Stock Takes: Has the market turned after a shocker past couple of years?

Contact's Tauhara geothermal project has been delayed.

The past two-and-a-half years have been a shocker for the sharemarket.

Since the S&P/NZX50 reached a peak of 13,643.78 on January 8, 2021, it’s mostly been downhill, reflecting sharply higher interest rates.

Until this month.

In the US, stocks rallied have strongly on the back of optimism that inflation there may about to be tamed after the CPI fell to 3.2 per cent in October, the first decline in four months.

Locally, the CPI increase for the September quarter was a lower-than-expected 1.8 per cent.

And data this week showing food prices fell 0.9 per cent in October served to reinforce the view that the Reserve Bank’s current official cash rate of 5.5 per cent may be as high as it gets.

So far this month, the benchmark S&P/NZ50 has gained five per cent or so.

“It does feel like the market may have reached a turning point,” Craigs Investment Partners Mark Lister says.

“There has been a genuine shift in market sentiment.”

“It’s impossible to say how long it will last, or whether it will continue, but we have had a difficult two-and-a-half years across the market,” Lister said.

“The last few months, in particular, saw the market go through a correction but, as is often the case, this November has started well.”

November historically has been the best month of the year for markets around the world.

“That seasonality seems to be playing out the way that it historically has,” he said.

US bond yields have come off their 10-year plus highs, as have New Zealand yields.

“I think that they have probably peaked at this point, and that’s given the market a bit of a boost.”

Lister says the data so far suggests the OCR may have reached its peak and that there was potential for OCR cuts earlier than the Reserve Bank had forecast.

In its last monetary policy statement, the bank’s forecast pointed to December 2024 as being when the OCR was likely to turn.

“The big question still is what happens with the economy, because part of the reason we are seeing inflation going lower is that goes hand in hand with a softer economy,” he said.

“That’s the piece of the puzzle that is unknown.

“The outlook for the market over the short term looks positive, but if you look ahead 12 months we are still not completely out of the woods yet,” he said.

“We were headed for our third down year in a row – that’s something that we have not seen before.

“Hopefully it will be an important turning point.”

Contact delays

Contact’s announcement that its 174 megawatt Tauhara geothermal project, near Taupo, has been delayed by another six months, is the the fourth delay since the project commenced.

Total delays are now add up to 15 months, with commissioning of a 152MW plant (the original plant capacity planned in 2021) now expected in September 2024, with full plant capacity not likely to be reached for another year.

Brokers Forsyth Barr estimate the total EBITDAF impact from the delay is about $125m, which is in addition to the $40m capex increase.

Accordingly, Forsyth Barr has lowered its target price by 15c to $7.35.

“We understand the root cause of the issues is design-related, meaning CEN is unlikely to receive compensation for the lost revenue caused by the delay or the additional capex,” Forsyth Barr said.

“We now assume CEN will hold its 2024 dividend flat at 35cps given the delay and additional $40m capex.

“Rising downside risks if there is more plant failure the Tauhara delay places CEN in a difficult position with its generation fleet.”

In August 2023 CEN lost one of its 100MW gas-peaking plants.

“Add in the Tauhara delay and we see further earnings downside risk if one of its remaining gas-fired plants has an unexpected outage — which does happen occasionally.”

The Tauhara delay also places pressure on the market to meet 2024 mid-winter peaks.

Chairman Mike Fuge, at this week’s annual meeting, said the company’s 2024 normalised and expected EBITDAF guidance of $600m remained.

Long short

Local firm Salt Funds Management is celebrating success on the international stage with a win at the With Intelligence Awards in Hong Kong last week.

The Salt Long Short Fund picked up the 2023 Australian Equity Award.

The With Intelligence Awards are widely recognised across the Asia-Pacific region and keenly sought by fund managers. The winners are selected using an objective measurement of the volatility of returns and whether positive returns are delivered.

Salt set up the Long Short Fund Fund almost 10 years ago as an alternative to a normal long-only equity fund.

“Global experience of such funds has been that good ones can offer equity-like returns over the long run and do so with no correlation to equity markets and with far less volatility,” said Salt managing director Matt Goodson.

“Having no correlation means that when markets are up, we may be up, down or flat and likewise when markets are down. There is no relationship. This tends to stand out when markets are choppy. It is also extremely useful for investors who may have a lot of equities exposure already but are looking to build a diversified portfolio.”

From inception in July 2014 to end-October 2023, the fund has returned 9.61 per cent per annum (post fees) versus 8.92 per cent for the S&P/NZX50 Gross index and 6.18 per cent for the S&P/ASX200 Accumulation Index.

Eastland sale

Trust-owned Eastland Group said it had raised capital through the sale of a 50 per cent interest in Eastland Generation to Japan’s Obayashi Corporation, an international construction and engineering company, listed on the Tokyo Stock Exchange.

The capital raise followed a competitive process to find a suitable partner in order to provide capital to fund a significant pipeline of renewable generation projects in New Zealand and to provide expertise and capability to support and accelerate these projects and other identified opportunities, Eastland said.

The transaction is underpinned by an enterprise valuation for Eastland Generation of over $500m.

Eastland said Obayashi had significant renewable energy development and operational experience in Japan, with a commitment to accelerating opportunities in the green energy sector.

The company has been operating in New Zealand since 2011 and has delivered several significant projects such as New Zealand’s first megawatt-class green hydrogen production facility, Halcyon Power.

Eastland Group’s sole shareholder is Trust Tairāwhiti.

The sale is conditional on OIO approval.

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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