Archive | Gainz

Augusta wants syndicate approval to add third property to new industrial fund

Augusta Capital Ltd said on Monday it had made a conditional offer to the investors in one of its syndicated properties for its new industrial fund to acquire that property. The offer is subject to an investor vote. If successful, this would be the third & final property in the initial portfolio for the launch of the new fund.

Augusta manages the syndicated property at 12 Brick St, Henderson, and portfolio & syndication management subsidiary Augusta Funds Management Ltd has sent a notice of meeting to the investors in that property requesting approval for a sale to the new fund.

Augusta managing director Mark Francis said: “It is a relatively new industrial property constructed in 2009, with a long-term lease of at least 10 years remaining to D&H Steel Construction Ltd – and potentially a further 5 years if the tenant does not exercise the break right it has at 10 years.”

Augusta has scheduled the investor vote for Friday next week, 2 February. The sale would be conditional on sufficient capital being raised under the public offering for the new fund and the existing tenant waiving its right of first refusal.

Mr Francis said if the sale is approved, the new fund will be launched with 3 properties in its initial portfolio – 862 Great South Rd, Penrose; The Hub, Wellington; & 12 Brick St.

That portfolio has a current valuation of $87.85 million, 14 tenants and a weighted average lease term of 7.2 years. Mr Francis expected occupancy to be 99% on settlement.

He expects the initial equity to be raised by the new fund to be between $58-60 million. As previously announced, Augusta will underwrite between $33-35 million of that equity raising and intends to subscribe for at least a 10% stake in the new fund and maintain that holding long-term.

Augusta is preparing a product disclosure statement for the fund, which it expects to be registered in mid-February. Settlement of the acquisition of the initial portfolio is intended to occur on 29 March.

Attribution: Company release.

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Dickens alleges business confidence surveys contain major political bias

Independent economist Rodney Dickens said in his first Ravings with Rodney column for the year the business confidence surveys which lead political & economic direction “have major political bias”, and backed that up with charts & statistics.

Mr Dickens, who runs his own company, Strategic Risk Analysis Ltd, wrote: “The ANZ business survey has gone AWOL again. Unfortunately, the bank economists – and therefore the media – haven’t focused enough on the massive political bias that currently overwhelms the results of the survey and make it a poor input into business & investment decisions.

“The NZIER business survey has been corrupted less by political gamesmanship, but some components have become poor leading indicators, while even the most useful component is under a cloud.”

In his Raving column, Mr Dickens put the 2 main components of the ANZ & NZIER surveys “in context which is critical for assessing whether much, if any, weight should be put on them in making business & investment decisions.

“When what were once useful leading indicators can’t be relied on, it increases the importance of having access to quality analysis of economic and housing prospects as input into business and investment decisions. Our driver-based approach to forecasting, that is supported by educated interpretation of the leading indicators rather than blind faith in indicators that have gone AWOL, should be a must-have for any businesses & investors wanting to make informed & profitable decisions.”

What Dickens found

“Based on the ANZ business confidence survey, the economy is heading for a recession (ie, negative gdp growth), with significantly more firms negative than positive (left chart). Based on the ANZ own activity survey, near-term prospects for annual gdp growth aren’t so bad, but growth should slow to below 2% over the first half of this year (right chart).

“When these surveys tumbled in November after the election outcome was finalised, the results were reported as if there was a significant threat to economic growth. For example:

NZ Herald, 30 November 2017: Business confidence tumbles to 8-year low in November
Stuff, 30 November 2017: Slump in business confidence poses ‘material risk’ to economy

Mr Dickens didn’t blame the journalists for reporting the survey results verbatim: “They lack the resource & maybe knowhow to back-test the reliability of the surveys. Consequently, they rely on the bank economists to provide the appropriate interpretation, which is a mistake.

“The headlines should have read: “Businesses again hijack survey to make political protest” & “Survey greatly overstates economic risks from the change in government”.

