Devon Funds Morning Note - 28 February 2024

Wednesday 28th February 2024

Building takeover interest

Global

The US indices were mixed on Tuesday, ahead of some key data points over the coming week, including the Personal Consumption Expenditures Index, the Fed's preferred inflation gauge. The Dow fell 0.25% while the S&P500 was up 0.2%. The Nasdaq rose 0.4%. The US 10-year Treasury Yield edged up to 4.3%.

Fed Governor Michelle Bowman said in a speech overnight that the time to cut interest rates “has not arrived yet,” which is consistent with the recent messages coming from the US central bank. Fed Chair Jerome Powell is due to speak to Congress next week, and there will ample economic data to digest before then. A print overnight showed that orders for long-lasting goods declined a more than expected 6% in January, with the driving factor being a big drop in demand for transportation (-16%).

US consumer confidence has also eased on concerns over a potential slowdown in the labour market and uncertainty over the outlook with an election later in the year. Donald Trump is certainly making his voice heard already, and getting a lot of free air time courtesy of the US justice system.

The Conference Board’s Consumer Confidence Index declined to 106.7, which was lower than the downwardly revised 110.9 in January and below estimates for 115.1. Optimists still outnumber pessimists. A pick-up in the housing market may be helping the mood. US home prices increased 6% year on year in January.

US consumers are still spending albeit in a more selective manner. Department chain Macy's reported quarterly revenues that were lower than expectations. The shares though advanced 3% on a plan to close around 150 stores. DIY chain Lowes delivered an earnings beat despite customers taking on fewer home improvement projects. Walmart shares edged higher despite news over the weekend that the Walton family have sold a chunky US$1.5b worth of stock over the weekend at record share price highs. The founding family of the world’s largest retailer still own around 45% of the US$480b company.

Zoom video soared 8% on an earnings beat (shares in the pandemic beneficiary are down over 80% since their 2020 peak), while cruise liners (which in contrast understandably suffered during Covid) sailed higher. Norwegian Cruise Liners jumped 20% after reporting its first profitable year since 2019. Also on the travel front it has been reported that Apple has cancelled plans to build an electric car company to rival Tesla.

Across the Atlantic, European indices were firmly higher, while the FTSE100 in the UK was flat. Medical device giant Smith & Nephew reported revenue growth ahead of forecasts while Barclays bank was higher on plans to sell US$1.1b of credit card debt to Blackstone. There was some good news for cash-strapped consumers, with UK grocery inflation falling to a 23-month low, at 5.3% in February.

Asian markets were mostly in the green. The Nikkei in Japan held around record highs, while the CSI300 in China jumped 1.2%. Japan’s core consumer inflation slowed for a third straight month in January but held at the central bank’s 2% target, keeping alive expectations it will end its negative interest rate policy by April.

New Zealand

The kiwi market eased on Tuesday, with the NZX50 dipping 0.13% to 11,694. EBOS rose 1.4% while retailers Briscoe and KMD Brands weakened again. Ryman dipped 3.2%. Chorus rose 0.13% while Vector dipped on their respective results and Goodman Property gained 1.3% on its announcement (see yesterday’s note). Fletcher Building had a strong session, jumping 2.6% with takeover speculation surfacing following the bid for construction firm CSR across the Tasman.

Heartland Group shares rose 0.85% despite the challenger bank reporting an 22.7% decline in first-half net profit after tax to $37.6m. The company has seen continued strong growth in reverse mortgages (up 18.7% in NZ), along with solid growth in asset and motor finance. Heartland is striving to become a bank in Australia through the acquisition of Challenger Bank. The company sees scope for market share gains and further out, Heartland is looking to achieve an underlying NPAT of $200 million by FY28.

Meridian has reported results this morning, with reported net profit after tax dipping 5% over the half year to $191 million due mainly due to changes in the fair value of hedge instruments. Operating earnings rose 4% to $443 million, driven by higher retail and wholesale sales. Agribusiness and large business segments performed strongly, up 9% and 6% respectively. The company reminded that the outcome of discussions with the Tiwai Point on a potential contract beyond 2024 remains uncertain. Meridian shares are ~2% lower this morning.

