Continuous Disclosure is a market news column, including analysis and opinion. Edited by Duncan Bridgeman, Tamsyn Parker and Jamie Gray. In today's edition:
• Market activity picking up
• ANZ sounds warning for Fonterra farmers
• Cannasouth recovery
• Latest Air NZ CEO candidates
Market activity picking up
As the finance and investment community awaits the outcome of an industry-led review of the capital markets, there's some excitement building over potential new NZX listings.
Stock Takes understands a sizeable IPO is entering the pipeline and may be made public in a fortnight or so. A second source reckons the potential offer to be roughly the same size as Napier Port's $234m capital raise but no one is letting slip the identity of the company or the industry.
There are also rumours of some smaller IPOs being considered later this year or next, including another cannabis company following Cannasouth's listing in June.
More immediately, an upcoming ASX listing is said to have a Kiwi flavour to it in terms of the issuer having business operations in New Zealand. Will keep you posted on that.
Of course, NZX will receive any good quality prospects with open arms and investors are looking for fresh product as well. Napier Port clearly demonstrated the appetite as the stock debuted at a 16 per cent premium to its $2.60 issue price before breaking the $3 mark recently.
Meanwhile, the Capital Markets 2029 Review Steering Committee, led by Marty Stearne and supported by EY, is due to release their report early next week. That coincides with an event in Auckland celebrating 150 years of the Stock Exchange.
Former Prime Minister Sir John Key has been lined up as the keynote speaker, an appropriate choice given his role in bringing electricity companies to market through the Mixed Ownership Model for state assets.
Complex situation: But Fonterra results delay not too surprising
Maybe the stock exchange is hoping Key, as ANZ's local chairman, may adopt the same model in the banking sector.
ANZ sounds warning for Fonterra farmers
The red ink is set to flow at next week's result from Fonterra, but will there be still more asset writedowns?
For the moment, Fonterra is playing safe by forecasting a $6.25 to $7.25 per kg milk price for the current season, compared with current futures market pricing of $6.81/kg.
ANZ agriculture economist Susan Kilsby has brought her milk price forecast down slightly from $7.10/kg to $7.00/kg - still a healthy number by historical standards.
"However, we question whether Fonterra will in fact be able to pay its farmers the full milk price that dairy prices and NZ dollar developments would normally warrant this season," she said in a dairy market update.
"We estimate that potential further asset write downs could impair the payout by 20 to 45 cents," she said.
Global dairy commodity markets are relatively stable, and this week's Global Dairy Trade auction showed prices were only fractionally weaker.
Whole milk powder prices, which have the greatest bearing on Fonterra's milk price, fell by 0.8 per cent to US$3,076 a tonne.
Kilsby said there was upside potential for prices as global milk supply growth continues to ease, but there were clouds over the demand outlook from China.
However, the New Zealand dollar has dropped by 8.8 per cent since February, which should run strongly in dairy exporters' favour.
Tighter supply, worldwide, also has the potential to lift prices later in the season.
Fonterra's farmgate milk price is a set calculation based primarily on prices attained for standard commodity products attained through sales either through the Global Dairy Trade or alternative channels. Foreign exchange rates and the theoretical costs of operating a milk-processing plant also come into the equation.
While it is generally assumed that Fonterra will pay its suppliers the farmgate milk price, it is not obliged to, Kilsby notes.
In 2013-14, the theoretical farmgate milk price was $8.93/kg, but Fonterra actually paid its paid its suppliers $8.40/kg that season.
"At present, there is a heightened risk that Fonterra won't be able to afford to pay its suppliers at the level it normally would based on the usual calculations," Kilsby said.
Fonterra said early this month that its 2019 financial year performance would be impaired $820-$860m worth of assets in the 2019 financial year and that there would be no dividend.
The co-op expects to make a reported loss of $590-675 million for the year - only its second loss on since its inception in 2001.
Kilsby said there was potential to write down Beingmate by a further $200m, China Farms by $100 to $200m, the Australian ingredients business by $100m and its ownership of Chile's Soprole by up to $200m.
"This further level of profit write-downs would be difficult to absorb within the business unless profitability improves substantially," Kilsby said.
"Therefore there is a risk that Fonterra may have to make a one-off reduction in its milk price payment in order to recover these potential losses," she said.
This $300-$700m range equates to $0.20-$0.45/kg of milksolids.
"Therefore, while our forecast for the calculated Farmgate Milk Price is $7/kg MS for the 2019-20 season, the actual price Fonterra may be able to pay its suppliers could be 20 to 45c less than this," she said.
Fonterra's units, which give investors outside the co-op access to its dividends, last traded at $3.26. Unit units have lost 35 per cent in value over over the last 12 months.
The co-op is is due to report its annual result on Thursday.
Cannasouth rebounds on back of Clark report
Shares in medicinal cannabis research company Cannasouth had a disappointing debut on the NZX in June, but the stock has since rebounded on the back of former Prime Minister Helen Clark's endorsement of the legalisation of cannabis in New Zealand.
A report from The Helen Clark Foundation - an independent think tank - recommended that New Zealand should expunge minor cannabis convictions and create a legal and responsible market for the drug.
It urges voters should tick "Yes" to cannabis legalisation and regulation in next year's referendum.
Clark said New Zealand needed to "face reality" and properly regulate the cannabis market in New Zealand.
Cannasouth shares were issued at 50c, rallied to 51c, and then quickly slumped, hitting a low for the year of 29c in July.
This week the stock has rallied sharply, hitting 51c on high turnover today.
Cannasouth develops medicinal cannabis treatment options for clinicians, doctors and patients.
Come fly with me
With Air NZ boss Christopher Luxon getting ready to depart, there are continuing rumblings about whether the National Party will find a place for him.
If it does, many political observers doubt that he would find the going easy; not many people make the adjustment from being a high flying executive to backbench MP, and John Key was the exception, not the rule.
Meanwhile, many are wondering who will replace Luxon at Air NZ.
Much of the talk centres on Alison Webster, who abruptly resigned as Qantas international chief executive in April with no explanation, and had earlier been frank about her desire to take the top job at that airline.
But others have been throwing around Fraser Whineray's name, and there is no shortage of other supposed candidates.
Perhaps Air NZ should save itself some work and just ask Shane Jones to nominate the best candidate, given his strong views on the airline's management.