Mr Dickens said these surveys were useful indicators of near-term economic growth prospects before 2002.

He said the NZIER survey “hasn’t been corrupted as much by political gamesmanship: Thankfully the commentary by the NZIER principal economist regarding the falls in many components of the NZIER quarterly business opinion survey was more balanced. This has in turn largely been reflected in the media commentary on the results of the December quarter survey.”

Note: Red & blue lines across the foot of each graph denote periods of government: Labour (red), National (blue).

NZIER, 16 January 2018: NZIER’s quarterly survey of business opinion shows businesses more pessimistic after the election
Stuff, 16 January 2018: Business confidence drops, with fewer expecting to hire or invest, 16 January 2018: NZIER business opinion survey shows the usual fall in confidence after a Labour-led government takes office, effect of election on actual business activity muted

Mr Dickens took issue with what he said was “still a lack of supporting analysis to put the NZIER December quarter results in context. And in my assessment there hasn’t been enough focus on political gamesmanship; instead, like the commentary accompanying the ANZ November & December surveys, the initial focus was on ‘uncertainty over new government policies’.”

He said the NZIER business confidence survey “has, like the ANZ business confidence survey, become much less useful as a leading indicator of economic growth since 2002. As the NZIER principal economist goes on to point out, it has generally had a negative bias while Labour governed and a positive bias while National governed, although this has only been the case after 2002.”

Rodney’s Ravings (entry by free subscription)

Attribution: Rodney’s Ravings.

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Regulator clears Fletcher Building of continuous disclosure breach

Fletcher Building Ltd’s board became aware in late 2016 of issues affecting performance of the Building & Interiors unit (B+I) of its construction division, but NZX Regulation has found the company didn’t breach its continuous disclosure obligations by announcing a consequent profit downgrade only in March 2017.

The company issued a second downgrade notice in July.

NZX Regulation published its findings yesterday following investigations of Fletcher Building’s disclosure of the material forecast earnings downgrades.

NZX Regulation assessed what information was material to Fletcher Building, and when it came into the possession of Fletcher Building’s senior executives & directors to trigger the disclosure requirement.

The regulator concluded that Fletcher Building released the material information promptly & without delay, as required under the listing rules. You can click on its full investigation report below.

Fletcher Building, not surprisingly, welcomed the findings.

The revelations

On 22 February 2017, Fletcher Building released its half-year financial results, confirming guidance it had previously given to the market, that operating earnings were expected to be in the range of $720-760 million for the 2017 financial year.

The company sought an urgent trading halt on Friday 17 March, saying it was reviewing the financial performance of its Construction division & its impact on earnings guidance previously provided to the market. The following Monday, 20 March, the company announced an earnings guidance update, including details of a downgrade in forecast earnings to a revised range of $610-650 million. Fletcher Building’s share price declined 13%, opening at $9.22, hitting a low of $8.00 during the day and closing at $8.28.

On 20 July, Fletcher Building announced a trading update & the departure of chief executive Mark Adamson. That announcement included details of a further downgrade in forecast earnings, to $525 million. The share price declined 8.8% from an opening price of $8.09 to a low of $7.38 before closing at $7.59.

The earnings forecast downgrades reflected losses being accrued in a number of projects within the B+I unit. NZX Regulation concluded: “We consider that information about those specific losses was not separately material information for Fletcher Building. This recognises the specific facts & circumstances relevant to Fletcher Building and how market expectations of its financial performance were set, which will necessarily differ from issuer to issuer.

“Market expectations of Fletcher Building’s financial performance were set by the published group level earnings forecasts. In these circumstances, we consider that financial performance at a business division level would need to be assessed in relation to how the performance impacted the group earnings forecasts in order for that information to be material information for Fletcher Building.

