Taking Stock 31 March 2022

Johnny Lee writes:

Air New Zealand has finally outlined its recapitalisation plans, announcing a rights issue to existing shareholders to fund its return to the skies.

The offer allows shareholders to buy two additional shares for every share held, at a price of $0.53 (fifty three cents). The share price closed yesterday around $1.37, fell by 10% the next morning and is likely to trade closer to its ''Theoretical Ex-Rights Price'' of $0.81 cents next week.

The Government, on behalf of New Zealand taxpayers, has thrown its financial support behind the plan, offering to maintain its majority shareholding in the company. A group of underwriters has agreed to guarantee the remainder of the capital raise, securing the company's short-term future.

Now the ball is handed to retail investors. The question these investors must ask themselves is what action to take in response to the offer.

Investors should read the investor presentation carefully. One particular quote is worth writing in full: ''Subject to performance, dividends expected to be considered from FY26.'' This is not a short-term recovery story.

The offer is renounceable, meaning that anyone who chooses not to participate can still receive compensation for their dilution. They can simply sell their rights on market and maintain their existing financial exposure to the company. The value of these rights is unknown and will fluctuate throughout the process. History tells us that rights trading tends to peak early – as the decision not to participate is usually immediate.

This would be an unusual decision to make in my view, although I accept that personal circumstances will vary relative to the timing demanded by the capital raising. Shareholders have known about this capital raising for years now. Remaining shareholders must be believers in the recovery story, a group this offer is clearly aimed towards.

Investors who choose to do nothing will have their entitlements sold via a shortfall bookbuild process. This is effectively an auction, where the final bid price (less fees) equates to a payment to those who did not accept the offer. If there is no excess value – meaning the share price falls below 53 cents and the rights become worthless – there will be no payment.

The offer size of $1.2 billion marks one of the largest rights issues in New Zealand history. The fact that the offer was able to receive underwriting support is a testament to what has been months and months of haggling, while hoping for conditions to improve. Undeniably, conditions have improved.

A large unknown in the equation will be the response from the thousands of new, smaller shareholders introduced over the past few years. Many of them will own mere dollars worth of shares and will have no difficulty investing a few more dollars in the hope of a brighter future. The total held by this group, however, is believed to be close to $100 million. Does this group have the ability and willingness to support the offer?

This is hardly the first time Air New Zealand has encountered a crisis. Longer-term investors will recall the 2001 restructure, when The Crown was forced to inject capital at 27 cents per share ($1.35 on a post-consolidation basis) to save the company. This was preceded by Prime Minister Clark's infamous ''hang on to them'' comment. Investors hoping for financial advice from Prime Minister Ardern may find themselves out of luck.

Investing in airlines has always been a touchy subject amongst investors. Between pandemics, terrorist attacks and liquidity crises, investors have suffered significant turbulence and more than a few have sworn off investing in airlines altogether. While it would be unfair to blame Air New Zealand for a global pandemic, this is not its first bailout and may not be its last.

Air New Zealand was once one of our largest publicly listed companies, producing consistent profits and paying strong dividends. The world has changed, and the company now forecasts heavy losses in the short term. One might argue that this offer price represents an opportunity to buy in while the share price trades at its absolute nadir, with a supportive major shareholder and competent management. Indeed, investors can apparently feel confident that the taxpayer will always be available as a backstop.

Others might argue that the world has changed, and the glory days of international travel have passed, with costs (fuel, health and safety, wages) likely to continue rising, while the demand for global travel has structurally changed.

Regardless of one's view, it is a relief to have this information in the public domain. Air New Zealand investors now have the full picture, and can choose to either sell, hold or invest more money into the company.

Clients wishing to discuss this offer are welcome to contact us.

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Meanwhile, a number of factors are converging on the New Zealand investing public, sending them back to the side-lines.

With several new bond issues looking to accept hundreds of millions of investor money on long-dated terms, investors may have begun feeling as though the tide is beginning to turn.

The foremost issue is clearly the ongoing conflict in Ukraine. Fear of escalation – particularly involving members of NATO – is creating huge levels of uncertainty.

Investors do not like uncertainty. Regardless of one's personal thoughts on the conflict, it represents a huge unknown that could veer towards either a global conflict, gradual de-escalation or simply a dragged-out war with no discernible conclusion in sight. All three produce distinct outcomes for the globe, with repercussions on everything from interest rates to commodity prices, not to mention human suffering.

It would be fair to say that any impact from this situation towards New Zealand publicly listed companies will be indirect. New Zealand is a long distance from Russia and our publicly listed companies share very few ties with Russia.

Investors also remain cautious in regards to the pandemic.

Discussions around the pandemic are shifting. Those businesses which have survived the past few years are beginning to see the faintest light hovering near the tunnel exit. Significant hope seems to be resting on the border restrictions being eased, with some convinced a return to historical tourism levels is achievable in the short term.

It will be interesting to observe how our tourism sector responds to increasing demand. The 2010s were marked with some complaints that New Zealand lacked the infrastructural capacity to house millions of tourists. The border closure was viewed by some as an opportunity to reset and reconfigure our approach to tourism. Has this occurred? Or are we simply going to sleepwalk into the same problems of yesteryear?

Inflation, and the response to this, is also weighing on investor sentiment.

Every day, new stories are emerging that suggest a worsening short-term picture. Building supply companies are reporting a complete lack of certain products. Kiwifruit growers are resorting to pleading in the media for retirees and university students to plug the labour gap until overseas workers return. Councils are proposing double digit rate rises on residents. Meanwhile, ASB calculates that without mortgage cost increases the cost of living for an average household has increased by $150 a week.

The Reserve Bank will respond. Banks are now forecasting 0.50% increases to the OCR over both of the next two months, a response that would be unprecedented.

An investor sitting on ample cash would appear to have very little incentive to part with it, as all economic indicators are suggesting rising interest rates around the corner. If tomorrow promises better returns, why would you invest today?

Of course, one cannot stay on the side lines forever. But with today's information, investors seeking certainty are finding it in short supply.

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Chris Lee writes:

A SMALL but (slowly) growing number of investors now want their investment advisers or fund managers to eliminate from portfolios any securities issued by companies that are ''anti-social''.

Environmental and social issues may be deemed by such investors to be of as much importance, at least, as the potential dividends and the potential for the company to grow.

Alternatively, some such investors might believe that in coming years the companies who do not pledge attention to these matters will pay more for capital and will not maintain their share of the markets that underwrite success.

A company that burns coal to heat its water or run its plant; a company that exploits cheap labour in other countries; a company that employs solely on merit; any of such companies might be excluded by investors or fund managers.

I suspect all of us in the capital markets are aware of this growing exclusion policy. Opinions will vary on the future of such change.

The ''ethical'' issues now include gender pay, gender equality, bonus policies, carbon, and even political donations.

Few of us know where to draw the line.

The truth is that, of the clients who contact me, fewer than three in a hundred discuss these issues.

Our best companies in terms of excellence and business successes include, for example, Mainfreight, a huge transport and logistics company with branches in many countries.

Some time ago I counted those who are deemed to be senior executives at Mainfreight and found that more than 180 of the 190 international executives were men.

Its board largely comprises directors who have served for decades, who are mostly male, and who are regularly reappointed because their knowledge, experience, and ''chemistry'' enables the board to continue to function well. Indeed, I would say, the board is seen as the ''gold standard''.

Mainfreight regularly displays a great culture, focusing on staff welfare, family issues, and social issues, like water usage.

