It has been an arresting sight to watch the prices of New Zealand's stock market listed companies head ever higher, even as the economy disappears underneath them.
While the recession is now getting under way in earnest, with more to come, the startlingly strong performance of the sharemarket has enabled companies listed on it to bolster their finances by raising more money from their shareholders.
A bit of envelope arithmetic suggests that in the region of $2.75 billion has been sucked out of investors' wallets and put into new issues of shares since the onset of the Covid-19 crisis. Seven of the bigger companies have between them raised more than $2.5 billion of this.
And looking through the list of the companies on the NZX also shows that many of the companies that have not issued new shares recently have at least been able to renegotiate and in many cases enlarge their borrowing facilities.
So, in other words, while the immediate future looks very grim indeed, many of our bigger companies have been able to give themselves a fighting chance of getting through it.
Take Auckland Airport for example. Its revenue generating business has been smashed - for now - by the closure of our border and by the domestic restrictions on flying - although the latter have now been lifted.
Its hair-raising monthly traffic update for April and May showed passenger volumes down well over 90%.
But on April 6 Auckland Airport was one of the first cabs off the rack with a capital raising, launching an ultimately successful bid to raise a whopping $1.2 billion from investors that will shore up its finances for the foreseeable future while it awaits a return of international travel.
A one-way street? Hardly...
And while it may have appeared to some (well, it did me) that pumping fresh money into something like Auckland Airport at the moment would have been a one way street in favour of the airport in the near term (no, I couldn't imagine the share price going up till international tourists were back), well, what do I know.
The new shares offered by Auckland Airport were at a price of $4.66 each. To say they've done well is to say nothing. At one point earlier this month the Auckland Airport share price topped the $7 mark. They have fallen since, but at time of writing investors taking up those new shares were still sitting on book profits of about 40.5%.
Little wonder then that other companies have been flocking to get in on the action too - and the results to date have been extremely good.
| Stashing the cash - the big capital raisers | |
|---|---|
| Auckland Airport | $1200 million |
| Infratil | $300 million |
| Investore Property | $105 million |
| Kathmandu | $207 million |
| Sky City Entertainment | $230 million |
| Sky Television | $157 million |
| Z Energy | $350 million |
| Total | $2549 million |
After an extremely volatile run in February/March the NZX50 Index measuring the value of the biggest stocks had by March 23 lost nearly 30% of its value in just over a month.
Since then, however, the NZX50 has increased in value again by about a third and is now back to levels seen at the beginning of March.
While the market continues to be at such elevated levels relative to the performance of the economy, it will continue to offer companies a cash lifeline. It is much easier to sell new shares and raise capital when the share price is high.
With Sky City Entertainment, which suffered from closure of its casinos during lockdowns here and in Australia, successfully getting a capital raising away this week, that leaves now not too many companies that I thought would be looking for capital to bolster their books yet to do so.
Fletcher Building hasn't gone to the market for more money yet, although it has recently renegotiated more breathing space with its lenders.
The other obvious candidate to take the hat around among its shareholders is Air New Zealand - but that's an interesting one that will be well worth watching.
Our national airline has obviously been devastated by the collapse of tourism too, but we taxpayers own 51% and the Government has put a $900 million loan facility on the Air NZ table - although this has not yet been used.
Fresh capital
By common market assent though, Air NZ is seen as needing to get fresh capital in from its shareholders and probably lots of it. I've certainly seen suggestions being bandied around of it needing about $1 billion.
The airline itself has indicated it could lose close on three quarters of a billion dollars in the financial year that finishes at the end of this month. Losses will continue beyond that.
No problem, surely? The Government can come to the party (with our money) and pump lots of lovely money in.
But there is a problem. The share price. I would assume investors see it as a no-brainer that the Government is going to put money in. So, they've been climbing in. The share price hit nearly $2 earlier this month. It has come back since, notably on Thursday of this week when announcing its result forecast.
But at time of writing it was still above $1.50, which is around double the value some analysts put on the stock.
A strange position
The Government is in the strange position whereby if it does pump loads of cash into Air New Zealand - as the 51% owner of the business - this will arguably give disproportionate benefit to the 49% public shareholders. It's certainly a point of discussion.
