Stock Takes: Big deals missing in action from NZ market

Australia is seeing a raft of big takeover offers for its listed companies while in New Zealand merger and acquisition activity seems to be concentrated at the smaller privately owned end of the market.

Earlier this month Sydney Airport rejected a A$22 billion offer while this week Spark Infrastructure received a A$5b offer from Kohlberg Kravis Roberts’ infrastructure fund and Ontario Teachers’ Pension Plan Board.

Mark Brown, chief investment officer at Devon Funds Management, said apart from the unwinding of Tilt from Trustpower there hadn’t been much takeover action in the listed market here.

This week Genesis Energy quietly told the market it would be keeping its 46 per cent stake in Kupe.

“After a thorough review process, the board has concluded that ongoing ownership of Kupe is in the best interests of shareholders and the company. Kupe remains a high-quality gas asset and will continue to play a key role in New Zealand’s transition to a lower carbon future,” the company told the market on Tuesday.

Brown reckons the lack of sale probably reflects the Government’s attitude towards the oil and gas sector.

“Any potential buyer is probably thinking’I can only run the asset out’ and also there is a risk the government says something else which makes the value of the asset fall further.”

Brown said Beach Energy, which is the operator and majority shareholder of Kupe, has had a tough time of it lately with its fields in Australia ruling it out as potential buyer of Genesis’ stake.

“Them being in a bit of a tight spot financially means they are not a natural buyer at the moment.”But he said Kupe was still making good money at the moment.

Analysts have noted they will be looking for a further explanation from Genesis’ management at its upcoming result in August for the lack of success in the sale despite management indicating there was strong interest.

Power play

All of the major power companies are due to report their financials next month with Contact Energy first cab off the rank on August 16.

Jarden analysts Grant Swanepoel, Nevill Gluyas and Luan Nguyen noted their focus would be on Mercury Energy’s outlook statement for its 2022 financial year.

“We expect this could be as high as $633m [EBITDA].”

The analysts are predicting a strong year ahead for the gentailer as its newly constructed Turitea North wind farm comes on board, it gets the full benefit of purchasing Trustpower’s retail book as well as 60 internal projects which have been promised to add a further $30m to its earnings.

The analysts have an overweight rating on Mercury and say its reduced trading multiple has made it noticeably cheaper than Meridian on near-term metrics.

When it comes to Meridian their focus will be on any update in the company selling its Australian assets, development of South Island demand from SMEs, its data centre and green hydrogen plant.

They have a neutral rating on Meridian and a buy rating on Contact Energy which has had a strong finish to its financial year.

Forsyth Barr analysts have an outperform rating on Contact and estimate the company had a record month in June producing EBITDAF of $78m – up $11m from its previous record set in June 2014.

“Strong hydro generation, being long generation, and higher commercial pricing were the main drivers of the record result.”

They lifted FY21 EBITDAF forecasts by $10m to $553m this week and increased their dividend forecast by 1cps to 36cps.

Golden performance

Numerous lockdowns and store closures have failed to take the shine off jeweller Michael Hill International.

Shares in the company hit a fresh high on Monday of 97c jumping 10c a share after it gave a glowing fourth quarter update last week.

Same store sales revenue was up 7.5 per cent over the 13 weeks to June 27 while revenue from all stores rose 116 per cent.

That was despite it having 559 lost store trading days in Australia and a loss of 3323 store trading days in Canada where its 40 stores were temporarily closed for most of the quarter due to Covid.

Michael Hill chief executive Daniel Bracken told the market the company finished its financial year with a strong trading performance and a robust balance sheet.

“Combined with demonstrated traction in our growth strategies, this sees the company well-positioned to continue its earnings trajectory and explore new opportunities.”

Jarden analysts Lily Zhuang and Andrew Steele reiterated their buy rating on the stock and have a target price of $1.10.

“We continue to be encouraged by MHJ’s trading performance given that 4Q21 group revenue was only -12.9 per cent below the non-Covid impacted 4Q19 despite 25 per cent lost store-weeks and 7 per cent fewer stores.”

The analysts also speculated on what the company’s plans for capital management options and “new opportunities” could entail.

“Management advises they are considering a range of capital management avenues including dividend payment levels and new opportunities which we expect could imply: a) an acquisition, b) expansion into a new market or c) other significant topline initiatives.”

But warned they would not be keen to see the first two options.

“The first two implications would give us pause given MHJ only fully exited its loss-making Emma & Roe and US operations some three years ago.”

Further detail is expected from the company at its annual result next month.

Crude oil dip

This week’s crude oil dip will be good news for Z Energy whose retail fuel margins have come under pressure in the past few months from the rising oil price.

Brent Crude fell under US$70 a barrel for the first time in months after OPEC announced it would ease back on its production cuts and increase production.

Oil prices hit a low point in April last year falling to around US$36 a barrel with aviation falling off a cliff due to global Covid lockdowns but it has been steadily rising since November.

Forsyth Barr analysts Andrew Harvey-Green and Mark Robertson noted this week that crude oil prices had risen 17 per cent during the June quarter to top NZ$100 a barrel for the first time since December 2019.

“Crude oil prices continue to be a headwind for retail [fuel] margins. A stabilisation in crude oil prices should see a moderate increase in retail margins.”

The analysts trimmed their Z Energy financial year 2022 EBITDAF forecast by $4 million to $277m this week. Z Energy has given guidance of between $270m and $310m.

Z will hold its annual investor day on Wednesday. The analysts said they would be looking out for an update on the company’s long-term strategic vision in light of the recent Climate Change Commission’s report highlighting the need to move away from fossil fuels.

S&P, NZX launch ESG index

S&P Dow Jones Indices and the NZX have launched a new environmental, social, and governance (ESG) index aimed at investors who target sustainability in their investment choices.

Jaspreet Duhra, global head of ESG Indices at S&P Dow Jones Indices, said that with the heightened focus on the impact of companies’ environmental, social and governance footprints, the index would serve as an independent and transparent tool in measuring ESG performance as more investors incorporate sustainability targets in their investment decisions.

NZX chief executive Mark Peterson said there was a real interest and growing focus on ESG, and that the new index would provide a performance benchmark for the development of product that the market is demanding.

“Investors will have more choice and, importantly, another lens on the New Zealand market, that allows them to retain diversification while giving more weight to high-ESG performance companies,” he said in a statement.

The S&P/NZX 50 Portfolio ESG Tilted Index is based on the S&P/NZX 50 Portfolio Index but offers more enhanced ESG characteristics than the “parent” index, S&P said.

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