Only a few years ago its annual report dealt with its ability to collect rainwater and use it internally, displaying a social instinct that was real and not just academic puffery.

Yet Mainfreight does not appear to accept some of the university advocacy in areas like gender equality.

How would an investor with black and white rules measure Mainfreight?

Would its obviously multi-cultural approach and its social concerns block out the somewhat shrill clamour for gender quotas in management teams and board appointments?

I use the word shrill, as the approach of many of our outstanding women in business is to quietly talk about knowledge, experience, and value-add, as the pathways to leadership roles, rather than arguably silly demands for artificial ''quotas'', made in full voice.

The conversation last week switched to a new government initiative which might compel listed companies to publish the salary bands of its staff, by gender.

As there are fewer than 200 public-listed companies, collectively representing just a tiny fraction of New Zealand's employment opportunities, this latest suggestion may be more to do with style than substance.

Such disclosure may also be misleading.

If a female Chief Financial Officer was paid far more than a male Senior Legal Counsel, who amongst us could argue that the salary difference had anything to do with gender. The range of skills and their value-add differ in every company, making comparisons highly subjective, in most cases.

As someone now at the tail end (last few years) of a long career in business, and someone who has sat on boards, chaired boards, and accepted Chief Executive roles, I know that only a braindead board would ever exclude the best candidate for any job because of gender, age, nationality, or race.

Obviously the gender of a bus driver or a maths teacher should not be relevant, but there may well be a difference between what a maths teacher is paid, and what a history teacher is paid. Supply and demand of the relevant skills will be a factor. Gender should not.

I believe that a campaign to force companies to adopt any ''socially desirable'' policy, by definition, might lead only to an obstacle to the pursuit of excellence.

Last week, various academic organisations claimed that the public were being duped by fund managers who sought a competitive advantage by claiming to have environmental and social policies.

Those making this judgement observed fund managers that turned a Nelsonian eye on what some in society would regard as atrocities. The implication was that the public are being fed mountain oysters. Grubby fund managers seeking a competitive edge and media favours might window dress their policies (or fees) in quest of a headline, rather than in search of better returns.

Would you invest in a managed fund that owned shares in the company that makes Putin's yacht, or transfers the money he has taken corruptly, or supplies him with milk or eggs? How would you or the fund manager know?

Would you invest in Mainfreight, whose best-paid executives are largely male?

Our current Government, able to force through transformational law while it has an outright majority, has recently ruled that co-governance, irrespective of the proportions of the population, outweighs proportionate quotas, on the basis of our founding Treaty. One assumes a kind government would have introduced this after consultation and do this transparently.

The Government is considering forcing disclosure of pay differences, presumably hoping to embarrass companies who pay more to one gender than another (for whatever reason).

It seeks to bring in a national Fair Pay Act. What is fair for Southland might not be fair in Auckland. How wide has the consultation been? Will investors care?

The Crown is trying to bring in a redundancy tax, cutting the costs of big business, which after such a tax could disguise dismissals with ''restructuring'' and thus pass the redundancy cost off to a handcuffed insurer. Rightly, the unions oppose such a philosophy. Would a new government simply reverse such a policy?

It is unsurprising that investors, financial advisers and fund managers are confused. Indeed I wonder how any investor can trust any fund manager to using the voting power of shares in a way that reflects the views of the individual investor.

The Government has already implemented a policy of quotas in the public sector, excluding applicants for senior positions on the basis that gender equality outweighs any injustice.

Governments are authorised to make such decisions. Election cycles, and government changes, are supposed to be the mechanism that ensures balance.

There is now a beautiful and timely example of how other similar countries address some of these social policies.

Malta, like New Zealand, is tiny, has had great benefit from its British connection (though it is now a republic), and, like NZ, is committed to be an inclusive country (unlike, say Syria).

It held its election last weekend.

It introduced a new policy.

Once the Maltese electorate had selected their politicians from the two main parties (National and Labour), each party was given six more seats, with which to ensure that both genders had at least 30% representation in its parliament.

Malta, like many Roman Catholic countries, has for centuries been led mostly by men, in public office and in the private sector.

It has now adapted its parliament to reduce inequality.

Presumably if more women than men had been elected to its parliament, the extra seats would have been used to ensure a minimum of 30% for men.

There seem to be many ways of dictating how a pie should be cut.

Will fund managers allocate more to Malta because of this new policy?

One wonders whether investors and voters are best to demand more transparency before granting power to directors, fund managers, and politicians. Companies and governments perhaps should display a manifesto before seeking a vote.

If Mainfreight disclosed that it selects solely on merit would fund managers abandon it?

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MALTA has been off limits for two years, thanks to Covid, denying my wife and I our winter escape, but we keep up with its news.

It has been badly hurt by the need to isolate Russia, as a response to its ravaging of Ukraine.

You see, Malta's economy for decades has been boosted by hosting many thousands of Eastern European school children, many from Russia, who receive their secondary education in Malta in the international language of English.

For wealthy Russian parents this option enabled them to provide their children with access to a first-rate educational system, in a safe country where crime, drugs etc are relatively low, and to return to Russia at age 18, with an education that opens up careers in English-speaking countries, and in careers like banking and aviation, where the English language is widely used.

The loss to Malta of several thousand students has thus been significant. Five thousand students brought in each year $100 million Euros, a useful sum for a country of 500,000 people.

Also significant is the threat to Malta's electricity grid.

In the 1970s Malta announced it might explore for oil in the elephant field within its territorial waters. That field extends right back to Libya, whose economy then, and probably now, very much depended on that oilfield.

Libya's Colonel Gaddafi negotiated to stop Malta from drilling into that field by offering Malta a 40-year supply of crude oil with a pricing formula that was extraordinarily discounted.

That agreement ended in 2012, the oil having fuelled Malta's grid. (Malta has no rivers, no hydro, and insufficient wind. It uses solar but that is inadequate)

Up stepped China and offered to convert the electricity grid, fuelling it with Russian liquified gas.

Russia would send over huge ships with gigantic gas cylinders that dock alongside the grid, leaving Malta with a cleaner source (gas vs crude oil), available indefinitely, or so Malta thought.

Indefinite horizons do not anticipate war.

Any escalation of the Ukraine invasion would pose a threat to shipping.

As an aside, when China rebuilt the grid, it did so at a cost of a billion or two, but it declined to be paid in Euros.

Malta was instructed to pay China in gold.

Since then the price of gold has increased by 50%. One hopes for Malta's sake that the full price was paid up front, and not in instalments!

Investment Opportunities

Goodman Property GMT – through its vehicle GMT Bond Issuer Ltd is offering a new 5-year senior bond (maturing 14 April 2027).

Based on current market conditions the interest rate will need to exceed 4.50% p.a. to be competitive (credit margin details announced on Monday 4 April). Note interest payments are semi-annual.

The offer opens next Monday, and closes on Thursday, so requests for a firm allocation must be in by 5pm on Wednesday 6 April please.

Mercury Energy – We have established a deal list for those wishing to hear more about a new capital bond from Mercury Energy. We are expecting this bond issue to open over the next three months.

Clients are welcome to join these lists.

Travel

Johnny will be in Christchurch on Wednesday 20 April, seeing clients at the Russley Golf Club Boardroom.

Edward will be in Auckland on Thursday 28 April, seeing clients at the Ellerslie International, and on Friday 29 April seeing clients at Aristotles in Wairau Valley.

