Taking Stock

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Taking Stock 19 May, 2022

Johnny Lee writes:

RYMAN Healthcare's share price has been oscillating wildly over the past week, as the market anticipates the release of its annual results (tomorrow, Friday 20 May).

Most New Zealand companies report on the February and August cycle, with only a handful reporting outside these months. Ryman, Infratil, Mainfreight and My Food Bag are among those who report on the May and November cycle. Infratil reported its results to market today.

These four in particular will be an interesting opportunity to take the pulse of our market, due to the diverse nature of the sectors they cover. In a free-falling market, all four have fallen this year, although Infratil has outperformed the average (again).

Mainfreight's most recent update, only three months ago, highlighted revenue growth of 45% and profit before tax gains of 85%. Since that update, the share price has declined 20%. My Food Bag also confirmed it is on track to meet its prior guidance but suffered a similar decline in share price.

It would be unfair not to note that there has been a distinct change in investor sentiment over the past three months. Consumer confidence has slipped, Covid concerns have receded and concerns around lockdowns have been replaced by concerns around inflation.

Some volatility is normal, but it would be optimistic to regard global conditions now as normal. While the New Zealand index has been seeing 1-2% swings, Ryman's price has been moving nearer 10%, sometimes over a few days.

This is unlikely to be nefarious. Listed companies, especially major listed companies like Ryman, will have strong controls over information flows to prevent one from trading with information outside the public domain. More likely, a number of traders are firming up their expectations for the result tomorrow, de-risking or punting depending on their mood.

Ryman, like every listed company on our exchange, will be keenly aware of the class action suit underway with respect to A2 Milk. Expectations surrounding disclosure are high, as investors rightly demand that companies inform them of pertinent changes to outlook and strategy.

The aged care sector has endured a year of tumult, with mandated lockdowns slowing construction activity, labour shortages causing ongoing problems and forecast house price declines adding uncertainty to projections. The sector has also endured additional costs in areas like security, as it fights to keep out the Covid-infected.

Tomorrow's update should ease some of the share price volatility and provide shareholders with certainty, either positive or negative. 

My Food Bag and Mainfreight's updates will also be helpful in gauging the true state of some of our biggest sectors.

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INFRATIL has reported further growth, driven primarily by the outstanding performance of its data centre division.

Infratil's update answered a number of long-standing questions for investors. It has been a period of significant change for Infratil.

Its subsidiary Manawa Energy – formerly Trustpower – has concluded the sale of its retail arm and is now pivoting to become a specialty generator of renewable energy. Manawa is seeking to become a market leader of small-scale solar and wind developments.

Another division, Vodafone, is actively shopping its TowerCo business, effectively competing with Spark which is attempting to sell the same assets. Infratil advises that an update will be provided to market within a month.

The sale of Infratil's RetireAustralia business is progressing, and likely to conclude this year.

The star of Infratil, undoubtedly, is the data centre division. Infratil's valuation of this investment grew 31% to almost $3 billion AUD. Four new data centres are under construction, and Infratil is eagerly acquiring more land to continue expanding this division. Lease terms have extended from an average of 14 years to 21 years.

Infratil also took the opportunity to provide more details of its upcoming bond offer. Infratil is considering making an offer of an 8-year (2030 maturity) bond, with a rate fixed for four years then resetting.

Resetting in this way protects investors from the possibility of further rising rates, while protecting Infratil in the event of falling rates. More details about the bond will be made shortly.

Overall, reading the report, the biggest question remaining to me is how the value of Infratil – its market capitalisation is currently around $5.7 billion and its debt totals $1.4 billion – is not higher. The value of its cash balance, its data centres, its holding in Manawa and its holding in Vodafone almost exceed this figure alone. RetireAustralia, Qscan, Pacific Radiology, Wellington Airport and its overseas renewable businesses (Galileo and Gurin) presumably carry some value.

Further details regarding the upcoming Infratil bond offer can be found below.

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THE Listed Property Trust market deserves an update, following a poor showing this month, with several stocks seeing large declines in share price, despite many seeing positive, but perhaps temporary, property revaluations.

Property for Industry provided a report to market, highlighting a 37% uplift in Net Tangible Assets to $3.03 a share. Meanwhile, the share price responded by dropping 15% to $2.35. Precinct has also recorded a steep drop in share price.

