Is there light at the end of the tunnel for NZ stocks?
Is there light at the end of the tunnel for New Zealand stocks?
The latest reporting season confirmed the first six months of 2024 were tough for corporate New Zealand, but the shift lower in interest rates here and around the world is giving cause for optimism that next year will be better.
The results covered the 12 months to June 30, and some interim six-month periods, so there was an element of “old news” to them, Craigs Investment Partners portfolio manager Mohandeep Singh says.
“Once we get through the next couple of months - through the hard stuff for the economy - it does turn quite aggressively the other way,” Singh told Stock Takes.
“Rates coming down makes a big difference for people, but it just takes time for that to fall into our pockets.
“Once that happens, and every other central bank around the world does the same thing, it will be a matter of ‘a rising tide lifts all boats’, and we will see some of our more beaten-up sectors start to come to life,” he said.
“We know that the first half was pretty tough, so there were no surprises in terms of the results being weaker,” he said.
“Where you saw the biggest moves [in share price] were probably on the outlook statements, and they were still pretty cautious.”
The Reserve Bank’s decision last month to cut its official cash rate by a quarter of a point to 5.25% was a key turning point, given it’s the first reduction in more than four years.
Market expectations are for two more cuts to happen before the end of this year.
“But the rubber from that will not hit the road until next year as those cuts start to flow through to the economy,” Singh said.
The reporting season was one of the more challenging ones for many corporates, but not all.
Fisher and Paykel Healthcare - the market’s biggest stock - didn’t report but gave a trading update and raised guidance, which drove another big lift in the share price.
The company, in its update, said it still expects full-year operating revenue to be in the range of $1.9 billion to $2.0b but sees a full-year net profit of $320 million to $370m from a previous range of $310m to $360m.
Singh said Chorus was the standout performer after it lifted its dividend profile well above market expectations.
The fibre networks company increased its dividend payout range from 60% to 80% range to a new range of 70% to 90% of net operating free cash flows.
Scales, a diversified agribusiness company, provided a reasonable half-year update, helped by a rebound in performance from the horticulture division.
The company confirmed its underlying net profit was expected to be in the $30-35m range.
Skellerup’s share price also bounced after its result met guidance - helped by a strong second-half result.
Since its lows in May, Skellerup shares have bounced almost 50% to around $5.
At the other end of the spectrum, a2 Milk was this season’s biggest decliner - the share price has fallen around 20%, based on an outlook that was less bullish than the market was expecting.
A2 Milk increased its annual net profit by 7.7% to $167.6m in the June year, driven by a strong performance in its main market - China.
Looking ahead, a2 Milk said it expected revenue growth of mid-single-digit per cent and Ebitda margins to be broadly similar to those in 2024 - which clearly disappointed the market.
The stock had run up hard into the result, so the guidance miss on 2025 growth sent the shares down sharply.
Manawa’s report was a trading update rather than a result where dry hydro conditions and a potential bad debt from a large customer saw guidance pulled back 25%.
Spark was the other weak name, with its full-year result only modestly missing guidance, but weak free cash flow raised concerns around the company’s ability to fund its dividend and growth ambitions.
While the S&P/NZX 50 index is up almost 6%, Singh said the sobering statistic was that F&P Healthcare (FPH) had been the primary driver of that performance.
“If we remove the impact of FPH on our market, the index would be flat,” Singh said
“The silver lining here is that beyond FPH, many stocks have not run away despite a better interest rate backdrop, which will ultimately improve the economic environment heading into 2025.”
Blackstone’s purchase of Sydney-based data centre operator AirTrunk in a A$24b ($26b) transaction - the biggest deal of the year so far in Australia - saw Jarden up its 12-month target for Infratil, half-owner of CDC Data Centres, from $11.40 to $12.20 (shares were at $11.44 in Thursday morning trading).
The build-up to the expectations-topping deal confirmed the AI boom is helping to stoke data centre operators’ valuations. 12 months ago, the industry chatter was that AirTrunk could sell for $10-11b.
Earlier this week, word was the selling price could top A$20b as Blackstone engaged in a bidding war with a consortium that included US private equity giant Silver Lake and MGX, a new UAE sovereign fund focused on AI-related investments.
Jarden equity research director, Nevill Gluyas, who was already bullish on CDC, seeing it well-equipped to ride the AI boom, said, “We believe a partial CDC stake sell-down or new equity partner valuation marker now seems possible between now and 2025.”
The sale of CDC shares by any of its existing shareholders was not yet certain (the Future Fund and Commonwealth Super each hold a 24% stake, with managers holding the balance) could be a catalyst for another valuation spike. Commonwealth Super is a rumoured seller.
But Gluyas also cautioned there was sparse public data on the privately held AirTrunk. Depending on which report you believe on estimates of AirTrunk’s enterprise value-to-Ebitda multiple, its sale implies CDC is worth anywhere between A$9.5b and A$23.5b.
“Without further disclosure on the transaction, it is not possible to read the reported multiples as positive, neutral or negative for CDC,” Gluyas told clients.
“The underlying data publicly available on AirTrunk is opaque, making it hard to work out detailed valuation metrics,” Harbour Asset Management portfolio manager and research analyst Shane Solly told the Herald.
“Nonetheless the investment bankers will have been working long into the night to try and use the info to pump the tyres on the value of the CDC stakes that are currently for sale – and they will probably start by working on the underbidders on the AirTrunk deal.”
In July, Infratil yet again upgraded the value of its 48.2% stake in CDC, this time to between A$4.16b and A$4.94b, implying an upper-end valuation of just under A$10b for the business as a whole.
Then there’s the fact that although AirTrunk has a total 1100 megawatts of data centre capacity (data centre size is measured by peak power use), similar to CDC’s 1220MW across various data centres in Australia and NZ, Gluyas notes it’s not apples to apples. Two firms have a different mix of customers and a different geographic spread. AirTrunk operates in Australia, Hong Kong, Japan, Singapore and Malaysia.
Another unknown: Blackstone said the A$25b headline price included capital expenditure for existing projects, which was not detailed (some reports have put it at A$500m).
There is one indicator at the sharp end of things. ASX-listed data centre operator NextDC (market cap: A$9.7b) has often been used as a marker in valuing the various privately held players. Its shares traded down 3.3% on the AirTrunk news, while Infratil was up 2.2% That suggested the market did not yet have a clear read on the deal, Gluyas said.
Shares in Donald Trump’s media company fell to a record low this week.
Trump Media, majority owned by the presidential hopeful, listed in March following a merger.
The stock last traded at US$16.68 ($27) - down more than 78% from its March high of US$79.38.
The slump means Donald Trump, the company’s largest shareholder, has seen his personal stake decline in value from US$6b to US$2b.
- With reporting on the AirTrunk deal by Chris Keall
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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