NZX investigation’s limits

NZX Regulation said its investigation was limited to assessing compliance with the NZX rules, and note:

  • Rumours relating to progress on the status of particular Fletcher Building projects are not the same as rumours about Fletcher Building’s financial performance at a group level
  • Rumours about financial performance measures must have a sufficient degree of credibility, specificity & certainty in order to give rise to potential disclosure obligations, and
  • In any case, in order for Fletcher Building to have a disclosure obligation, the information must be in the possession of Fletcher Building’s executive officers or directors.

The regulator concluded: “We have not identified any evidence that executive officers or directors of Fletcher Building were in possession of material information as a result of the rumours & speculation relating to its progress on particular projects.”

NZX view of how the 2016 events unfolded

NZX Regulation said a number of matters relating to the Construction division were brought to the attention of the Fletcher Building board as a result of a review in late 2016: “That review focused on issues relating to personnel, organisational structure, and management & governance processes within the Construction division.

“Those issues led to a strategic review of the Construction division, including the B+I unit. During the strategic review, the performance of the B+I unit & specific projects within that business unit became an increasing focus for senior Fletcher Building executive officers & the Fletcher Building board. This included an in-depth project-by-project review of the Construction division, and changes to the senior leadership team & senior management functions within the Construction division.

“As a result of this process, Fletcher Building senior executives became aware of information relating to the financial performance of the B+I unit, and the impact of certain major projects on that performance.

“Determining margins on construction projects is complex, requiring subjective assessments & prudent judgments to be made on future events. These assessments need rigorous testing by management to ensure appropriate judgments are made. Due to financial reporting standards that apply to construction projects, any projected losses must be immediately accounted for. Fletcher Building tracked these projects & the estimated impact of projected losses on the group earnings forecast.

“Although losses were being recognised for certain projects in the B+I unit during late 2016 & early 2017, these did not initially have a material impact on the group earnings forecast, which remained within the published guidance range. As the review continued throughout the first quarter of 2017, additional information & estimates relating to the financial performance of the Construction division became available to executive officers….

“Our investigation identified that Fletcher Building acted promptly when information relevant to Fletcher Building’s financial performance & earnings forecasts came into the possession of executive officers & directors. This included Fletcher Building assessing that information in light of Fletcher Building’s continuous disclosure obligations.

“Following our investigation, we determined that, for the purposes of the rules:

“March 2017 downgrade: Fletcher Building first became aware on the evening of 16 March that there was a material risk that its actual group earnings results would materially differ from its published forecast. That awareness arose when information was provided to Fletcher Building executive officers that evening on additional projected losses on a key Construction division project. In order to manage its disclosure obligations, and in accordance with NZX Regulation guidance, Fletcher Building applied for a trading halt while it sought further information to confirm its revised forecast. This included assessing information relating to provisions against future losses. The actual change to Fletcher Building’s earnings forecast was confirmed while the trading halt was in place. Fletcher Building released its announcement on the earnings forecast downgrade before market open on 20 March, at which time the trading halt was lifted, and

“July 2017 downgrade: Fletcher Building first became aware on the evening of 19 July that there was a material risk that its actual group earnings results would materially differ from the revised earnings forecasts that had been published on 20 March. That awareness arose when information was provided to Fletcher Building executive officers as a result of regular project reviews, regarding projected losses in various of those projects. Following engagement with management & Fletcher Building’s auditors, the Fletcher Building board determined that additional loss provisioning would also be required. Fletcher Building released its announcement on this subsequent earnings forecast downgrade before market open on 20 July.”

NZX Regulation investigation report Fletcher Building Ltd – continuous disclosure

Earlier stories:
27 October 2017: Sheppard turns Fletcher meeting into “absolution or exorcism” exercise
25 October 2017: Fletcher issues guidance, names new chief executive
25 October 2017: Fletcher shares in trading halt on eve of AGM
21 September 2017: A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
17 August 2017: ‘Fessed up, time to move on, says an unconvincing Fletcher boss
21 July 2017: Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
19 March 2017: Fletcher Building to explain construction loss Monday morning
22 February 2017: Fletcher Building net up 2% after site closures

Attribution: NZX Regulation report.