Edward will also be in Nelson on Thursday 12 May, seeing clients at Trailways Hotel, and in Blenheim on Friday 13 May, seeing clients at the Chateau Marlborough.

Edward will also be in Napier on 19 May and 20 May. Location TBC.

Chris will be in Auckland in 12 and 13 April. He hopes to announce new seminar dates for a series in May.

Chris Lee and Partners Limited


Taking Stock 24 March 2022

 

Chris Lee writes:

STRESS – wars, pandemics, galloping inflation – creates havoc, testing everyone, including investors.

The London Metal Exchange, where a critically important metal, nickel, is traded, highlights that stress can translate into madness.

Such madness evolves during capital flow mayhem, a conceivable outcome being the withdrawal of tens of billions of foreign capital from New Zealand's share market and our fixed interest markets, leaving our market illiquid during days of fearfulness.

The fixed interest secondary market in New Zealand in those days would become dysfunctional. Our market liquidity is already threatened by the billions repatriated in recent years.

We need to fix this.

Nothing better illustrates all the stress and madness than the current nickel market in London, where a market that prices physical nickel of around 30,000 tonnes, permits banks and punters to trade hundreds of thousands of tonnes of (non-existent) nickel.

Obviously, this anomaly has always been addressed by the ability of a punter to pay money to exit the undeliverable promise implicit in derivative punting.

The market crashed earlier this month, causing losses of billions of dollars for some, gains for others.

Nickel had traded for many months in a band of around US $10,000, hovering around $20,000.

The world's largest nickel supplier, a Chinese company, decided nickel was too dear so it ''shorted'' the metal on the futures market, believing prices had to fall.

The punters took on the Chinese business, and in theory made billions by forcing up the price in the futures market to $100,000 a tonne, within three days of the price being $25,000.

The Chinese company could thus infer its supply of nickel had grown in value by billions – but its derivative position meant it owed multi billions, an unimaginable sum, leading, in market parlance, to ''margin calls'' requiring the Chinese company to deposit billions of dollars, within a day, to offset the failed punt. Chaos resulted. Billions are hard to find, in a day. Banks then have to decide who to support, and who to abandon.

Ultimately the London Metal Exchange's nickel committee decided to close the market, for the first time in 145 years, and even more astonishingly, elected to cancel the trades that had led to the mayhem.

Ordinary punters like Goldman Sachs were spitting nickel tacks, unable to collect on bets that would have led to multi-million dollar bonuses for the characters who play the game daily, a sector that attracts the type of personality that might make their career in foreign exchange trading, or other commodity trading.

As an aside I recall that in London, when I worked there, these traders were often what Londoners called ''cockneys who crossed town'' and sometimes ''barrow boys'', now living in a flash area, driving the best cars in the street, inanely over-rewarded for their punting with other people's money.

The cleverest barrow boys used their trading skills to migrate into real management roles and often became executives of large organisations (or even Prime Ministers).

The Metal Exchange last week closed the market, then re-opened, seeking to impose a trading band of just five percent on any one day, somewhat deflating those traders.

The price of nickel then ''fell'' to US$45,000, approximately double what it had been a fortnight earlier.

Mayhem. Madness. Utter disarray.

Nickel is an essential metal. It is not a crypto coin or a non-fungible token. It is used in the batteries that power cars, especially electric cars, and is a key component of most automobiles. It is fundamental for the move to electrify transport, at least while we use current technology.

Its supplies are essential, yet here we had a price gyrating like a seismograph in a violent earthquake.

Imagine if the commodity had been milk powder. The equivalent gyration would have seen milk powder rise from $4,000 a tonne to $20,000 a tonne – in a day!

Curiously the nickel drama went largely unnoticed in NZ, the signal of extreme market distress in a key global market regarded by our media as less significant than a sale of someone's nice house for a vulgar price.

In capital markets, the nickel story was close to a nuclear event.

It symbolised the type of exaggerated response that has its roots in fear and greed.

The nickel story was a line in a paragraph that might explain the loss of trust that leads to a decline of the globe's surplus capital, or certainly the decline of trust in other parts of the world. Trust in places like New Zealand was a hard-earned status that had led to a large capital flow arriving here, displaying faith in our sharemarket standards, our fixed interest market's transparency, and, I guess, displaying an historic respect for economic management, sovereign debt levels, Treasury competence, Reserve Bank independence etc.

Is that trust shaken by recent events?

The implication for NZ investors is that we are having to rely less on foreign money for market liquidity and pricing.

Perhaps that is why we have been prepared to sell foreign investors our land, our houses, and our most promising businesses, anticipating reversals such as we are seeing today.

Perhaps our willingness to sell in recent years has been a deliberate decision to boost our market liquidity, for the days when foreign capital was receding. We need to reverse that outflow or come up with credible alternatives that keep our markets functional.

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CERTAINLY, our governments led by Clark and Key, and earlier, briefly, Shipley, were keen to sell key assets to China when their regimes held power.

The book, In the Jaws of The Dragon, by Ron Asher, provided detailed evidence of mass sales, often, at least on the surface, at illogical and unwise prices, even if our national mission was to reduce the country's debt. Ever recall the ''Crafar'' dairy farms?

Asher's book, which I reviewed years ago, pointed to some fairly unusual goings-on, creating an aura of mystery. His research seemed compelling.

Interestingly, Paper Plus has recently removed the book from its shelves.

I wonder why.

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OF particular relevance to NZ retail investors will be any new capital market focus on ensuring liquidity for our fixed interest secondary market.

As rates rise and new offers arrive promising returns of four to five percent, investors are having to ponder elevated inflation, paradoxically matched not by higher asset prices, but by falling asset prices.

At its extreme, this phenomenon suggests an investor has the choice of better interest rates, but not keeping up with inflation until it subsides, or buying property or equities that might have to be very skilfully chosen to avoid losses, as property prices and share prices face downside pricing.

Market liquidity is helped only a little by our larger Kiwisaver funds, which allocate a few billion each year to NZ equities, but in recent years have not been enthused by the awfully low returns from corporate bonds, only the worst funds forced to buy at rates close to nil.

A few billion of new money each year is relevant to our domestic sharemarket but the amount spent in the corporate bond market has been minimal, understandable given the rates.

Yet the NZX has for decades promoted itself for its wide range of corporate bonds.

An investor could be forgiven then for inferring that the NZX and its major brokers had committed to combine with the banks to maintain a two-way secondary market in corporate bonds, using capital to maintain an orderly market.

Go back a decade or so and you would find that all the banks and major brokers would quote a realistic price for credible fixed interest securities, on both sides, buy and sell, of a transaction.

Covid has occasionally spooked markets.

Those who promote and underwrite fixed interest issues, in so doing scooping up fairly handsome fees, have not all accepted that they ''owed'' the market after-sale service.

Currently cash-rich fixed interest investors are spoiled for choice, the re-issue of Insurance Australia Group subordinated notes at a rate exceeding five percent, to be followed by a similar offering from Mercury Energy, though its details are not known.

Investor demand suggests to me that many retail investors have recovered an appetite for better-yielding fixed interest offers, accepting that the buying power of their money will be less than inflation.

Others may seek to buy shares in strong NZ companies with the power to increase the prices of their products and services but quite clearly there are many listed companies which are being damaged by inflation, leading to share price falls, their pricing power a victim of consumer behaviour.