The Listed Property Trust sector is one that is likely to be under the most pressure from rising interest rates. There has been a notable increase in sellers looking to reduce their exposure to this sector since interest rates began climbing, with many citing an uncompetitive dividend yield as the principal driver for their decision.

This is logical and, indeed, was evident during the other side of the cycle when share prices soared as interest rates fell. Short-term forecast dividend growth is fairly low. The challenge for these companies will be to meaningfully lift distributions to remain competitive with other financial products. Term deposit rates are rising. Bond rates are rising. Property trusts promising a long-term return of 3.5% gross will struggle to muster interest. Vital Healthcare's recent capital raising saw acceptance of just 34% of entitlements. Most unitholders simply accepted the dilution, leading underwriters to seek to reduce their exposure.

Some of these companies are turning to property development, aspiring to add value to existing assets or acquire new buildings. Some, like Kiwi Property Group, are actively changing strategy. Most companies are now trading well below their Net Tangible Assets. Could we see asset sales, to capitalise on these gains?

Many of these property trusts will have long-term leases with their tenants that include provisions to adjust rental income by rates related to general inflation. These CPI adjustments may take time to fully integrate and lift rental incomes, but they exist for the very scenario we find ourselves in. One hopes the tenants will be able to absorb such cost increases in difficult times.

The price declines observed across the Listed Property Trust sector are logical in this environment and present a challenge to the sector. Rising interest rates will cause an increase in debt servicing costs and promote a move away from low-yielding equities.

If returns cannot be meaningfully increased, continued declines seem inevitable.

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THE ''cryptocrash'' seen over the past week raises an interesting view into the mentality of investors and fund managers in this space. 

For most veteran investors, cryptocurrency remains merely a curiosity, existing in a sphere well outside their risk tolerance, perhaps sharing that sphere with the likes of non-fungible tokens.

Fund managers that leapt into this space with various cryptocurrency offerings, hoping to capitalise on significant public interest, now find themselves rushing to reassure investors who will naturally be panicking over the enormous and sudden losses. Over the past 30 days, Bitcoin has fallen 25%. A number of articles, both here and abroad, are claiming that such declines are expected volatility and an accepted part of investing in cryptocurrencies. 

The same people argue that ''Apple and Amazon went through the same thing'' and this is highlighting “the value of long-term investing”.

Bitcoin is no Apple. People speculating on the price of Bitcoin rising, for whatever reason, need to accept that there is always a risk the price simply continues to slide. There will be no receivers and no underlying assets to be sold to recover anything lost. If Bitcoin, or any of the other estimated 20,000 cryptocurrencies for that matter, continues to slide, there would be no recourse, except perhaps on any salesmen who mis-described risk.

Fund managers suggesting that Kiwisaver investors “ought to allocate 10% of their money into Bitcoin” will no doubt be working hard to ensure their investors fully understand the risk of following such a strategy.

A number of prominent cryptocurrencies have faded into obscurity and worthlessness. A number of cryptocurrency trading platforms, including some New Zealand firms, have revealed themselves to be either dishonest or outright fraudulent. 

The cryptocurrency market is being tested. I suspect those remaining on the sidelines will continue to do so, and hope that those in the game, so to speak, never have to endure another month like this.

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Z ENERGY shareholders have received an email, advising them of Ampol's recent dual listing on our stock exchange and inviting them to contact their broker if they have interest in acquiring a shareholding in the Australian company. The email does not require a response.

Ampol is the company that acquired Z Energy in the recent takeover. I suspect the email will be a one off.

Ampol dividends do not (yet) carry imputation credits, and the company trades at higher multiples than Z Energy did. It may not appeal to the same investors.

However, investors wanting exposure to this sector now have a new option to consider on our local exchange.

Ampol's stock code is ALD.

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Chris Lee writes:

MOURNED by family, friends and professional associates, the founder of Milford Asset Management, Brian Gaynor, will also be missed greatly by the many retail investors, for whom he was a lighthouse.

In the past decades, Gaynor has been almost the only meaningful source of accessible financial market analysis, almost the only media commentator with both the knowledge and the skill to provide media financial comment insightfully.

From a herd of commentators who in essence have never worked in financial market engine rooms, and largely produce dross, Gaynor stood out because he exhibited knowledge and independence.

In the world of financial markets there are many skillsets, varying from investment banking, mathematical analysis, asset trading, research and funds management.

Gaynor pursued the research path, leading to funds management.