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Auckland Airport to plough North Queensland sale return into NZ growth

Auckland International Airport Ltd has put a price of $A370 million on its 24.6% stake in North Queensland Airports Pty Ltd and will offer the lot to the other 3 shareholders of the private company.

Auckland Airport chief executive Adrian Littlewood said today: “The sale will enable Auckland Airport to focus attention on growing its New Zealand travel, trade & tourism businesses and to recycle the proceeds into supporting the significant step up in aeronautical investment at Auckland Airport over the next 5 years, that we recently announced along with our aeronautical charges for financial years 2018-22.”

The sale will be subject only to securing necessary regulatory & counterparty approvals (if any) and completed in accordance with the requirements of the North Queensland Airports securityholders agreement.

Auckland Airport said all 3 other shareholders were entitled to buy pro rate shares of the Auckland interest, but 2 – The Infrastructure Fund (which has 20%) & Perron Investments Pty Ltd (5%) – have said they’re prepared to take the whole Auckland 24.6%.

IIF Cairns Mackay Investment Ltd, an entity advised by JP Morgan Asset Management, owns 50% and hasn’t signalled its interest yet. After a strategic review last August, Auckland Airport also undertook discussions with third parties.

Attribution: Auckland Airport release, North Queensland Airports website.

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Michael Hill lifts sales but US concerns continue

Jewellery retailer Michael Hill International Ltd increased group revenue by 4.7% and same-store sales by 0.5% in the December half-year, but reiterated concern about its US business, where sales fell 10%.

The trading update combines 5 months of accounting-adjusted sales results plus preliminary sales figures for December. The company will deliver its more detailed half-year results on 22 February.

The company opened 14 Michael Hill stores & one Emma & Roe store during the half-year, taking the total to 347 – 317 Michael Hill, 30 Emma & Roe.

7 of the new stores are in Canada, taking the total there to 83, and 6 opened in Australia, taking the total there to 172. The company added one store in New Zealand for a total 53, and has 9 in the US.

Sales under the Michael Hill brand grew 4.3% and same-store sales grew 0.7% – 3.4% in New Zealand, 4.8% in Canada, flat in Australia, down 10% in the US.

Emma & Roe grew sales by 20.1%, but same-store sales fell 5.4%.

Total sales for the group, now based in Brisbane, were $A341.5 million ($A326 million for the December 2016 half) – Michael Hill $A331 million ($A317.3 million), Emma & Roe $10.5 million ($A8.75 million). E-commerce sales grew by 71% to $A5.6 million.

Chief executive Phil Taylor said the company was in the final stages of its comprehensive brand review, a management review of the findings.

Attribution: Company release.

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Local interest rate rise depends on US action

ASB Bank’s economists have forecast rises in interest rates toward the end of this year, ahead of an increase in the official cashrate (OCR) in early 2019.

ASB economist Kim Mundy said in the bank’s Home loan rate report, out on Monday, longer-term interest rates could move higher this year as US interest rates lift.

“Heading into 2017, our expectation had been for slightly higher mortgage rates by year-end. Key to this was expectations of higher offshore (US) interest rates & ongoing bank funding challenges. However… current mortgage rates are close to where they were in January 2017 (and some fixed-terms are even lower than they were then!).

“So what happened? Firstly, bank funding challenges were already exerting pressure on mortgage rates at the end of 2016/early 2017. However, increasing domestic deposit growth rates later in 2017 saw some of these pressures ease.

“Secondly, the lift in US interest rates was less straightforward than we had anticipated. Despite the US Federal Reserve lifting the Fed funds rate 3 times in 2017, interest rates actually softened as concern over the pace of US tax reform progress grew.

“Now as we face 2018 we are, once again, expecting interest rates to lift over the year. US interest rates are expected to continue lifting (particularly now that the US tax bill has passed). US interest rates tend to impact New Zealand’s longer-term interest rates and, as a result, we are likely to see this pressure flow through to the 3-year-plus fixed rates.”