The argument could well be that a $1.50 price is being driven by the 49% shareholders - but the 51% shareholder wouldn't want to pay anything like that for a new offer of shares.
Air New Zealand is reportedly looking at capital raising options and it will be interesting indeed to see what it comes up with.
Notwithstanding the Air New Zealand situation though, there's no question the unexpected strength of the sharemarket as a whole at the moment has been of great use for our companies.
And the shoring up of balance sheets, both with new equity and with extended debt facilities should help the country as a whole as the whole country descends into a rather deep hole.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
55 Comments
Lost decade ahead for stocks? Dalio thinks it could be.
https://markets.businessinsider.com/news/stocks/stock-market-verge-lost…
Aligns with the high level of Shiller's CAPE which was back up at 1929 levels when the initial crash hit - given the loss of earnings it must be far worse now although given the cyclically adjusted nature of the model, perhaps won't be visible until we have the data/in retrospect.
https://upload.wikimedia.org/wikipedia/commons/7/73/SP_500_Price_Earnin…
A high CAPE ratio has been linked to the phrase "irrational exuberance" and to Shiller's book of the same name. After Fed President Alan Greenspan coined the term in 1996, the CAPE ratio reached an all-time high during the 2000 dot-com bubble. It also reached a historically high level again during the housing bubble up to 2007 before the crash of the great recession.
You had better hope that Dalio is wrong... sharemarket is the arena for mainly young investors and those approaching retirement. There will be a lot of long faces and failing funds. Like the joke, how to make a small fortune from the sharemarket... start with a large fortune.
I think you're confusing those high returns over the last few years with the property market ;)
The sharemarket will return to the long term average after a downwards over-correction - so will all other asset markets.
As I always suggest, the trick is to make sure you ( 2nd person, plural) aren't the one paying for the privilege of being part of the spectacle.
I agree...
The only one's benefiting at the present time are fund managers, who guarantee nothing but a compulsory cut for themselves; regardless of performance.
I looked at my conservative kiwisaver fund, and its return of 0.79% after fees is way less than the short term deposits I have over the same period. These managers secure more than a third of my gains as their fees.
Thankfully, kiwisaver and my term deposits form a small part of my overall investments, but its high time the government introduced the ability to self manage kiwisaver. These so called expert fund managers would then have to reduce their fees and lift their game.
As more and more people join the unemployment queue, there is clearly a discontent between the sharemarket performance and reality. This discontent has been created by artificial stimulus of money printing; reflected in historically low interest rates which bare no relationship to the business risk out there. Banks know this, and are being very selective with who they lend to and this includes to publicly listed companies; with those missing out having raise funds more expensively through bond or share rights issues.
The ignorant havent worked this out, while the short term speculators are having a field day with margin trading. Perhaps the only bright side here is the government will be receiving tax from these gains; but only if these traders haven't engineered profit transfers elsewhere.
Hindsight is a wonderful thing, but my mistake was I didnt realise how long these crocked banksters could keep their party going. We may have to wait for another 6 to 12 months before reality bites.
Pathos.Based on conventional metrics and a 'normal' interest rate environment, you'd be right. But with world economies going boldly where no man has gone before, who knows? Billionaire venture capitalist Chamath Palihapitiya; 'those guys (value investors) are morons,The historic way of determining value by looking at balance sheets and discounted cash flow no longer works, Today, when money has no value, because we’ve essentially printed all the money in the world and we’ll continue to print it over and over, you have to find value in other parts of the balance sheet, so you have to go to things like brand or intangibles. And this is where their mathematical models break, and then their brains explode'.
"I'm old enough to remember Bruce Judge."
Judge Corp, Ariadne, et al ....
Swashbuckling 1980s corporate raider Bruce Judge is now flogging micro bikinis and lingerie
https://thewest.com.au/news/qld/swashbuckling-1980s-corporate-raider-br…
But its not really a rescue is it? Its more like life support!
Buying bonds and keeping debt costs low doesnt help improve profits in a recession, so some of these businesses will eventually have to turn a profit by restructuring their businesses or eventually going to bankruptcy
Capital raising by a rights issue by companies affect different people in different ways:
1) people just starting out in their careers are in investment mode and have cash to subscribe to rights issues. They may welcome the opportunity to buy shares at a discount to market price.
