Powerco is the second-largest electricity distributor in New Zealand. Photo / Bevan Conley
ANALYSIS
With all the focus on New Zealand’s current energy shortage, one story slipped under the radar this week.
Australia’s second-largest pension fund will take up majority ownership of North Island electricity distributor Powerco, the Australian Financial Review reported earlier this week.
It’s a significant deal that will see the Australian Retirement Trust (ART) acquire a 33% stake from Queensland Investment Corporation (QIC), taking its ownership to 58%. Dexus Group will retain a 42% shareholding.
The transaction, which is said to be worth about $2 billion, came after QIC put its stake up for sale in April.
Stock Takes had previously suggested Powerco might have been a good strategic acquisition for the New Zealand Super Fund, which is a logical investor in local infrastructure assets.
New legislation removing a ban on the fund taking a controlling interest in an entity passed its third reading in Parliament in May.
The fund does not discuss investment opportunities or plans and it’s unclear whether it took a close look at the Powerco shares. Powerco is the second-largest electricity distributor in New Zealand, supplying electricity to over 340,000 homes and businesses in the North Island.
Its network covers the Coromandel, the Bay of Plenty, South Waikato, Taranaki, Whanganui, Manawatū and Wairarapa.
It has been a solid investment for QIC, which bought its stake from Babcock & Brown Infrastructure for $423 million in 2008. The company last year reported earnings before interest, tax, depreciation and amortisation (Ebitda) of $263m and has regulated assets of $3.1b.
Recent results by ASX-listed retailers have revealed the big divide between how retailers are doing here versus across the ditch.
“We have had this tale of two economies and it doesn’t yet seem that the Aussie economy is yet sinking in the same way we have seen in New Zealand, despite the fact that the RBA [Reserve Bank of Australia] looks like they are in a far more hawkish camp compared to where the RBNZ [Reserve Bank of New Zealand] is,” Fisher Funds’ Australian equities manager Robbie Urquhart says.
While JB Hi-Fi saw same-store sales growth of 5.2% in Australia in July, in New Zealand it was down 4.9%. Likewise, furniture retailer Nick Scali had flat same-store sales growth in July but New Zealand was down 35%.
“It’s a very stark difference.”
Urquhart said there had been some pockets of strength in NZ with the Super Retail Group. The company’s Macpac store base, which had about 38 stores in NZ and 50-odd in Australia, reported like-for-like sales were up 9% after the first seven weeks after June 30 over both regions.
While in its full-year result, NZ’s like-for-like sales rose 8%, whereas in Australia it was negative. This was primarily because of the weather differences, Urquhart said.
“It’s not uniform across all categories, but Macpac might be the exception that makes the rule.”
Kathmandu owner KMD Brands also gave an update recently. Fisher Funds NZ manager Matt Peek said its financials had been getting sequentially worse until the latest update, which was based on quite a short time period.
Peek said it seemed like there was just a glimmer of hope that it wasn’t declining by as much.
“People are obviously very sensitive to whether things are getting worse or not, and especially for the New Zealand companies, every update is getting worse in terms of decline on the prior year.
“People are definitely on tenterhooks about, ‘Are we seeing the first green shoots or are things still deteriorating?’, and I think with that one, it was still not good but perhaps not quite as bad as feared.”
Urhart said both JB Hi-Fi and Super Retail Group saw share price rallies after the results. “These results for them have been a lot better than expected.”
KMD Brands, which is due to release its result on September 25, has seen a recovery in its share price since August 9 but still has a long way to go to get to where it was even at the start of this year. Its shares opened on Thursday at 57c down from around a dollar in early January.
Tourism Holdings’ balance sheet rebuild has won favour with Forsyth Barr, which gives the company an outperform rating, saying it offers “appealing value” at current levels.
The campervan rentals and sales company has refinanced its debt facility with better terms and increased its size to $225m.
Analysts Andy Bowley and Hugh Lockwood say this gives it ample headroom to manage its near-term funding needs. Net debt should increase marginally in the 2025 financial year, despite a lower capex outlook, with increases thereafter commensurate with fleet growth and improving rental demand.