Investors choosing fixed interest (or bank deposits) imply that the (minimal) loss of spending power for an unknown number of years is a better fate than a possibly significant loss of capital in retreating share and property markets.

Of course, there is another alternative for investors.

Invest in commodities like gold, or oil, or wheat. But not nickel!

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Johnny Lee writes:

THE recent update from our largest publicly listed company, Fisher and Paykel Healthcare, has confirmed what many shareholders have suspected – that the developments in the fight against Covid have led to a gradual easing in demand for FPH's products.

Fisher and Paykel, which produces equipment and disposables used in the treatment of respiratory diseases (including Covid-19), has enjoyed record revenues and profits over the past few years. Soaring demand for its products caused the share price to reach a high of around $38, but the price has since retreated, now sitting around $24.50 a share.

Fisher and Paykel's board is to be commended, in my view. Throughout the pandemic, the company was cautious – some believed too cautious – in hoarding its newfound wealth, taking a long-term view while the share price skyrocketed.

The company was at pains to ensure that shareholders understood that the surge in revenue was temporary. The company often refused to provide guidance, believing the uncertainties were too high.

There were modest increases in the company's dividends, but the company also decided to use its windfall to invest in land and buildings to support future growth, including another three manufacturing facilities, with the first already under construction in Mexico.

But the ground is shifting beneath them. Two things conspired to impact its most recent update.

Firstly, the emergence of the Omicron variant has seen an associated decrease in the usage of respiratory intervention.

The second is the reduced incidence of the flu, as increased mask wearing, improved hygiene practices, social distancing norms, higher rates of remote working and, importantly, decreased international travel, have led to successive years of low rates of influenza globally.

Interestingly, healthcare experts believe this may be short-lived, with some expecting a severe global resurgence in influenza rates once international travel recommences, partially fuelled by the lack of immunity in the community.

Another factor affecting profitability is the persistently high cost of freight, an issue affecting all industries at the moment. One imagines that this problem will ease in time.

Despite the share price fall this week, it is important to recall the context of the forecast decline in annual revenue. In 2019, the full year result showed a profit of approximately $210 million, on about one billion of revenue. 2020 saw a profit of $287m, on revenue of $1.26 billion. 2021 saw a net profit after tax of $524 million, on revenue of almost $2 billion dollars.

The forecast for 2022 is for revenue this year to be approximately $1.7 billion, a 15% decline, but 70% higher than 2019.

My point is this: Shareholders of Fisher and Paykel have enjoyed several years of extraordinary growth driven by factors that were expected, by the board, to be temporary. Revenues are now beginning to normalise while the company waits for its long-term investments to bear fruit.

Relationships have been formed with healthcare providers, greater awareness now exists as to the company's quality and reliability, and there is an increased political will to properly fund healthcare to prepare for the sort of pandemics experienced over the past two years.

The conditions experienced in that time may never be experienced again. However, the company has enjoyed a windfall and invested it towards what it hopes will be an even brighter future.

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UPDATES across the retail sector paint a picture of a resilient industry eager for lockdowns to become a thing of the past.

Briscoes, The Warehouse and ''KMD Brands'' (formerly Kathmandu) have all reported to market. Hallenstein Glasson will report tomorrow.

The themes expressed across the sector are being shared by their peers further abroad – supply chain disruption, inflation, and maybe soon, falling discretionary household spending.

Briscoes reported a modest lift in sales and profit, enabling the company to continue bumping up its dividend to shareholders. Throughout the year, the company deliberately bloated its inventory, hoping to avoid the impact of the supply chain issues plaguing its peers. Perhaps the most disappointing aspect of its performance was the value added by its minority shareholding in KMD Brands, which is clearly struggling.

Online sales continue to surge, now making up over a quarter of total sales. A significant investment was made into modernising this channel.

As an aside, it will be interesting to observe how this evolves with the wind-down of mandates around the country. Will consumers, now confident in their ability to shop safely and easily via an online portal, continue to do so? Or will we see a return to in-person shopping?

The Warehouse reported a small dip in both sales and profit, as lockdowns took effect and freight costs weighed on earnings. The company's evolution from ''Red Sheds'' to an online retailer continues, especially across its newer brands, like Torpedo7.

One curious aspect of The Warehouse's report was a comment towards the end of the statement, highlighting that the company believes it is now price competitive on a range of common grocery products including bread, milk and eggs. The CEO of the company made subsequent remarks to the media that it believes our supermarket duopoly is failing New Zealanders.

KMD Brands fell to a loss, with sales slightly lower amid store closures and a failure to meet customer demand due to factory closures.

All three companies highlighted the same point – inflation is rising, and belts are being tightened. Banks are forecasting that households will face significant rises in living costs, money that must come from somewhere.  ASB calculated the average household will spend an additional $7,500 per year to maintain its 2021 level of consumption.

Retail has always been a particularly cyclical sector, with years of growth and years of contraction. Now, the retail sector faces the challenge of convincing consumers that its products still offer enough value to justify a swipe of the credit card. Retail spending fell almost 8% from January to February of this year.

The years have been kind to this sector, and all of them boast considerable liquidity to ensure they have the flexibility to weather a dip in consumer spending. The past 12 months have been challenging, but the lifting of mandates and expected influx of overseas tourists will present an opportunity to each of them in the year ahead.

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Investment Opportunities

IAG – IAG will be closing their subordinated note offer tomorrow morning. The rate will be fixed for the first six-year period and will likely be set around 5.20%. If you would like to join this list, please urgently contact us. IAG will be paying the transaction costs so there will be no cost to clients.

Mercury Energy – We have established a list for those wishing to hear more about a new capital bond from Mercury Energy. We are expecting this bond issue to open over the next three months. Clients are welcome to join this list.

Goodman Property Trust – Goodman Bond Issuer Limited has indicated it is considering a new bond issue of a five-year, fixed rate, senior secured green bonds. We are anticipating an interest rate of approximately 4.00%. Clients wishing to express an interest in this offer are welcome to contact us.

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Travel

Johnny will be in Christchurch on Wednesday 20 April, seeing clients at the Russley Golf Club Boardroom.

Edward will be in Auckland on Thursday 28 April, seeing clients at the Ellerslie International, and on Friday 29 April seeing clients at Aristotles in Wairau Valley.

Edward will also be in Nelson on Thursday 12 May, seeing clients at Trailways Hotel, and in Blenheim on Friday 13 May, seeing clients at the Chateau Marlborough.

Chris will be in Auckland in April, dates to be advised.

Chris Lee & Partners Ltd


Taking Stock 17 March, 2022

Johnny Lee writes:

THE Commerce Commission released two judgments this week of high relevance to sharemarket investors, approving both the Z Energy/Ampol takeover and the 2 Degrees/Orcon merger.

The Z Energy/Ampol approval finally puts to bed the biggest impediment on the takeover offer, which now seems all but certain to successfully conclude.

There are still hurdles. The most significant of these is the approval of Z Energy shareholders, although I suspect this will meet the threshold required. This is despite a number of retail shareholders expressing to us a preference to retain their holding, preferring to hold a cash-generative essential service, rather than pass ownership to an Australian corporate.

Combined with the news that Gull is to be sold from Ampol to Australian investment firm Allegro Funds, it seems New Zealand fuel retailing is swinging back towards overseas ownership, with the likes of Waitomo amongst the larger remaining New Zealand companies.

That is not to say that New Zealanders cannot purchase shares in Ampol itself. Ampol is listed on the Australian Stock Exchange and trades millions of dollars-worth of stock each day.