The Reserve Bank cut the official cashrate from 2% to 1.75% in November 2016 and has held it there. ASB’s economists expect the Reserve Bank to raise the official cashrate in February 2019 – “and, as the OCR is one factor influencing floating & shorter-term fixed mortgage rates, there is a risk that New Zealand’s shorter-term interest rates start to lift ahead of any OCR increases.”

Attribution: Bank report.

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Warehouse’s “improving trajectory” looks illusory, transformation impacts still to come

The Warehouse Group Ltd said yesterday “encouraging” Christmas trading confirmed its “improving trajectory”.

The first comparison, for the retail group’s main outlets, the Red Sheds, indicated a trajectory that’s negative, but over Christmas was less bad.

The second comparison, for the company’s first half (to the end of January), shows a steep decline in returns – down 22-28%, largely resulting from “a significant accrual for a redesigned incentive programme”.

The word “significant” has no place in a statement like this because it signifies nothing. It commonly amounts to “big effort which should be praised”, but in reality should be read as “Big deal! Tell me when you’ve got something solid to say.” The Warehouse has made no attempt here to quantify the cost of hiring new staff & importing foreign executive expertise.

The company talked a year ago about reorganising, and has since focused on “transformation”.

In yesterday’s announcement, when I got to “strong sell-through of seasonal lines” I knew gobbledegook was going to win over a straightforward tally of performance. The quoted phrase’s context: “Year on Year unit sales show an increase of 5.1% with transactions rising 2.9% in conjunction with strong sell-through of seasonal lines.”

I figure statements like that, which have made it through the chief executive to the board, are indeed a strong indication that transformation is needed, but not quite the one they’re talking about.

The strong sell-through was followed by this comment from group chief executive Nick Grayston: “As expected the move from Hi-Lo to Every Day Low Price (EDLP) in the Warehouse ‘Red Sheds’ coupled with a one-time reduction in ranges and consequent clearance activity has resulted in a reduced Average Selling Price, however margin rates on current products have generally improved, and customers’ reaction to the pricing changes and product improvements have been very positive. Further work is in progress around price elasticity with a view to improving gross margins and the one-off clearance of discontinued products is on track.”

Red Shed Christmas same-store sales were down 2.8%, whereas they were down 4% in the first quarter, the 13 weeks to 29 October.

While Mr Grayston said the Warehouse Stationery ‘Blue Sheds’ were preparing for their peak back-to-school trading season – which is annual – he added: “However, we expect sales to be down about 6.5% at the first half based on softer performance of communications & technology segments, and the one-off impact of the integration of the Blue Sheds’ business onto core Red Sheds operating systems at the start of the financial year.”

Mr Grayston said the technology & appliance retailer Noel Leeming continued to perform strongly and outdoor gear retailer Torpedo7 had been steadily improving all year. Torpedo7 founders Luke Howard-Willis & his father Guy sold a majority stake to The Warehouse in 2013 and exited completely in early 2016.

Moving on from what looks like weak Christmas trading by the Red Sheds, a continuing downturn in the Blue Sheds, no indication of how well Noel Leeming did over Christmas and an indication that The Warehouse hasn’t yet got to grips with a small retail chain it fully acquired in March 2016, Mr Grayston was keen to focus on transformation – but warned not to expect benefits too soon: “While we are all keen to start delivering the benefits of our transformation, we have a long way to go, but these are encouraging signs. H1 trading to date has confirmed for us that our customers like and have responded well to our pricing & product changes. We continue to invest in technology and build out the team to execute the next steps in our change programmes.

“Our forecast for first-half (to the end of January) adjusted net profit from continuing operations for the group is $32-$35 million, which is 22-28% down on the comparative continuing operations performance last year.

“The result for the half includes a significant accrual for a redesigned incentive programme, intended to reward better than expected financial performance along with reinforcing specific behaviours necessary to execute the transformation. It recognises the need to retain staff and recruit top global talent through this rapid period of radical transition. If the second half-year performance fails to deliver on our improved outlook, the accrual will be reversed to profit. If not for the accrual, our financial performance in the first half would be close to last year’s.”

