets.

Indeed Tomlinson is one of New Zealand's most honourable and best business leaders, unnoticed perhaps because he is neither a trader, nor a blowhard, a genuine contributor to New Zealand's growth, to employment, and to communities, in a quiet unassuming way.

One could surmise that Blenheim's world-class aircraft museum would acknowledge the benefit of the silent support of such New Zealanders.

Indevin already controls 20% of New Zealand's wine exports.

If this conditional purchase converts to a sale, Indevin would be the giant player in the sector, unlisted, privately owned, and likely to be the leader in the use of new technology in areas like grape picking and pruning, as well as in the use of science in its wine making, combined with the use of ''art''.

It has many gold medal-winning brands.

New Zealand needs more companies like Indevin and more leaders like Tomlinson.  His presence on any board of directors should give investors confidence that the company has long-term ambitions, built on comparative advantage.

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Johnny Lee writes:

MAINFREIGHT's share price outperformance continues to astound, as the company surges up the list of New Zealand's most valuable companies.  The share price has doubled in the past 12 months and has gained 10 percent in the last week alone.

The share price leap observed over the past week follows an update to market, highlighting that the company continues to benefit from the current economic environment – logistics and transportation remain in high demand amid a global shortage as supply chains are stretched and the cost of transportation soars.

The company is under no illusions that some of these factors are temporary.  It describes today's eye-watering freight costs as ''inflated'', and ''artificially increasing sales revenues''.  Nevertheless, hay is being made and Mainfreight has raised the possibility that these logistical disruptions – or opportunities, from the perspective of a freight company – may persist into next year.

Early indications for next year suggest the company will see yet another leap in revenue and profit, matched by a forecast increase in capital expenditure.  The company is clearly investing for more growth, as it sees its market share continue to increase.

Of course, it would not be a Mainfreight announcement without a detailed commentary on a social issue of choice – this time tackling our skilled worker shortage.  The company made the point that this shortage has been created due to an underinvestment in improving the educational outcomes of our young people.  The update itself also dedicated some column inches to Mainfreight's sustainability efforts, including its commitment to solar energy generation, rainwater capture and exploring alternative fuel sources for its fleet.

The company's promise that it ''will never make a convenient Board appointment'' will please investors attracted to the philosophy of board members being selected based on experience and merit.  While it has become somewhat fashionable for companies to elect overseas-based so-called ''rockstars'' to their boards, or worse, political figures seeking to add ''prestige'' to a management team, Mainfreight believes it can create a balanced and diverse management team without making short-term changes specifically for this purpose.

Nor would Mainfreight be compelled to install arbitrary rules around tenure of service, instead believing that directors who perform should be retained, rather than refreshed at pre-determined intervals.  While there are no doubt instances of underperforming directors clinging to roles, with ideas that have been eclipsed by more modern approaches, Mainfreight does not belong in this category.

Mainfreight remains one of our best performing companies with a proven management team, and a clear willingness to not only talk about issues such as climate change and water management, but also actually commit capital to playing its part in tackling them.  I suspect that the number of unhappy long-term investors demanding the board ''refresh'' is a vocal minority.

While these discussions take place, Mainfreight continues to grow, and lay the framework for future growth.  As this occurs, it will begin to be included in new sharemarket indices, which will mean more exposure to overseas investors and Exchange Traded Funds.  This will in turn result in the sort of questions Mainfreight is now dealing with, as these new, large shareholders push for diversity on boards and greater focus on issues like climate change.  These are simply the costs of being a publicly listed company in 2021.

However, the update and subsequent share price increase shows that financial performance is still the most important metric for investors.  And for Mainfreight, the next 12 months are offering some significant tailwinds as it takes advantage of conditions it finds itself in, and invests the profits in future growth.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

THE rapid increase in share price following the announcement also highlights another consideration for investors this month.

February and August are the months of each year when most listed companies report their financial results to market and announce any dividend payments.

Last year was something of an exception, after the NZX granted companies additional time in the face of Covid.  However, these months are when companies report results that either exceed, meet or fall short of market expectations, and are invariably followed by share price movements.

Most major companies – Fletcher Building, EBOS, Spark – will be reporting to market this month, with the rest – including the likes of Infratil, Ryman and Fisher & Paykel – next reporting in November.

Comparisons to last year will not be overly useful, given the changes in economic conditions since then.  Forecasting will be difficult.  However, investors will be keeping their eyes on several companies in particular.

Air New Zealand's results will be one of the more significant announcements.  Air New Zealand has been thorough in keeping the market informed, recently increasing the forecast for its upcoming loss to ''not exceeding $530 million'', $80 million worse than its previous forecast of ''not exceeding $450 million''.

The Government loan facility will provide the company with some ability to maintain pricing tension, although it seems inevitable that a capital raising of relevant size to Air New Zealand will demand a meaningful discount.

A2 Milk's result will also be keenly anticipated, although investors will likely be fearing the worst.  The company has had a string of negative updates to market and has lost its status as a market darling among institutional investors.  One imagines that the company will be more cautious regarding its forecasting, as the world grapples with heightened uncertainty.

Ultimately, the theme of supply chain disruption and logistical difficulties is likely to be the predominant one, especially among companies exposed to the import/export sector.

Market forces should resolve this issue in time, but the short-term impact will be meaningful.

_ _ _ _ _ _ _ _ _ _


David will be in New Plymouth on 19 August.

Johnny will be in Tauranga on 26 August.

Michael will be in Hamilton and Tauranga in September.

Chris will visit Christchurch on August 17 (afternoon) and 18 (morning), with several available times on Wednesday morning. Clients wishing to review their portfolios are welcome to contact him now, as he is unable to extend his stay to accommodate late requests. He will undergo his second operation on 8 September and thus will not be returning to Christchurch until October.

On Wednesday 25 August he will be in Auckland, able to meet by arrangement in Ellerslie and Albany. To date, he has available times in Ellerslie, beginning at 10am (Ellerslie International Hotel). The North Shore times have been allocated.

If you would like to make an appointment, please contact our office.

Chris Lee & Partners Ltd

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