Stock Takes: Auckland Council succeeds where Michael Wood did not

The Auckland Council will sell down its stake in Auckland International Airport. Photo / Alex Burton

The Auckland Council did a better job of selling Auckland Airport shares than Michael Wood, but only just.

Stocktakes has borrowed that one-liner from Auckland Chamber chair Simon Bridges, who couldn’t resist a quip at a recent gathering to hear from Australian Treasurer Jim Chalmers.

The former transport minister (Wood not Bridges) made a mess of his airport share sale.

But some around town are wondering if the council really did much better.

The decision to sell 7 per cent sees the council selling at a low point in the cycle for aviation sector stocks and giving up a potential premium for a strategic stake by selling down to an inconsequential 11 per cent holding.

Leveraging a control premium from the stake was probably a stretch, given it would have required touting for a potential new owner to take the 18 per cent as a cornerstone.

The politics of a foreign sale for the airport got pretty ugly back in 2008 when the Canadian Pension Plan made a play for a controlling 40 per cent stake.

But selling down a partial share into this market looks like it will involve a bargain basement return.

Meanwhile, Auckland ratepayers will still face a 7.7 per cent rate hike.

Unfortunately, the political compromise might have just delivered Aucklanders the worst of both worlds.

This week, Auckland Airport shares fell sharply after it announced a revised dividend policy.

The company will now pay its shareholders only 70 per cent to 90 per cent of its underlying net profit after tax, from a previous policy of 100 per cent, in order to preserve capital for expansion.

Airport shareholders have not received a dividend since the company scrapped its interim dividend in March 2020 due to the financial hit from the Covid-19 pandemic.

NZX tidy-up

The NZX is tidying up the rules around capital raisings, particularly accelerated non-renounceable entitlement offers, otherwise known as ANREOs.

The exchange issued a consultation paper in late July 2022, seeking feedback on proposed amendments to the settings in the NZX Listing Rules.

The rules around capital raises were relaxed when companies rushed to shore up their balance sheets in response to Covid-19.

Chapman Tripp partner Roger Wallis said the NZX was using the current quiet period to tidy up some loose ends.

“The market is quiet - anyone who tells you otherwise is being untruthful,” Wallis said.

“There are the occasional big transactions - like Infratil’s last week - but it’s not as active as it was.

“So it’s logical to do these tidy-ups when the market is a bit quiet.”

Wallis said boards these days tended to “go out of their way” to make offers fair.

“It should be beneficial for individual investors and for institutions as it gives certainty around whether an issue can do an ANREO,” he said.

An ANREO offer is essentially a pro-rata offer that does not have a rights issue associated with it.

“Rules around better disclosure about the choice of structure and fees - the better issuers have been choosing to do that voluntarily,” Wallis said. “Net, net, it’s a good development.”

NZX said it will be seeking FMA approval for the proposed amendments to the Listing Rules and said it would publish guidance in relation to the new requirements, prior to the updated rules taking effect.

China blues

Harbour Asset Management research analyst Oyvinn Rimer, fresh back from a trip to China after a four-year absence, has confirmed what the commentaries keep saying: the PRC has been very slow to emerge from the shadow of Covid.

“It didn’t take much to notice that China is still far from where it was pre-Covid in terms of sentiment, consumer activity and general business,” Rimer said in a report.

“The streets were emptier, the tourists missing, the malls now more of a thoroughfare and place to eat than to part with precious cash in stores; and the air cleaner than what you could expect when steel production is still holding at record levels.”

Rimer, a veteran a2 Milk watcher, said the company’s positioning in the all-important mother and baby store channel, was fairly unchanged relative to previous visits.

“What was noticeable was that competing brands already had the latest version of product on shelf after the new licence scheme started on 21 May 2023 - a2 and Synlait only received the formal licence in early June and will take a number of months to manufacture and ship to China before being available on shelves,” he said.

“This poses a risk in the short-term that new parents opt for competing brands if they think availability might become an issue as a2 transitions to newly-licenced formulas.”

China has been very slow to emerge from the shadow of Covid. Photo / Getty Images

Rimer said that beyond the implementation risks of the new products, a2 seems to be executing well in the Chinese market and has seen strong market share gains of late.

“We cannot tell for sure whether this is them taking share from the leading domestic brands and multi-national competitors or whether it is largely driven by a large number of smaller brands exiting the market due to the new licensing regime,” he said.

“No doubt it is good to see a2 as a key beneficiary of the consolidation, but we reserve judgment of whether this is due to strong execution, or from picking up sales from brands exiting the market, or a combination of both.”

Synlait and Abbott?

Synlait Milk, which has successfully overcome the challenge of re-registering its China-bound infant formula product, is pinning its hopes on making plant-based product for a new, as yet unnamed, customer, which is understood to be US infant formula giant Abbott Health.

Cash-strapped Synlait is in the middle of selling assets - the Dairyworks and Talbot Forest Cheese businesses - to pay down debt.

The company also has high hopes that the new customer will provide a sufficient offset to reduce its reliance on a2 Milk - by far its biggest client.

EBOS suffers

Shares in EBOS Group have taken a pounding after the surprising news that it would lose its Chemist Warehouse (CW) Pharmaceutical supply contract from July 2024 to its largest competitor, Sigma.

Forsyth Barr estimates the contract currently makes an Ebitda contribution of about A$60 million ($66m) to A$70m ($77m), or 11 per cent of 2023 Ebitda.

“While disappointing and we make material earnings downgrades, the core defensive growth story remains intact,” Forsyth Barr said in an analyst’s report.

“EBOS is a well-run, diversified, defensive business with a robust organic growth outlook (with upside from M&A).”

The broker has maintained a “neutral” rating on the stock, and has a target price of $37.70.

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