On Tuesday the company reported an underlying net profit after tax of $51.8m, within its guidance range and slightly up on analysts’ consensus forecasts.
In May it issued a profit warning in which it slashed its earnings forecast for the 2024 year and in its result presentation backed off any timeline for its longer-term $100m profit goal.
The analysts say investors should see the result as incrementally positive for two reasons; they’re not expecting a change in future net profit consensus, (Forsyth Barr forecasts $61.4m) and any lingering doubts over the balance sheet should be allayed.
“[Tourism Holdings’] belief that this level of earnings is achievable in future provides a clear pathway for profits over the medium term.
“There were other tailwinds, including the final 5c dividend in the mid-payout range, and robust earnings growth supported by a cyclical recovery over the medium term.”
Although Bowley and Lockwood lowered the target share price from $3.60 to $3.45, that is double the 12-month low of $1.70.
Spark was a big disappointment this reporting season, with earnings falling short of already downgraded guidance and a subdued outlook putting pressure on dividend growth.
The shares fell as low as $3.60 this week, their lowest price since April 2019, and the chart shows a 32% decline since mid-January.
The telco revealed some hefty restructuring, saying it will cut $50m, or 10%, from its labour costs this financial year. As the Herald’s technology editor Chris Keall reported earlier in the week, that translates to potentially hundreds of jobs on the line.
At the same time, Spark is juggling its investment programme - including a $1b spend on data centre expansion over the next five to seven years - with declining cash flow and shareholder expectations.
Spark’s earnings, adjusted for one-offs, dropped 2.5% to a below-forecast $1.163b in FY24, and it is forecasting an increase in FY25 to between $1.165b and $1.222b.
The telco said its dividend will stay at 27.5 cents per share (cps) in FY25 - which could be seen as a win for dividend-focused shareholders given some analysts had been concerned about a possible cut.
However, Stock Takes does note the FY25 dividend is expected to be 75% imputed for tax, rather than the 100% last year.
If this year’s rally in the gold price shows anything, it is that the precious metal is no longer inextricably tied to the interest rate cycle. But that does not mean lower rates will have no impact: talk last week at the Jackson Hole symposium in Wyoming of coming cuts will give gold some extra shine.
Traditionally, gold is seen as a better investment when rates are low and when other asset classes are not up to much. By this token, it should have had a dim start to 2024 given the unexpectedly strong performance of US equities, the resilience of the economy, and a delay to expected Federal Reserve rate cuts. Yet it has risen 22% this year, outperforming the S&P 500, and has recently crossed US$2500 a troy ounce.
Clearly, there were some buyers out there whose main concern was not the opportunity cost of holding gold. Enter central banks, which in the first half of the year bought 483 tonnes of the precious metal, says the World Gold Council. That is the highest amount since the body started collecting data. It is hard not to attribute some of this colossal buying spree to the Russia-Ukraine crisis, and in particular to the freezing of Russian central bank assets that occurred in 2022. That, predictably, sparked a desire in large emerging economies to shift away from the dollar.
While on a quarterly basis purchases will fluctuate - and indeed they were lower in the second quarter compared with the first - that looks like a structural tailwind for gold demand independent of everything else happening in the financial system.
Overlaying this trend is the traditional portfolio rotation into gold, which occurs when interest rates fall. Rich individuals and financial investors have been filling their vaults. Inflows into gold-backed exchange-traded funds resumed in May, and July was the third consecutive positive month with inflows of US$3.7b. While this is cyclical, rather than structural, it does not look like it will turn anytime soon. The market whiplash this summer should also help drive interest in gold, insofar as it reawakens concerns about equity market volatility.
There is, of course, many a scenario in which the gloss comes off the gold trade. An acceleration in the equity market rally, higher-for-longer rates and declining geopolitical risk could all conspire to reduce demand for the metal. But, as it stands, the case for all of these appears to lack lustre.
- Financial Times Lex column, Tamsyn Parker, Grant Bradley.
Meanwhile, Greenpeace has described it as a 'Scorched Earth Budget'.