He learned his craft from one of New Zealand's financial market kings, Bryan Johnson, who in his mid-20s had bought 50% of Jarden about fifty years ago, and is credited with having advanced Jarden towards its current elite, and unique, status.

Gaynor, an immigrant from Ireland, learnt the various aspects of research, made himself relatively wealthy at an early age, and eventually became an eminent fund manager, a pragmatist with social instincts who never preached elitism.

He had moved in circles which intersected with financial market kings, but also with the charlatans and crooks who soiled the market in the 1980s, leading to the failure of hundreds of public-listed companies and immense destruction of investor wealth.

He had seen the insider traders (who were inexplicably not prosecuted), the liars and lotharios who seduced the media, the incompetent regulators, the dreadful law-makers and the inept auditors, receivers and lawyers who greedily built their private wealth while creating mayhem.

During a stint as an advisor to Prime Minister David Lange, he had watched the corruption that led to knighthoods being negotiated in exchange for political donations. He told me he was in the room on an occasion when a cheque was swapped for the promise of a knighthood.

Gaynor's social instincts loathed these practices and led to his wish to form and then list on the stock exchange a funds management company with no tolerance of rogues.

Brian Gaynor was clearly not unflawed. Like everyone else, his judgement and some of his theories failed the test of time.

He erred when he was drawn into the toxic world of the likes of Doug (Somers) Edgar, Kelvin Syms and Roger Moses, nearly 20 years ago, when they were cynically recruiting utterly naïve and inept people to flog off empty promises.

He joined the board of Vestar, a Syms creation. Syms, a former partner of Edgar was seeking to exploit Gaynor's admired reputation to build an empire based on selling stuff like Radius, Bridgecorp and virtually any product provider which would pay triple brokerage.

To his credit, Gaynor lasted two board meetings and walked out, revolted by what his due diligence was uncovering.

When he sought to list Milford in the 1990s, he ran into vicious criticism from the property enthusiast Jones, who had not enlisted Gaynor into his fan club.

Jones' media columns were a factor in Gaynor's decision to fund Milford privately. At that time, Jones was seen as a market sage, by some investors.

Gaynor's company, over many years, has achieved rare scale with more than $10 billion funds under management, meaning Milford's fees and performance bonuses are each year collected in hundreds of millions, enabling the company to develop a competent, flexible, research-based organisation.

It has served its clients, staff and shareholders well, distancing itself from most of its competitors, and significantly outliving other public-listed companies including the creations of those who criticised him.

Brian Gaynor more or less retired from his Milford daily routine some years ago, but retained access to Milford's research capacity, enabling him to discuss big subjects in everyday language, supported by the quantitative research of Milford.

What separated Gaynor from all the unmoneyed, untrained, academic commentators that the media seeks out was his ability to analyse, to put into perspective, and his refusal to be cowed by the herd protection mentality that defines the mediocre.

Like many, I lament that he never wrote the definitive book on the ratbags who fouled New Zealand's capital markets in the 1980s, setting back the country for at least a decade.

Brian knew who the culprits were, labelled two of them ''the worst New Zealanders I ever met'', (both were knighted) and built his career serving those he preferred, in so doing acquiring wealth few ever achieve.

His career and life are over. He leaves an army of admirers, of whom I am one.

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Investment Opportunities


Infratil Limited (IFT) has announced that it plans to issue a new eight-year senior bond, with an interest rate reset after four years.

IFT will be paying the transactions costs for this offer. Accordingly, clients will not be charged brokerage.

The offer will be listed on the NZX.

Clients interested in participating in this offer are welcome to contact us as soon as possible with their indicative level of interest and the CSN they wish to use.

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Chris will be in Taupo on Monday June 6, available to meet with clients, before talking to a group on June 7

Edward will be in Auckland over three days in June. He will be in Mount Wellington on Wednesday 8 June, on the North Shore on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

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


Seminar Dates ahead – please contact us to book:

Monday 23 May, Mt Wellington - Mt Richmond Hotel, 1.30pm (FULL)

Tuesday 24 May, Takapuna - Milford Cruising Club, 11am

Thursday 26 May, Whangarei - Flame Hotel, 11am          

Monday 30 May, Palmerston North - Distinction Coachman Hotel, 11am    

Tuesday 31 May, Napier - Crown Hotel, 11am 

Chris Lee & Partners Ltd


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