2) income oriented investors (mainly retirees) typically don't have excess capital to subscribe to rights issues, so they are likely to have their shareholding diluted. They also potentially face a reduction in dividend income as companies may reduce their dividend per share and conserve cash for the business operations.
Even those who dont fall into the two camps such as myself like receiving dividend cheques (now direct credits) in the bank account. The divs make the investment feel like an investment with a proper return that you can spend or do something else with. Give me dividends over capital gains any day of the week.
Sounds good, and makes sense, until a Telecom came along.
Telecom - the bluest of blue-chip NZ stocks in 2000. The local leader in its field at the time of blue-sky telecommunications development. How could it not succeed?
It was paying 12% Dividend. Its share price was nearly $12 and it was freshly spun out of Government hands with Government markets protection to see off any competition. Can't lose......but it did!
It didn't see VoIP coming, and if it did, it didn't react. It didn't see Fibre coming and certainly didn't react.
It halved the dividend to keep gong - Shares went to $6 ( a double whammy for any shareholder!). It spun out Chorus and that nearly sent it broke ( Government stepped in yet again - see mine re AIR NZ below) and shares went to $3 - the dividend halved again.
By then, shareholders had been whacked in every direction as had Telecome shares ( about to be rebranded Spark to get away from the stigma) and a 1/5 Chorus holding of negligible value.
Today, all's well. (??!!) But anyone who held on to the shares for The Dividends lost hope and wealth many years back.
Technological improvement which benefits society as a whole can pose challenges to existing business models. This can create other opportunities for other businesses.
Some others which were unable to adapt to such changes include broadcast TV, print media such as magazines and newspapers, 2G phone makers (remember how Nokia was the largest mobile phone brand?), analog film (remember the dominance of Kodak & Fuji Film?)
Air NZ is going to be a textbook case; studied in the future by many an economics' student on the whys and wherefores sharemarket investing.
The only thing we don't know is "Who is going to be the BIG loser? Us, as taxpayers, or us, as individual shareholders?". It is almost a certainty going to be one of those two, and whilst the Government may think it can control the narrative, doing so will make it ( and us) the loser.
Far better that it quits its holding now at $1.50 a share (sell the whole 51% parcel at a discounted $1 if need be. That's still way above Fair Value), withdraw the $900m Facility; stand back and rescue what's left after it crash-lands into its balance sheet. But then again, that's sensibility thinking....
"Air NZ is going to be a textbook case; studied in the future by many an economics' student on the whys and wherefores sharemarket investing."
I prefer to view Air NZ as a text book case of the whys and wherefore of investing in the airline industry. (not necessarily share market investing). There are many other more attractive businesses available for investment in the share market for long term investors.
Animal spirits are at work ...
How to "spend" $6.00 ....
(Ignoring FX rates for purpose of illustration)
1) buy 4 shares of Air NZ =$6.00 (in reality, would cost more due to commissions involved) or
2) buy 4 shares of Hertz = $6.00 (on Robinhood or some other commission free platform) or
3) go to TAB and put $3.00 "each way" on horse number 5 in Race 3 at Ellerslie for total bet of $6.00 or
4) go to TAB and put $6.00 for win on horse number 5 in Race 3 at Ellerslie or
5) buy lucky dip on Lotto for $5.60 (and buy some pick a mix lollies with $0.40 change ...)
Then pray .... (LOL)
"Does the govt rig the races? No. But they own half of air nz. So which one has the most chance of turning your $6 into $0."
Roger the dodger,
That's an interesting perspective you've raised, something that I hadn't thought about. Just so I understand you clearly, your point is:
i) that government will never let the business fail? or
ii) the government will never let the share price fall below a certain price?
iii) other
Loading up the corps (no pun intended) with extra share allocations is a fools game. It is debt by any other name & showcases the fundamental failings at this moment in time. Capitalism has collapsed. That's what it's designed to do. It is part of a healthy life-cycle. Why do we have to rescue everyone all the time. Let if collapse, then on the other side it (& all of us) will be a stronger thing. All we're doing at the moment is encouraging incompetence. God help us.
Its interesting that these companies are raising capital to pay off interest -bearing debt , just at a time when interest rates are the lowest in our lifetime .
And more interesting when you consider that individual sharemarket investors expectations of return are way higher than Banks .