But Z Energy's departure from our exchange is a blow to investor choice. Last year saw a number of new and interesting companies join our board, and the NZX will no doubt be eager to build on this momentum.

Meanwhile, the 2 Degrees/Orcon merger was approved despite a clear reduction in consumer choice, arguing that the combined entity could offer a more compelling deal for consumers than either could alone. Together, it was argued, they would be better equipped to compete and offer greater consumer choice.

New Zealanders would no doubt welcome a strong competitor to Spark and Vodafone. Competition breeds innovation and ensures margins are kept in check.

That being said, I doubt shareholders of Spark and Infratil (part owner of Vodafone) are particularly worried about the threat of competition from 2 Degrees yet. Utility ''stickiness'', or the willingness of customers to ''stick'' with their providers, remains high.

However, I do expect the marketing campaign, once the merger concludes, to be significant. If 2 Degrees is to flex its newfound muscle, it needs to offer a compelling reason for people to switch - and communicate it well.

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ONE of the worst sharemarket performers so far this year has been the retirement village sector.

While our overall sharemarket index has fallen 10% this year, the retirement sector is off almost 25%, with Ryman Healthcare's share price decline the largest contributor from the group.

Ryman's decline has followed a shift in our economic outlook, with rising interest rates now priced in, and some economic commentary suggesting a house price decline is probable this year. Building costs are also forecast to rise substantially, while labour constraints are likely to be an issue in the near-term, before our migration system scales back up.

Ryman is not blamed for fluctuations in the global price of oil or the local price of timber and steel. However, investors can absolutely expect communication in the face of such a severe decline in value.

One curious aspect regarding Ryman's decline has been the dearth of market announcements from the company. We are nearly a quarter of the way through this calendar year, and Ryman has yet to make a single announcement to the stock exchange. Company announcements are not limited to profit announcements or land purchases, but include disclosure notifications when certain people (for example, the CEO) purchase or sell shares in the company.

A growing trend among listed companies is to produce a monthly operating report, updating the market on a predictable schedule with specific metrics and their performance month to month. Companies including Air New Zealand, Auckland Airport, Contact Energy, Meridian Energy and the NZX have all adopted this idea, and it is one that has had a tangible impact on retail shareholders, who often lack the access afforded to institutional investors.

This information is usually a standardised template, with no market commentary or outlook included. That aspect is normally reserved for half-year and full-year reports.

Ryman, of course, has no obligations (beyond continuous disclosure) to provide updates to the market. The company will report in May this year, and judging by Summerset's recent full year result, the sector remains in a good position, with pent up demand.

A $1.5 billion dollar decline in value is significant and the share price is now approaching levels not seen since 2017. Shareholders are rightly questioning whether market conditions have deteriorated to the point of justifying such a fall. The fact that the entire sector – including Oceania and Arvida - has fallen suggests it is not a Ryman-specific issue.

An update from our tenth largest publicly listed company would be most welcome.

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DIVIDEND Reinvestment Plans (DRPs) are often topical this time of year, as investors consider whether such schemes suit their particular needs.

DRPs are schemes whereby a shareholder elects to receive additional shares in lieu of a cash dividend. Typically, these are awarded with a slight discount, to incentivise investors to accept scrip instead of cash. For example, Vital Healthcare's recent DRP applied a 1% discount to anyone who accepted the proposal.

DRPs also allow investors to acquire additional shares without incurring brokerage fees. Investors with no additional need for income, or young investors with entry-level portfolios, may find value in participating in DRPs.

Generally speaking, a cash dividend affords investors greater choice and spares them from the risk of volatility. Acceptance of DRPs remains low across New Zealand, with most opting for cash.

Not every company offers a DRP. Those that choose to may suspend or terminate the DRP as their cash position evolves over time. For example, companies with little need for cash often elect to suspend reinvestment.

Clients uncertain about whether to participate in Dividend Reinvestment Plans are welcome to contact us for advice.

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David Colman writes:

THIS week's news of an immediate reduction in fuel tax surprised us all, and was shortly followed by a 7% overnight fall in the price of crude, a factor that may have more bearing over time.

The tax cut reminds me of the Julia Gillard-led Australian Government's well-intentioned Minerals Resource Rent Tax (MRRT) which specifically targeted large mining companies, by taxing ''super profits'' generated from the mining sector.

If only it was so easy to predict the future value of commodities, company profits and tax revenue.

During the time the MRRT was in effect, commodity prices fell sharply and the companies involved, such as BHP and Rio Tinto, ended up contributing a far smaller figure than initially estimated.

The MRRT generated receipts of just $200 million (about $2.8 billion less than anticipated) and was estimated to cost almost $100 million to implement.

After being introduced in 2012, it was repealed only a year later by the Abbott government.

The two actions should be another reminder that Government policy changes can be swift and unpredictable.

An unpredictable cabinet can cause much the same problems that the New Zealand Government may be trying to solve. The decision to cut fuel tax is also at odds with the same administration that has declared a climate emergency and publicly committed to reducing emissions.

Is a temporary reduction in fuel taxes part of a long-formulated contingency plan for the current inflationary environment?

The price of crude, since peaking around $130 a week ago, is now back under $100 a barrel. Already, we are seeing prices at the pump follow suit.

Uncertainty is not reduced by unexpected decisions, whether well-intentioned or not.

Politicians make political decisions. Democracy rewards those who chase our votes, often resulting in ideological rather than logical decisions, such as the case with the New Zealand retirement age.

The OECD has publicly recommended New Zealand raise the applicable age for the pension as a way to cut government spending and ensure pension sustainability for years to come.

From a practical perspective, raising the retirement age could be based on demographic statistics (such as life expectancy) and the cost to the country that an increasing number of retirees represents. Politicians, influenced by polls, have consistently ruled out such an approach, concerned for the electability of such policy.

Democratically elected spenders of borrowed money seem comfortable dumping the fiscal problems they create on to the opposing side, central banks and future taxpayers when their time is up.

The current finance minister suggests that the economy can afford not to raise the retirement age. Other options do not seem to be contemplated. I see this as an issue that can only be ignored for so long.

Countries such as New Zealand, with stable governments and disciplined central banks, enjoy the level of domestic and international investment they receive partly due to this confidence in predictable economic conditions. Well-defined and logical public policy reinforce this confidence.

The Reserve Bank of New Zealand is viewed internationally as predictable and reliable. A long history of clear communication and adherence to established economic principles is mutually beneficial, helping to maintain a stable currency, which in turn helps the RBNZ pursue its agenda of financial stability.

Its policies are generally telegraphed well in advance, with indications of interest rate hikes later this year, and progressively increasing capital requirements for banks from July 2022.

Governments would do well to adopt such predictable behaviour, especially as we begin planning to re-open our borders to tourists, students and workers.

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MANY New Zealand companies have performed well under difficult conditions, and I am optimistic the return of international travel provides significant opportunities to be capitalised upon.

Tourism and hospitality-related businesses, and property-related shares, may see their fortunes rise as Covid-19 concerns continue to fade.

Property Trusts, particularly those in the office and retail space such as Precinct and Kiwi Property Group, may benefit from this ''return to normal''. With lockdowns seemingly a thing of the past, and isolation periods following suit, these companies will be hopeful that the worst is now behind them.

As international travellers return, so too should the prospects of companies that rely on this freedom of movement.

