Continuous Disclosure is a market news column, including analysis and opinion. Edited by Duncan Bridgeman, Tamsyn Parker and Jamie Gray.
In today's edition:
• Listed property running hot
• Cannabis float price questioned
• Vocus officially in play
Auckland residential property investors might be feeling the cold bite of winter but listed property investments have had a strong run of late.
Investors have continued to flock to dividend-paying stocks in the falling interest rate environment and property stocks have benefited.
Last month the New Zealand real estate securities index was up 4 per cent compared to the S&P/NZX50 index which rose 1.1 per cent.
Over the year the sector is up 26.7 per cent versus an 18 per cent rise from the NZX50.
Harbour Asset Management's Shane Solly said property shares had ripped higher as the Reserve Bank cut the official cash rate and 10-year bond yields fell to two-year lows globally and all-time lows in New Zealand.
"A rate cut by the [RBNZ] continued to drive yield-sensitive, including property securities, higher."
That was also backed by a solid reporting season for the sector with seven listed property vehicles delivering results last month.
Solly said across the sector rental trends were positive and independent valuations strengthened.
"Earnings dilution from asset sales impacted on headline numbers and contributed to flat dividends, but asset sales continue to enhance portfolio and financial quality, reinforcing NZ property securities as a place to invest for quality, defensive income."
Forsyth Barr analyst Jeremy Simpson said in a note the only surprise in the reporting season for him was the strong result and dividend from Augusta Capital.
Simpson said he had made only minor changes to his forecasts for the sector after the results upgrading his view on Investore from neutral to outperform with a target price of $1.61.
His top picks for the sector are Vital Healthcare, Investore, Kiwi Property Group and Augusta Capital.
Vital Healthcare saw the biggest share price jump in May with a relief rally pushing it up 9.4 per cent, while Investore rose 9.1 per cent and Augusta 8 per cent.
But not all property stocks were so bullish with Argosy Property Trust up just 0.4 per cent over the month.
While dividends for the sector remain strong Simpson said his expectations for dividend growth was that it would remain essentially flat over the next two financial years.
Cannabis float priced too high?
Medicinal cannabis certainly has plenty of investors buzzing at the moment — even the Church of England says it is now willing to invest in the sector for the first time.
Locally investors are being given the chance to get involved through Cannasouth — the first Kiwi medical cannabis company to undertake a public sharemarket float which is set to list on Wednesday.
But one research firm has questioned the cost of buying into the Waikato-based research company, whose public offer closes today, compared to Australian listed cannabis companies.
In a research note Shareclarity described Cannasouth as a "very early-stage investment" that was being priced 70 to 200 per cent higher than later-stage initial public offers and 25 to 100 per cent higher than other established medicinal cannabis companies already listed on the ASX.
The research firm admits valuing startups can be difficult because they often have little in the way of product development, assets or intellectual property or paying customers.
Cannasouth has no revenue or forecast financials but is touting its ability to secure licences and strong relationships with regulators as selling points.
Shareclarity says a metric often used to value start-ups is "price to invested capital" which looks at what a company is worth versus the amount of money, in cash and assets, that has gone into it.
"Investors generally pay more for companies that are further down the development path, have unique and non-replicable businesses models, operate within large addressable markets with few competitors, and can scale quickly and inexpensively."
It says Cannasouth would potentially have post-IPO invested capital of $8.7 million to $13.7m and a "price to invested capital" of 3.7-4.7x.
That compares to Creo Pharma — a medicinal cannabis and hemp ingredients company with farms, laboratories, manufacturing facilities and distribution agreements around the world — which listed in October 2016 at 2.2x its invested capital.
"Its shares have since traded as low as 1.1x its invested capital and are now under a full takeover offer at 2.3x its invested capital."
Another ASX-listed firm — AusCann Group, which is a partially-integrated manufacturer of medicinal cannabis products with operations in Australia and Chile, was listed in January 2017 at 2.0x its invested capital and its shares are currently trading at 1.5x its invested capital.
While AusCann Group has farms, research facilities and supply agreements in Australia and around the world and was listed in May 2017 at 1.6x, its invested capital and its shares are now trading at 3.1x its invested capital. That doesn't seem to have put investors off the New Zealand float though.
Mark Lucas, chief executive and co-founder of Cannasouth, said as it was in the middle of a regulated offer it was not appropriate for it to comment on third-party valuations outside of what was contained in its product disclosure statement.
However, he said the capital raise had gone well. Lucas said it anticipated closing the offer fully subscribed as of 5pm today.
Cannasouth is looking to raise up to $10m and will use the money for research and development, a new commercial processing facility, more staff and to boost its working capital, as well as paying for the NZX float.
Energy giant bids for Orcon owner Vocus
Vocus is officially in play for the fourth time within 24 months.
Australian utilities giant AGL Energy has lodged a A$4.85-a-share non-binding bid for the ASX-listed telecommunications company, valuing it at A$3.1 billion ($3.3b).
The bid comes just days after Swedish private equity player EQT dropped its $5.25-a-share/A$3.4b offer, only a week into due diligence.
No detail was provided, but industry scuttlebutt holds that after examining Vocus' books, EQT wanted to lower its offer to A$5/share.
AGL will now begin due diligence aware of rumours that yet another suitor, Canadian infrastructure investment company Brookfield, is also mulling a bid (Brookfield has already partnered with Infratil in a $3.4b deal for Vodafone's NZ business, still subject to regulatory approval — which any Brookfield involvement in a Vocus bid would complicate).
If AGL's bid does succeed, it will be a case of fourth time's the charm.
In mid-2017, US private equity outfits KKR and Affinity Partners both offered A$3.50 a share for Vocus.
The twin offers were rejected by Vocus' board, but the company did put its NZ assets — including Orcon, Slingshot, Flip 2Talk, power retailer Switch, data centres and the fibre network it bought from FX Networks — on the block, only for a new chairman and CEO to pull them from the market in early 2018.
Vocus said its New Zealand business had an 8 per cent increase in underlying earnings to $63m last year on revenue that rose 4 per cent to $364m.
On Tuesday, the stock spiked 13 per cent to $4.17 on news of EQL's bid