Spark New Zealand has announced a 4.8% fall in net profit after tax for the half year to $157m. Reported revenue declined 22% to $1,976 million, while earnings (EBITDAI) fell 49.1% to $530 million. Comparatives were challenging given the TowerCo and Spark Sport transactions last year. Stripping out one off benefits last year, revenue increased 1.3% to $1.976 billion, driven by ongoing strength in mobile, momentum in data centres and high-tech, continued stabilisation in broadband, and a return to growth in cloud.

Management noted that the first half was characterised by challenging economic conditions, and that Spark, while largely resilient to economic downturns, was not immune. The telco sees earnings tailwinds from the ongoing exponential growth in data, businesses digitisation and cloud adoption, and the rapid uptake of generative AI, which is seeing demand for data centre capacity accelerating. The company remains committed to FY24 guidance. Spark shares are ~1% higher this morning.

Vista Group meanwhile has seen full year earnings (EBITDA) surge 25% to $13.3m. Total revenue rose at the cinema software company rose 6% to $143.0m of which $124m is recurring. The company has guided for FY24 revenues of $152m – $157m, and is seeking to be cash flow positive in the fourth quarter. Management noted that the first multi-territory client was live on Vista Cloud, with second half signings including Pathé (France, Netherlands, Belgium, Switzerland, 129 sites), and Major Cineplex (Thailand, 182 sites). The company noted a strong box office, with 2023 takings up 30% in 2023 to US$34b. Vista shares have soared nearly 6% on the open.

We have the RBNZ decision today, with the big decision at 2pm. The good news is that inflation expectations have fallen, tradable inflation is lowering and softening the impact of the non-tradable elements. Retail sales data has been weak. A cut is not expected, and the remaining question is whether we will get another rise in the coming months. Some banks are going the other way - ASB dropped its 18-month fixed mortgage rate by 26bps.

A reduction in interest rates will be well received by kiwi borrowers. Stats NZ reported yesterday that in the year ended June 2023, average mortgage payments increased 27.5%. The weekly average spent on interest payments alone increased 49.9%. Principal repayments were unchanged. One in five households in New Zealand that paid a mortgage (22%) spent 40% or more of their disposable income on housing costs, an increase of 4.2 percentage points.

Australia

The Australian market rose for the fourth session in a row on Tuesday, with the ASX200 gaining 0.13% to 7,663. Sentiment was boosted by the consumer staples sector, which surged 2.15% as Coles delivered a result ahead of expectations. Building products group CSR surged 5% after it agreed to a A$4.5 billion takeover bid from France’s Saint-Gobain. Cement Group Adbri also rose after its board approved a buyout proposal from CRH. Building materials players Reece went even better, soaring 18% on a robust earnings report, with the tradie equipment supplier seeing a strong order backlog and inflationary pressures moderate. On the other side, Johns Lyng Group fell 13% as the construction company reported a drop in first-half profit.

In the energy sector Woodside rose 0.8% as full year profits fell by a less than expected 37% to US$3.32 billion. The oil and gas producer took write-downs on projects in the US and Western Australia. The final dividend of US60 cents was higher than consensus estimates of ~US50 cents, but down from US$1.44 a year ago.

Coles also reported a fall in earnings which was overall well received. First-half net profits fell 8.4% to A$589 million. Sales rose 3% to A$22.27 billion. Sales from continuing operations rose some 6.8% when stripping out its Express convenience stores sold last year. Supermarket price inflation moderated slightly during the period to 3%, and margins contracted to 5.1% from 5.3% a year ago (Woolworths said last week it was running at 6% margins).

The supermarket sector is in the spotlight in Australia, with accusations of “price gouging” in some quarters. A Greens inquiry into grocery prices is scheduled to start next month. The supermarket sector went through a period of supernormal demand during the pandemic, but these tailwinds are moderating, with price inflation coming down, but with costs going up. A challenged economic environment is adding to the pressure on this side of the Tasman – Woolworths has written down the value of its NZ business by $1.6 billion.

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