Others, like Sky City Entertainment and Auckland Airport, will no doubt be delighted to have the certainty of a border opening date. I imagine these companies are busy planning ways to ensure they maximise the opportunities now available to them.

Certainty does this. It gives businesses the confidence to plan and invest in their future. The next twelve months will be a very exciting period for New Zealand business.

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Investment Opportunities

IAG Insurance – has announced that it plans to issue up to $400m worth of subordinated notes. The interest rate has not been set yet; however, we anticipate that the notes will offer at least 5.00% which will be fixed until 15 June 2028.

Full details on the offer, including a presentation, can be found on our website. Kevin has written an article on this offer for advised clients only which we have uploaded to the private area of our website.

IAG have confirmed that they will pay the brokerage cost for these notes. Accordingly, clients will not be charged brokerage.


Taking Stock 10 March, 2022

Johnny Lee writes:

THE sharemarket's poor showing in 2022 has, so far, stood in strong contrast with the underlying performance of our listed companies, and reflects an increasingly pessimistic view of our medium-term outlook.

While the threat of global war and an ongoing pandemic continue to weigh on the minds of investors, inflation is looming as the top issue in this medium-term picture.

Investors have, broadly speaking, enjoyed positive revaluations as interest rate falls helped drive the relative value of dividend paying shares. A share paying 5% or 6% dividends, against the backdrop of interest rates close to 0%, looks an acceptable return for risk.

In the bond market, some companies were able to time their issuance extremely well, with the likes of Chorus and Auckland Council standing out as particularly well-timed. I suspect the poor investor return of the Auckland Council 30-year bond may have complicated further issues of extremely-long dated retail debt.

Not all shares face the same prospects in inflationary environments. As term deposit rates rise, companies that are able to lift prices, lift profits and lift dividends may be able to maintain these share price gains.

However, if they cannot, term deposits will become an increasingly preferred option, as their share prices fall to reflect an increased yield.

A climb in the Official Cash Rate is expected – and soon. However, we have had false starts before.

The OCR rose to 8.25% in July 2007. Prior to the most recent uplift, the rate was lifted twice – in 2010 (unwound in 2011) and 2014 (unwound in 2015). Since then, Central Banks around the world have been more cautious around raising rates, wanting to ensure that rhetoric matches action. No central bank wants to be blamed for any recession that might arrive.

The fact is that many recent mortgage owners have never experienced rising interest rates. Those with a high degree of leverage will find themselves tested.

The causes of this inflation are varied.

The war in Ukraine has already caused devastation across the region. As well as the awful loss of life, we have seen cities levelled while roads and infrastructure crumble. Each day seems to bring further escalations, with the price and supply of oil becoming a major bargaining chip. Who will pay for Ukraine's restoration?

The growing disaster in the ''breadbasket of Europe'' is a wildcard to the world's economy. Wheat prices are soaring as fields are razed and farmers evacuate (or worse). Ukraine accounts for around ten percent of the world's wheat market. Russia is closer to twenty percent.

Gold has also risen in value. Gold has long been considered an ''inflation hedge'' - rising in value during times of high inflation. Oil and gold producers, including the likes of Woodside Petroleum and Newcrest Mining, have leapt in value, considered relatively safe havens from the crisis in Eastern Europe. Russia and China might be planning to hold their gold in their own vaults, as the world increasingly denies Russia access to the wealth it stored in the West.

For New Zealanders, other costs including council rates are also soaring, suggesting that the inflation measurement by year end might be close to double figures.

One cost that that has not risen is the price of carbon. Globally, carbon credit pricing has retreated, as investors worldwide begin to cash in on the strong gains this year. New Zealand has not been immune to this.

It is clear that as we approach the expected peak in Covid infections, new concerns are developing. Investors waiting for a period of relative stability may find themselves waiting a little longer.

_ _ _ _ _ _ _ _ _ _

AT the risk of peddling doom and gloom, one might observe that overall sentiment is undeniably negative at the moment. Consumer confidence and business confidence levels are low, most businesses are forecasting reductions in profits, and access to labour is now the single biggest concern for New Zealand businesses.

Even anecdotally, there is an observable increase in businesses limiting services due to lack of staff. Airports are almost empty, hotels have at best skeleton staffing and many retail outlets are closed.

Tourism and overseas travel remain an unknown. The assumption appears to be that New Zealand will soon fling open the doors to an eager crowd of wealthy tourists and an even larger group of overseas workers and students. An influx of foreigners would no doubt be a welcome reprieve for our embattled tourism and hospitality sector, but to date this relief seems futuristic.

Yet investors can afford some degree of optimism at this point. Recent overseas surveys suggest that, at least in Western countries, there is a desire to continue large-scale international travel. The likes of Auckland Airport, Air New Zealand and Sky City will no doubt have both fingers and toes crossed that demand to explore New Zealand remains as high as it was pre-Covid, perhaps even higher.

This willingness to travel is absolutely a key part of our economic recovery story, whether as students, workers or holiday-makers. New Zealand's challenge will be to take advantage of this opportunity without encumbering ourselves with the same problems of yesteryear, such as placing undue strain on our infrastructure.

New Zealand will need leadership in this regard. Our Minister for Tourism – Stuart Nash – will have a challenging six months ahead, and I wish him luck in what will no doubt be an exciting time for our country.

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THE team at Infratil continue to focus on maximising the company's existing assets, with another announcement made this week about its Vodafone holding.

Last week I discussed Infratil's decision to conduct a strategic review of its RetireAustralia assets, and the possibility of a sale of these assets to a new or existing provider of aged care in Australia. This week saw Infratil announce that it is looking to sell Vodafone's tower business, with further reporting suggesting interest from Australian investors would be strong.

It also follows both Spark's announcement that it is seeking to complete a similar transaction in the coming months, and a global trend towards telecommunication providers looking to offload their physical tower assets. In Australia, at least two other companies are looking to do the same.

The logic of this ''capital release'' is to improve both use of capital and company returns. If the sale realised, say, a billion dollars, and Infratil agreed to lease back the assets for, say, 50 million a year for 40 years, it would essentially be betting that the company could achieve a better long-term return with that billion dollars than five percent.

The buyer would own an asset used by one of our largest companies, producing a known return for an extremely long term. The value of this contract would define the value of the assets, although there may be a potential for synergies with other (or new) providers, that might increase the towers' income.

Shareholders of Infratil are not typically investing to achieve five percent returns. Their long-term returns have been well in excess of this.

With both Spark and Infratil looking to offload their ''TowerCo'' assets, both parties will be relying on their contracted advisers to ensure a strong price for the sale. Both buyer and seller will be wanting to maximise value.

This timing, of both major telecommunication companies selling their assets at the same time, is of course negative for pricing tension. However, I am certain this was considered, and both companies will be confident that the timing is right to lock in asset prices.

Could these moves lead to increased competition from new providers? Other telecommunication providers may agree to rent space on these independently held towers, providing an additional revenue stream to the tower owners. Trustpower, for example, already uses Spark's mobile network to provide its mobile services. And it is absolutely true that the huge capital cost of establishing a nationwide network of towers from which to broadcast a signal would be a barrier to entry to new players, let alone the cost of buying or leasing land around the country.

Spark and Vodafone both have considerable market share, with 2 Degrees/Orcon rounding out the majority of the New Zealand mobile market. All of these companies will be confident that the breadth of their offerings – broadband, streaming - will make it hard for a new company to enter and compete.

Time will tell. For now, both Infratil and Spark investors will be curious to see how their respective companies plan to utilise the proceeds from such a sale.

