Stock Takes: NZ power sector clouds upbeat reporting season

Uncertainty over the power sector has taken the gloss off what was a positive reporting season for NZX listed companies.

Despite all the Covid-19 disruption and supply chain issues, most came through the June year in reasonable shape.

Harbour Asset Management said New Zealand’s equity market delivered one of its strongest monthly returns in some time.

“This result was mainly driven by a much stronger earnings season than consensus market expectations, with the number of profit result beats against expectation higher than misses in the order of 2 to 1 at an earnings-per-share level,” Harbour said.

“Idiosyncratic factors such as the inclusion of Mainfreight and Serko in the FTSE global stock market benchmarks, and an acceleration in mergers and acquisitions, also boosted returns,” it said.

“The New Zealand market’s relatively high weighting to growth and defensive stocks may also have attracted capital as global growth expectations were trimmed,” Harbour said.

Meanwhile Jarden said that despite New Zealand moving into Covid-19 level 4 as the August reporting season began, price moves for impacted stocks were much more limited than last year’s first lockdown.

Overall, the S&P/NZX50 index gained 5 per cent in August and is up 10.7 per cent on a 12-month rolling basis.

“This price stability is reflective of stronger balance sheets, confidence from previous experiences of restrictions easing, and a ramp-up in the pace of vaccinations,” Jarden said in a commentary.

A key exception is the strong pricing of Summerset and Ryman Healthcare, where the market appears to be less fearful of a sharp fall in house prices compared with the uncertainty in March 2020.

Cloudy power sector

Castle Point Funds co-founder Richard Stubbs the key themes of the fund manager’s conversations with companies had been supply chain disruptions and labour cost pressures.

“Most companies have been incredibly resilient over a very turbulent year and are optimistic about the future,” he said.

But while the market saw it as a positive season, a measure of uncertainty overhangs the power generators, which form the cornerstone of the local market.

Forsyth Barr said the August 9 blackouts and subsequent fallout had dominated the month.

There had also been unexpected Cook Strait cable constraints and record carbon prices.

“We are more cautious on the near-term outlook for the electricity sector than we have been historically, with regulatory/political risk rising a notch in August and the spread between dividend yields and market interest rates falling to a record low,” Forsyth Barr said.

Forsyth Barr has given Mercury, Meridian and Trustpower an “underperform” rating.

Genesis Energy is the only stock rated as “outperform” by the broker.

August 2021 was “probably the most remarkable month” in the electricity market since it began 25 years ago, with three significant and unusual events – the August 9 blackouts, the level 4 lockdown and constraints on the HDVC link.

These events occurred against a backdrop of improving hydro storage conditions with hydro storage lifting from 109 per cent of average at the beginning of the month to 127 per cent of average by month end.

“Of these events, the blackouts have the potential for the greatest sector-wide impacts, with four investigations taking place,” Forsyth Barr said.

In addition to the three wholesale electricity market events, on September the Government held its third NZ carbon unit auction which saw the spot price spike to $59 a tonne.

More to come?

ANZ New Zealand is tapping the debt market for up to $250 million in the form of 10-year unsecured subordinated bonds and more offers along these lines from the big Aussie banks can be expected.

The offer will raise Tier 2 capital to help ANZ meet its Reserve Bank regulatory capital requirements and manage its capital position.

The indicative margin range for the bonds is 1.25 per cent to 1.45 per cent per annum over the underlying swap rate.

Fisher Funds senior portfolio manager fixed income, David McLeish, expects the big Aussie banks to seek $6 to $7 billion in total from local and overseas investors to get their balance sheets in line with Reserve Bank capital requirements.

“I think that it is probably a first of quite a few similar transactions from a number of the big banks,” he said.

“Under the new capital requirements issuing this kind of debt is likely to be viewed as quite beneficial from their perspective, so I suggest that you will see more,” he said.

Bremworth on a roll

Shares in Carpet maker Bremworth, formerly Cavalier, have been on roll.

The stock is currently trading at its highest point in five years after a string of announcements.

Bremworth, which has spurned synthetics to focus on making carpets from wool, changed its name to Bremworth effective from August 30, following a move in 2020 to return the carpet business to the original Bremworth brand.

ForsythBarr investment adviser Dan Stratful said Bremworth was clearly benefiting from closed borders, which has led to consumers redirecting their travel spend to home improvement.

“It also looks like a possible consumer shift back to wool carpets from synthetics is occurring,” he said.

The company returning a $1.7m profit from a $21.5m loss in 2020 appears to have been a catalyst for the share price.

“The balance sheet now in good shape – no bank debt and $22.5m cash at June 30, 2021 leaves them well placed to execute their new turnaround strategy,” he said.

For the record

Cancer diagnostics company Pacific Edge has made it absolutely clear that it is not seeking capital after an erroneous message escaped on the ASX earlier in the week.

“Pacific Edge is aware of the media commentary relating to its announcement yesterday and it wishes to reconfirm that the information released by ASX is incorrect,” the company said.

“Pacific Edge confirms that all material information is in the market and Pacific Edge is in compliance with its continuous disclosure obligations,” it said.

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