Has ESG investing lost its shine? Spark finds friends and worries over Synlait’s weak second half – Stock Takes

ESG investing has been put on the back foot. Photo / 123rf

Environmental, social and governance investing looks to be on the back foot, particularly in the United States after the change of Government.

In the US, environmental, social and governance (ESG) investing faces pushback under the presidency of Donald Trump – and there are signs of a change of heart in Europe as well.

The term “ESG” has steadily faded from the investor and corporate lexicon over the past year after cultural and political clashes over its meaning and purpose, a report published on the Harvard Law School Forum said.

Institutional investors have gone quiet on ESG amid public criticism and congressional subpoenas.

Investment giant BlackRock had publicly disavowed the term for having become too politicised and the use of “ESG” in earnings calls had dropped precipitously, the report said.

Robbie Urquhart, senior portfolio manager Australian equities at Fisher Funds, said the US and other jurisdictions have seen a shift in their approach to ESG.

“In response to that, there are a number of corporates and fund managers globally that have altered their stance on ESG,” Urquhart told Stock Takes.

“But from our perspective, we have not changed our approach to ESG investing in response to these changes.

“The rationale that underlines that still holds today,” Urquhart says.

“When you have fads either by moving the ESG dial more in favour of being stricter or becoming more relaxed, to the extent that you have short-term gyrations in how the pendulum swings, we are unlikely to alter our approach.”

From an environmental perspective, changes in attitude towards ESG would not alter the need for the world to decarbonise over time, Urquhart said.

“Some of those shifts that we have seen in the US are possibly in response to the parameters being too strict, given the pace of technology changes is taking longer than some would have hoped.

“Nevertheless, the world still needs to decarbonise and as a consequence, it is still in investors’ interests to try and help push towards a decarbonised future in a sensible fashion.”

Urquhart noted the pushback on ESG, particularly in the US, looked to be strong.

Irrespective of how the US may be moving against ESG, Urquhart didn’t think the local “institutional landscape” had altered that much.

“I would be surprised to see huge changes in New Zealand investment policy off the back of what we have seen in the US.”

But Urquhart said it would be interesting to see how ethical investing evolves in the European market over time, given the likely military build-up there.

“Clearly, we have seen a big step up in promises for defence spending in the European countries, and defence generally has not been a great destination for ESG funds.”

Spark finds friends

It’s been a luckless year or two for Spark.

A string of earnings downgrades has acted to drive Spark’s share price to 14-year lows, but the telco has found a friend in US investment behemoth BlackRock, which has lifted its stake to 8.07% from 5.9%.

And brokers Forsyth Barr have upgraded the stock to “outperform”.

“We expect structural, competitive and cyclical headwinds to slowly start to ease through 2025,” Forsyth Barr said in a research note.

“While the structural decline in broadband and cloud gross margins is likely to continue for the foreseeable future, pressure on corporate mobile in particular and enterprise IT services should start to abate as [competitor] 2degrees begins to prioritise returns over market share gains, and Spark’s partnership agreements reduce costs and cyclicality in IT services.

Spark has undergone a series of earnings downgrades. Photo / NZME

“Outside of the fundamentals, we believe the dissonance between Spark’s cashflow generation and its ambitions has contributed meaningfully to the 60% drop in the share price over the last year.”

The broker said the combination of: (1) maintaining a 25 cents per share (cps) dividend; (2) retaining the A- credit rating; and (3) funding its data centre (DC) ambition was not a feasible proposition.

“We struggle to understand why it is taking so long to correct, but expect it to be done within the next 12 months,” Forsyth Barr said.

It expected the dividend to be reduced to 18cps.

“The uncertainty around funding its DC expansion remains high, but most outcomes should be positive – including abandoning the expansion altogether.”

Spark’s shares rebounded off their lows this week. They now trade at around $2.08.

The Warehouse out of favour

Forsyth Barr analysts Paul Koraua and Rohan Koreman-Smit continue to view The Warehouse Group’s performance as unattractive, describing its 2025 first-half result as “less worse than expected”.

Of particular concern for Koraua and Koreman-Smit was The Warehouse’s heightened promotional activity and aged inventory, which contributed to a group gross margin contraction of 170 basis points, along with a 7% decline in gross profit versus the prior corresponding period.

Koraua and Koreman-Smit did think that costs were well controlled by the group, with personnel and lease expenses broadly flat year on year and IT, SaaS (Software as a Service) and travel expenses down by 7%.

The Warehouse has set an internal target to reduce its cost of doing business to below 31% in the near term (it currently sits at 31.3%), but the pair believe this target will be a challenge to meet.

This is because sales momentum is likely to remain weak in the near term, there are timing uncertainties around further IT savings due to contractual terms and personnel and lease costs are generally inflationary.

The Warehouse has maintained its initial guidance for the second-half result, expecting an operating loss of $14 million, in line with the second-half result in 2024.

However, Koraua and Koreman-Smit continue to believe in a downside to the guidance, noting heightened promotional pressure and gross margin exit run-rates in the second quarter of 2025.

The pair also expect domestic consumer spending to remain subdued over the next six months.

They are forecasting a second-half operating loss of $18m, with no expected dividend until the second half of the next financial year.

Shares in The Warehouse now trade at around 90c, having dropped by about 42% over the last 12 months.

Cloudy outlook

Synlait Milk’s first-half ebitda (earnings before interest, tax, depreciation and amortisation) of $63.1m was meaningfully ahead of what Forsyth Barr senior analyst Matt Montgomerie would have forecast six months ago, but he says the outlook for the second half is unclear.

The dairy processor is guiding to net debt of $250m–$300m by the end of 2025 (prior guidance was $200m–$250m).

This included the Bright Dairy loan of $130m but excludes lease liabilities of $55m.

Synlait is targeting senior leverage to ebitda of 2.5 times in full-year 2025 (which includes lease liabilities but excludes the Bright Dairy loan).

“The midpoint of Synlait’s debt guidance and 2.25x gearing (target <2.5x) implies ebitda of $90m,” Montgomerie notes.

“This in itself was not confusing, but the lack of commentary around why second-half 2025 performance is expected to be so weak versus 1H25 was.”

The outlook for a2 Milk – Synlait’s biggest customer – remained robust.

“While favourable foreign exchange and stream returns ($12m year-on-year ebitda benefit in 1H25) may abate, it is still difficult to reconcile the weak implied guidance,” Montgomerie said.

Synlait’s shares have fallen, post-result, to around 76c, after last month hitting a high for the year of $1.02.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.

- Additional reporting Tom Raynel