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SHAREHOLDERS of NZX Limited are reminded that tomorrow (Friday 11March) will mark the closing date of the recent rights offer.

The offer entitles shareholders to buy additional NZX shares at a fixed price of $1.42. The current price on market, as at time of writing, is $1.38. While this column should never be regarded as financial advice, this arithmetic should not require complex thought. A $2 coin is not worth a $5 note.

Any rights not taken up will be purchased by the underwriter of the offer.

Should the share price stage a late rally and return to levels in excess of the offer price, it would be reasonable to expect a full subscription to the offer. The dividend yield on offer (about 6%) will be compelling enough to entice investors, but only the most charitable shareholders would choose to buy additional shares at a premium to their market price.

Other recent entitlement offers have included a condition to account for such a decline, re-pricing the offer to a fixed percentage discount if the share price falls below the offer price, ensuring that retail investors are not effectively disadvantaged by the different offer timetables.

For whatever reason, this did not occur in this instance. The net effect of this exclusion highlights a key discrepancy in the way retail and institutional shareholders are treated.

When capital raisings occur, it is commonplace to see both institutional placements and retail placements occur separately. Institutions are normally given the ''first bite of the cherry'' to ensure certainty around the amount raised. In this case, institutions were invited to buy shares at $1.42 at the same ratio of retail shareholders – 1 new share for every 9 held. Two-thirds of these institutional shareholders elected to accept the offer. The remaining stock not purchased was offered back to institutions and eventually sold at $1.62 – a 20 cents per share premium – via bookbuild. In total, $16 million was raised from the institutions.

This institutional placement has been fully settled and allotted. Those buyers at $1.42 have had the opportunity to profitably trade their shares for about two weeks. The buyers at $1.62 have either sold at a loss or continue to hold these new shares.

The retail placement, by contrast, has not yet occurred. Barring a last-minute leap in share price, shareholders will either find themselves diluted (by the institutional placement) or paying a price in excess of market value. Those who decline to buy will see their shares purchased by the underwriter, effectively increased the asset backing of the shares.

Treating shareholders classes differently may appear unjust from the outside, but there is a logic to this process. Retail shareholders normally require a longer lead-in period for offers, to account for things like postal delays, lack of liquidity, personal holidays, or the opportunity to consult with independent advisors. Institutional investors do not face these same issues and can generally respond quickly to capital demands. At the time of the offer, the NZX share price had been trading at $1.70, so the decision to buy seemed obvious. The developments in Ukraine sent share prices tumbling.

The end result in this situation is that retail participation may be jeopardised by the declining share price. Normally – and this is generally market convention – the price on offer for retail shareholders would have been the lesser of $1.42 or a modest discount to the average price of the five days prior to the closing date. This ensures that the company is able to raise the money sought without allocating to the underwriter, and that retail shareholders are not punished by the difference in settlement date.

Short of such a last-minute price recovery, this offer will result in disappointment for most of the parties involved. The underwriters may end up holding a larger than anticipated shareholding, retail shareholders may find themselves diluted, and institutional investors have likely seen a fairly immediate loss on their investment. Wars can ruin the best of plans.

I am certain the NZX did not envisage the share price deteriorating to this extent in such a short timeframe. The share has fallen 20% in one month – possibly its worst ever month. However, this situation could have been avoided with a modest concession around re-pricing, spelt out in the original offer documents.

Clients who hold NZX shares are welcome to contact us if they would like to discuss this offer further. It closes tomorrow.

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TRAVEL

 

There are no current travel plans, apart from Chris Lee's Auckland trip next week, which is fully subscribed.

 

Chris Lee & Partners Ltd

 


Taking Stock Thursday 3 March, 2022

Johnny Lee writes:

FOR those who follow and maintain an interest in financial markets, reporting season – February and August – ranks as the most important period of the year, as companies ''check in'' with their investors, summarise the previous six months and outline the strategy for the six months ahead.

For advisers, it also provides an opportunity to review concrete data to compare to researched expectations.

The start of 2022 has been particularly eventful. The invasion of Ukraine has contributed to market volatility and rising oil prices, which are currently hovering around US$105 a barrel. Even the more electrically-inclined drivers among us will have noted the rising petrol price, as it feeds into other costs, including food and air travel. The Deputy Governor of the Reserve Bank has publicly noted that these oil price rises have exceeded forecasts and may necessitate a response.

At the same time, the growing dialogue surrounding taxation of petrol is unlikely to wane, nor is the inertia of our tax brackets, as wages rise and lower income earners find themselves deducting a greater proportion of their wage for the taxman.

For politicians, of course, the rising tax take is a welcome boon, albeit one accompanied with another array of problems. Politicians rarely find electoral success when presiding over periods of high inflation, regardless of whether this blame is justified. Young people, in particular, have become noticeably more vocal regarding inflation.

Inflation, of course, acts as the tireless assistant to the debt-ridden owners of assets, particularly homeowners. Provided wages keep pace with inflation, this nominal debt will gradually ''inflate away''.

For those on fixed incomes, a different challenge lies ahead. Owners of capital will be actively adjusting their expectations around the value of this capital, and the rates of return demanded to justify investment. Investors in bonds, for example, will need to consider whether the rates on offer will be sufficient over the entire term of the investment. We accept interest rates are expected to rise – so long-term rates must account for this. But any prospect of stagflation – stagnant economic growth, high unemployment and high inflation – might reverse interest rate rises. This week alone, the Federal Reserve Chair sounded caution on rate rises, citing the Ukraine invasion.

Companies are making these same adjustments, looking over their balance sheets to ensure that capital is employed effectively and generating returns that justify continued ownership.

Spark Limited is one such company that is leading towards a divestment of assets, as it considers ''inviting external investment'' in its tower business.

Spark's half-year result was broadly in line with expectations, reaffirming its 25 cent annual dividend and seeing pleasing growth in revenue, profit and free cash flow.

Its plan for the ''TowerCo'' business will likely remain the focal point for investors over the months ahead.

Spark's plan is to separate its mobile site business – primarily towers but also including assets such as the transmitters found on light poles – into a separate entity within Spark. Spark would likely then sell a portion of this new entity to outside investors. Spark is keen to expedite this endeavour, indicating in its results that it will start this process in the coming months.

This trend towards the packaging and sale of these physical assets is a global one in the telecommunications sector. Spark is first and foremost a telecommunications provider, servicing millions of New Zealanders with their mobile and broadband needs. While the infrastructure behind this industry is of course essential, ownership of the infrastructure is not, and the infrastructure itself may not generate a rate of return acceptable to the board of Spark.

A similarity could be drawn to Seeka's strategic decision to arrange sale and leaseback agreements in regards to its land assets, freeing up capital to be better utilised towards what the company excels at – marketing and selling crops.

A key rationale behind Spark's venture is industry consolidation. Spark's tower assets are almost exclusively utilised by Spark itself, referred to as the ''tenancy ratio'' of the assets. The likes of Vodafone - or the upcoming 2 Degrees/Orcon merged entity - effectively duplicate these assets, trebling costs such as maintenance and leases across the sector. Having one tower, independently owned and servicing all, would create a more efficient cost base.

One imagines that the list of interested parties in these assets will be long. When Telstra conducted a similar sale of its tower assets – now called InfraCo – it was part-sold to Australia's sovereign wealth fund. Could the likes of ACC have an interest in buying these assets?

