Stock Takes: A2 fall shows NZ's frailty

A2's size means it can move the market - up and down. Photo / Bloomberg

A2 Milk's plunge on Wednesday shows just how exposed the New Zealand market can be to one stock.

Shares in the milk marketing firm tumbled 13.7 per cent to $11.30 after a trading update failed to meet expectations — dragging the NZX 50 index down by 1.8 per cent.

Once a sharemarket minnow, A2 is now the largest by market capitalisation and it can pull the market both up and down.

Market players say kneejerk reactions like this appear to be driven out of Australia, with dual-listed New Zealand companies the most exposed.

Harbour Asset Management's Shane Solly said Australia had a broader range of investors than New Zealand and some appeared to take a far more aggressive approach to any sign of negative news.

He pointed to Fletcher Building as another example of a dual-listed New Zealand company which had been hit by Australian investors reacting to new pieces of information.

While dual-listed defensive type companies were less volatile, Solly said investors should get used to growth companies having more ups and downs.

But another analyst believes the situation also points to low visibility of A2's sales.

Castle Point's Stephen Bennie said the most telling aspect of this week's update was that visibility on growth slowing might be just as limited as when it was accelerating.

"Just last month, on 3rd April, A2 issued an update that growth remained on the stellar but familiar path," he said. "However, just over a month later the company had to update the market that broker forecasts for 2018 were too high and downgrades were required, despite favourable currency movements."

Bennie said A2's dream run might have ended as abruptly as it began.

"The heavy reliance on the daigou [overseas personal shopper] channel means you just can't know with any certainty whether this is a blip or a fundamental shift to a lower growth path. I would suggest that the current share price still doesn't fully recognise that risk."

A2's share's yesterday closed up 47c on $11.77.

Plenty of fuel left

Despite the recent furore over BP's leaked fuel price email, one analyst believes regulation of the industry is unlikely to be needed.

UBS' Jeremy Kincaid this week released a note upgrading Z Energy to a "buy", on the back of his analysis that the electric vehicle market is likely to take longer to develop than expected and the retail fuels market will not be regulated.

"Rising margins and a large price difference between the regions has put the retail fuels market in the spotlight of the Government.

"Nevertheless, our analysis suggests the level of price undercutting is broadly similar in the North and South Island," Kincaid. "This coupled with only a moderate level of market concentration, low barriers to entry and the regulator's analysis around margins, points to what appears to be a competitive market."

Kincaid said even though Z Energy earned a return in excess of its weighted average cost of capital, that did not mean the market was not competitive.

Even if the market was regulated, the analyst said its valuation of Z would fall by around $1, but that would still be higher than the stock currently trades at.

That view will be music to the ears of fuel retailers, who are waiting for the Government to approve a change to the Commerce Act which will then enable the Commerce Commission to undertake market studies — allowing it to look under the hood of the fuel industry.

Kincaid also poured cold water on the immediate threat posed by electric cars, saying he expected fuel demand to peak in 2030 as demand for aviation fuel was driven by tourism growth.

"We have revised our EV [electric vehicle] uptake to mimic that of Japan as four out of five imports into New Zealand come from Japan.

"However, we have made some adjustments which slow EV adoption in NZ due to NZers' love for larger vehicles, few EV options and no Government incentives." Kincaid said he expected Z Energy to have earnings per share growth for another 16 years and valued the stock at $9.

Z Energy's shares closed on $7.55 yesterday.

Double whammy

Mercury New Zealand shareholders have been hit by a potential double blow this week as it was announced that the stock will be removed from the MSCI Global Standard Indexes to be replaced by a2 Milk on May 31, as well as Mercury making an investment in Tilt Renewables.

Mercury revealed on Monday that it would buy 19.99 per cent of Tilt for $143 million from the Tauranga Electricity Consumer Trust.

It also has the option to buy a further 6.8 per cent if it can convince shareholders to allow it to breach the 20 per cent level which would normally trigger a takeover offer.

That seems unlikely given that Infratil — Tilt's majority shareholder — has indicated it isn't keen to do that, as it missed out to Mercury on buying the stake.

Mercury shareholders hoping for a higher dividend payout are likely to be disappointed, with the money going towards the acquisition and Tilt looking as though it will need ongoing support to help with expansion plans.

Morningstar analyst Adrian Atkins this week noted that Mercury had paid a high price for the Tilt stake — a 24 per cent premium to Tilt's Friday closing price.

Mercury's share price closed on $3.14 yesterday.