A word from the chair

Warehouse chair Joan Withers added: “Many of the operational impacts on profit performance are transitional in nature and not expected to recur. The Warehouse Group is in the process of a fundamental transformation to improve performance & profitability, which is our key focus for 2018.”

The company will issue its full-year guidance along with the first-half financial results on Thursday 8 March.

Earlier story:
12 January 2017: The Warehouse reorganises

Attribution: Company release.

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Summerset quarterly sales top 200

Retirement village developer & operator Summerset Group Holdings Ltd achieved 200 sales of occupation rights in a quarter for the first time in the 3 months to December.

The 106 new sales matched 4th-quarter sales in 2016, but resales were far above previous quarterly figures in both 2016 & 2017.

The highest previous number of resales over the 2 years was 77 in the June 2016 quarter. In the December 2017 quarter there were 98.

Total sales for the year were up 3.7%, from 658 to 682 – new sales 382 (414 in 2016), resales 300 (244).

Summerset chief executive Julian Cook didn’t comment on the drop in new sales for the year, but said presales & waitlist levels “both continue to track positively.”

2017 sales by quarter & annual totals:
New sales: 97, 82, 97, 106; 382
Resales: 74, 70, 58, 98; 300
Total sales/quarter: 171, 152, 155, 204; 682

2016 sales by quarter & annual totals:
New sales: 75, 108, 125, 106; 414
Resales: 46, 77, 71, 50; 244
Total sales/quarter: 121, 185, 196, 156; 658

Attribution: Company release.

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Australian investors switch loans to owner-occupier status after differential introduced

The Reserve Bank of Australia candidly noted on Friday that housing investors had switched $A61 billion to owner-occupied status after it introduced an interest rate differential between the 2 categories in 2015.

In its financial aggregates for November, the bank said: “Following the introduction of an interest rate differential between housing loans to investors & owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan.

“The net value of switching of loan purpose from investor to owner-occupier is estimated to have been $A61 billion over the period of July 2015-November 2017, of which $A1.2 billion occurred in November 2017.

“These changes are reflected in the level of owner-occupier & investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.”

Link: Reserve Bank of Australia, financial aggregates November 2017

Attribution: Bank release.

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Augusta gets some remodelling for second industrial fund property

Augusta Capital Ltd confirmed its intention to establish an industrial property fund on 22 December, when it entered into an agreement for the new fund to unconditionally acquire the property at 862 Great South Rd, Penrose.

Augusta managing director Mark Francis said the fund would acquire the Penrose property for $19.05 million, with settlement set for 29 March.

The company settled the $44.9 million acquisition of its first fund asset, the Hub industrial property at Seaview in Wellington, on 20 December.

The 2.37ha Penrose property is fully occupied by Graphic Packaging International NZ Ltd (formerly known as Colorpak NZ Ltd), which will surrender the front portion of the property and enter into a new 8-year lease for the rear portion (from completion of certain works in the second half of 2018).

Graphic Packaging is ultimately owned by NYSE-listed Graphic Packaging Holding Co, which produces packaging for consumer products companies.

Mr Francis said the vendor (a private individual) was obliged under the sale & purchase agreement to complete a demolition of the front portion of the site. Once that’s done, the front portion presents various development options for the new industrial fund. The vendor has also agreed to underwrite $12 million of shares in the new fund (secured by a right to set off against the purchase price payable).

Mr Francis said the acquisition reinforced Augusta’s intention for the fund to be weighted towards the Auckland industrial market. He said Augusta was completing due diligence & negotiations on a further 2 Auckland properties.

Timing of the public offering for the new fund will be announced in the New Year.

Earlier stories:
20 December 2017: Augusta settles Hub purchase
13 December 2017: Augusta buys Wellington property as seed for new industrial fund

Attribution: Company release.

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