The Government's offer of $900 million to AirNZ comes at a very high interest rate. They may be wise not to use it and instead go for share issue, as public seem to be willing to subscribe to it. May be even the Funds will lap it up, like they did with the Airport issue. Those two companies are the counry's staple PR thingies, can't be allowed to sink.
Here's an interesting example of a marginal buyer of shares in the US share market ...
https://twitter.com/stoolpresidente/status/1274076383615090688?s=20
Just like a game of bingo, and instead of numbers, using letters of the alphabet ... R, T, X ...
Animal spirits at work ...
"Efficient markets"?
US$200,000 RTX, market order ... Done.
https://twitter.com/stoolpresidente/status/1274079260869898241?s=20
Spoken like a person who has idea about sharemarket investing. Contrary to the property sprinklers opinions, the sharemaket has been the greatest wealth builder for over a century
I think you're right. Even in the past 30 years, sharemarket investing has been quite spectacular even in lil ol' NZ. Even in the indexes like Smartshares. Probably not as obvious to people though. The property bubble is the be-all-and-end-all for most. My intuition tells me that obsession is going to be very destructive for NZ going forward.
"Spoken like a person who has no idea about sharemarket investing. "
Albert2020,
You sound like you have experience in share market investing and are a long term investor (not a share trader). Could you clarify on which points of the article above do you disagree with? Interested in hearing your perspective.
not necessarily if you take up the offer of extra shares at the discounted price which later increases. Eg, AIA shareholders needed to acquire roughly 20% extra shares to maintain their % stake in the company but as these were priced at $4.66 vs current price at the time of over $6.00, the holders adjusted average acquisition cost per share of their total holding could drop markedly and the net value gain rise - how much depends on size of holding and length of time held. Share issues can be lucrative value accretive opportunities.
not necessarily if you take up the offer of extra shares at the discounted price which later increases. Eg, AIA shareholders needed to acquire roughly 20% extra shares to maintain their % stake in the company but as these were priced at $4.66 vs current price at the time of over $6.00, the holders adjusted average acquisition cost per share of their total holding could drop markedly and the net value gain rise - how much depends on size of holding and length of time held. Share issues can be lucrative value accretive opportunities.
You're making the assumption that revenues and profits will return to some level in the past. If they don't, the share issuanace only represents dilution.
OK. The term dilution normally refers to a reduction in the percentage of the company you own if you don't take up your entitlement of additional new shares on offer. But if you are applying it to mean total value including dividends then yes, where earnings or dividend payouts subsequently fail to meet expectations it is possible for your combined net position to decline following issuance and the extra cash you've laid out to go down the plughole eg Fletchers cap raise last year. That's the gamble you take. NZ rugby wasn't willing to do so on the sky TV offer.
I bet the executives with share options were pleasantly surprised! Not. Unfortunately this only illustrates that the NZX is following the federal reserves instructions to keep assets inflating.
Complete madness. The mantra for the central banks is like the "Charge of the light brigade " .....
"Ours is not to reason why, ours is but to do... and BUY!
The executives at SKY TV would be especially 'unsurprised' at their company's recent capital raise where long term investors have not only been eviscerated by the precipitous share price plunge because of the hopeless performance of the company under their leadership but now have to endure the same executives receiving tranches of new issue shares at 12c, which had been trading at the 30c mark just previously.
* Fonterra is probably a good buy
* Rakon might be a buy next year
* Fletchers if you like to dollar cost averaging
You could always buy a basket of growth companies and hope the winners are bigger than the losers:
- Scott Technologies
- Cannasouth
- New Talisman Gold Mines, etc
Ummmmmmm .. Gold, Silver lol .. bonds = lmfao . You could buy the Emerging Market ETF - probably not a bad idea actually and Silver's time has probably come - JP Morgan certainly own enough of the stuff!
But yeah, it's ME, so I'm really just going to say - Buy Bitcoin yo'll !!
There are good trades out there for longer term equity holders.
I sold my stake in Rakon a while back. So much potential though, especially with the soon advent of 5G networks.
Unfortunately with Covid, Rakon could be beaten to the punch. Sometimes with these older companies innovation becomes a bit stagnant and management less dynamic. "Sell in May and Go Away".
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.