More answers will come over the months ahead. Regardless of outcome, shareholders should be pleased that the board is being proactive in managing its assets and ensuring the company is maximising the value of said assets.

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THE proposed acquisition of Z Energy by Australian giant Ampol is nearing its conclusion, with the decision date of March 16 only 2 weeks away.

This process involves the Commerce Commission inviting all and sundry to submit their views on the proposed transaction directly to the Commission, which are promptly displayed on the Commerce Commission website for the world to read. This effectively becomes the means by which Ampol is able to negotiate concessions or propose acceptable terms to which it would agree to compromise should the Commerce Commission have legitimate concerns. Submitters can choose to make their contributions anonymous, an option perhaps more should have elected to accept.

Predictably, competitors or opponents of Z Energy have railed against the proposal, with most respondents insisting on terms that are unlikely to receive the courtesy of a response, let alone be accepted as a condition of clearance. Others with far too much spare time on their hands also took the opportunity to contribute their unique viewpoints, apparently unencumbered by the need to maintain relevance to the subject at hand.

The key point of contention remains Ampol's ownership of Gull. A last-minute concession by Ampol confirmed that the Gull investment will take place as a Trade Sale (meaning, not an IPO) which should simplify matters and clear up most of the ''muddying of the waters'' that was taking place.

Z Energy shareholders will no doubt welcome a conclusion to this story next month, if only to provide certainty as to the path forward, assuming no further delays to the decision date.

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ANOTHER group able to celebrate renewed certainty would be shareholders in listed utility Chorus Limited. Chorus owns and operates our fibre network.

Chorus is nearing the end of the fibre rollout as the number of unconnected dwellings wane. Expenditure, including labour, materials and property leases, is falling alongside this. While the network must be maintained – a cost that will rise with age – Chorus is finding itself in a position where costs are falling and revenue is not. It has long forecasted that this time would come and has previously put forward several options that the company would consider as a ''next step''.

Chorus has now solidified those plans and notified shareholders of how it plans to return its profits to them.

Firstly, Chorus is embarking on a $150 million share buyback, buying shares from the listed market for cancellation, reducing the number of shares on offer and, theoretically, raising the share price at the same time.

Secondly, the company has provided specific guidance around future dividends.

It expects dividends to lift from 25 cents per share last year, to 35 cents this year, 40 cents next year and 45 cents in 2024. Importantly, Chorus has signalled that the dividend will initially be unimputed.

Thirdly, Chorus continues to seek opportunities to grow, maintaining some flexibility should these opportunities arise.

The announcement was followed by a flurry of buying interest in the company's shares. Demand for strong dividend-paying shares remains elevated, even as inflation and interest rate rises loom on the horizon.

Chorus's emphasis on improving the quality of its offering – such as its recent ''Big Fibre Boost'' – will stave off the challengers from the world of wireless transmission for now. But the stable growth in both fibre usage and fibre demand should give confidence to investors that the plans put forward in its market announcement are sustainable and achievable, a welcome boon to those seeking income from the sharemarket.

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AIR New Zealand has put pen to paper and confirmed it is raising a significant amount of capital via a rights issue to shareholders – and soon.

The company confirmed that the capital raise is intended to launch by the end of this month, or early April if conditions deteriorate. Air New Zealand also reported a loss of $376,000,000 for the second half of last year.

This will be a very important litmus test for the strength of our capital markets. We know for a fact that a sizeable contingent of New Zealand investors has no interest at all in committing more money into this company or indeed this sector. Famed investor Warren Buffett has well publicised views on the topic of investing in the airline industry.

However, there will be some willing to listen. Shareholders who have remained as shareholders over the past two years clearly believe in a future in which these losses are endured, the accrued debts repaid and a profitable airline emerges.

Presenting a vision of an airline with a strong cornerstone shareholder, sufficient liquidity to withstand global turbulence, and a plan to regain the confidence of global travellers will be key. Risk-averse or income investors will likely prefer to wait out this period of uncertainty.

The capital raising, ultimately, will need to be steeply discounted. Traders have a price, and larger scale investors will have an interest if they see long-term value for their clients. The issue with telegraphing large-scale capital raisings in this way is that today's potential investors remain on the sidelines, unwilling to pay $1.50 now if they believe they could buy for $1 in the near future.

The Government has committed the taxpayer to maintain their stake in the company, although I would note that the wording of this commitment appears to leave some room for interpretation. Assuming this support, price tension will need to be introduced from the remaining investors.

If New Zealand accepts that we need our own for-profit national airline, to be part-owned by the Government and part-owned by Kiwisaver funds, retail investors and overseas investors, the company must be allowed to operate in this way. Airfares may need to rise.

For readers who chose to hold onto their Air New Zealand shares during this downturn, a decision will soon be placed before you – whether to commit more money to the company or allow yourself to be diluted. The extent of this dilution is not publicly known yet, but will need to be meaningful in light of the sheer volume of debt the company has accrued over the past two years.

Once the details are formally announced, clients with Air New Zealand shares are welcome to contact us to discuss the suitability of the offer.

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INFRATIL'S announcement, that it is conducting a ''strategic review'' of its RetireAustralia arm, will likely mark an end to its ownership in the business.

For context, Infratil's most recent ''strategic reviews'' were of NZ Bus, Tilt Renewables, Perth Energy and its ANU student accommodation concession. All four resulted in sales, and all within months of the review. Never accuse of Infratil of dilly-dallying.

It has been obvious for some time that Infratil's core focus moving forward was its data centres, radiology business and renewable energy developments. All recent investments have been focused on these three areas. Infratil's job is to find sectors and industries where its capital and investment expertise will add demonstrable value, providing scale and synergies to areas of the economy that it expects to flourish. In its most recent interim report, Infratil outlines its investments in Energy, Healthcare, Airport, Connectivity, Data and Social/Other. RetireAustralia slots neatly into the latter category.

I recall a meeting with investors where Infratil committed barely ten words discussing RetireAustralia, despite several questions on the topic. Meanwhile, 2022 has not been kind to the share prices of the listed retirement operators – Ryman is down 19%, Summerset is off 12% - as a variety of factors conflate, including sentiments around house prices.

I would not consider the sale of RetireAustralia an indictment on the management of this particular company or the retirement living sector at large. Ultimately, companies like Ryman and Summerset continue to make considerable sums every year from the sector, in spite of the aforementioned recent share price performance. Summerset's full year result featured a huge increase in profit, and strong demand for its construction pipeline.

The biggest issue Summerset highlighted was the growing shortage of nursing staff. Covid restrictions are limiting immigration, and rising labour costs – nurses' wages - are making the provision of care more expensive.

It will be interesting to observe which companies, if any, emerge as potential buyers of RetireAustralia. The New Zealand operators have expanded into Australia already but have focused on Melbourne/Victoria and seemed comfortable focusing solely on this region. RetireAustralia has a presence across Australia, including Adelaide and Sydney.

For now, Infratil investors remain invested in a diversified business, across the likes of Wellington Airport and Vodafone, as well as the sectors previously discussed. The sale may not occur – Infratil is not known for giving away assets after all – but if a sale does eventuate, it will allow a new owner to emerge, or an existing player to gain substantial scale across Australia.

Infratil will update the market in due course.

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TRAVEL

Chris is in Auckland on March 14 – 16 and has three available times to meet investors at Mt Wellington on Tuesday March 15 (2:30, 3:15, 4:00)

Chris Lee & Partners Ltd


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