Money Editor for NZ Herald

Stock takes: Meridian D-Day and Fed timing

The intervention by the government of John Key (left) on Chorus pricing for copper services is backed by a former telecommunications commissioner. Photo / APN
The intervention by the government of John Key (left) on Chorus pricing for copper services is backed by a former telecommunications commissioner. Photo / APN


The price retail investors can expect to pay for Meridian Energy shares will be revealed today when its prospectus is officially lodged with the Financial Markets Authority.

Price caps for share offers are not typically used in New Zealand sharemarket floats but the Government has listened to retail investors who complained about the uncertainty created by the wide price range given for the Mighty River Power float.

Outside of New Zealand price caps have tended to be positioned in the upper half of the guidance range. If the cap is set at the top of the range it could come down if the price set by institutional bidders is lower.

But the Government really needs to get retail investors on side this time round after the disastrous performance of Mighty River Power's shares. A lower price cap or a discount to what the institutions end up paying would be one good way to do this.

Dividend sell

One thing is clear. Meridian will all be about the high dividend yield. All indications are that the yield will be in double digits once the instalment payment is factored into calculations.

Investors could be getting an effective gross yield of about 12 per cent based on paying only 60 per cent of the money upfront.

There aren't too many other stocks which pay a double-digit yield. Those that do include Sky TV, Chorus, New Zealand Oil & Gas and Turners Auctions.

Investors in Meridian will need to weigh up whether they are in for the long haul in which case the yield might not look quite so attractive once the second 40 per cent payment is made in 18 months' time.

Good timing

The United States Federal Reserve's decision not to start tapering its US$85 billion ($101 billion) a month bond-buying programme could not have come at a better time for Meridian Energy.

International investors had been pulling away from high-yielding stocks in preparation for the tapering as a signal for higher interest rates.

High-yielding stocks typically suffer when rates go up as investors seek less risky places to put their money. The Fed's move could put Meridian back on the radar for international investors.

Ideally the Government wants lots of retail investors to buy in to meet its 85 per cent threshold for New Zealand ownership.

But it also needs overseas interest to create pricing tension. Domestic fund managers tend to be given as little stock as possible to encourage buying once the company lists on the market.

How high?

The NZX50 benchmark index has hit a new all-time high every day this week. Yesterday, spurred by the Fed's announcement, it closed up 1.05 per cent at 4753.035.

But one wonders how much higher it could go? Meridian Energy's listing on October 29 could signal a peaking point.

One market source said Meridian would soak up a lot of money and it might take the rest of the year for the market to absorb the float. Analysts have put Meridian's value at about $4 billion meaning the 49 per cent sale would be worth about $2 billion, resulting in investors having to cough up about $1.2 billion to start with.

That's less initially than the $1.7 billion raised from Mighty River Power. Mighty River listed on May 10 and the market peaked on May 13 before falling away. It took until this week to recover.

The source predicted Meridian's float could also make it a lot harder for two proposed property floats to come to market. Stock Takes understands one of the initial public offers may end up in a direct property sale rather than a sharemarket listing.

Village chatter

There is talk in the market about Metlifecare's major shareholder Retirement Villages Group (RVG) selling its stake in the company through a block trade.

RVG owns 37.7 per cent of New Zealand's second-largest listed retirement village operator. Its share would be worth about $200 million.

Australian media have suggested the deal could be done in November. But a local investment banking source said that was unlikely and it was just a rumour doing the rounds.

One fund manager said if the deal was done it would be good for the company as it would get rid of the overhang of having such a large stake held by one shareholder.

Metlifecare boosted its size last year after a merger with Vision Senior Living and Private Life Care Holdings. Its shares closed up 2c yesterday at $3.20.

Copper clash

UBS has maintained its buy recommendation on Chorus after more ructions over copper pricing this week.

In a surprise move former Telecommunications Commissioner Ross Patterson came out in support of the Government adjusting what lines company Chorus charges internet retailers for copper services.

The Commerce Commission this year proposed cutting wholesale copper prices to about $32 a month, less than the entry-level price of much faster fibre services. But the Government stepped in to fast-track a review of telecommunications law proposing setting copper prices between $37.50 and $42.50 - roughly equivalent to fibre prices.

Patterson said setting copper and fibre prices on par would encourage consumers to migrate to the fibre internet services being made available as Chorus and the Government's other private partners roll out the $1.5 billion ultra-fast broadband (UFB) network.

UBS analysts said Patterson's support was clearly a boon for Chorus but other than that the company's situation had not changed since the Government's announcement last month.

"Political will remains focused on a successful UFB, meaning retrospective changes to copper regulation must be managed extremely carefully. We retain our buy on Chorus."

UBS also maintained its price target of $3.20.

Chorus shares closed up 5c yesterday at $2.88.

Rubicon undervalued

Research firm Edison reckons Rubicon's shares don't match up to the underlying value of its assets. Rubicon owns stakes in wood product distributor Tenon and forestry seedlings supplier Arborgen.

In a note Edison analysts Toby Thorrington and Roger Johnston said both Tenon and Arborgen had improved performances in their latest financial results and had put in place banking facilities for their next growth phases.

"These results reinforce our view that Rubicon's share price understates the underlying value of its investments - worth $0.90 per share - and we expect to see this discount narrow over time."

The stock closed up 2c yesterday at 37c.

- NZ Herald

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Money Editor for NZ Herald

Tamsyn Parker is the NZ Herald's Money Editor. A business journalist for ten years, she has worked in the UK and NZ for the New Zealand Herald, the National Business Review and a specialist publication on investment products for financial advisors. She is passionate about helping readers learn more about to make their money work for them.

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