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P O Box 20034, Bishopdale, Christchurch. 16 SEPTEMBER 2010 Volume 32 No 1

Payout for Flying Winning Job SCF Investors Colours Strategy Done Page2 Page 3 Page 4 Page 5

Massive Impact Rebuilding CHRISTCHURCH QUAKE AND SCF EQUATE TO $5BN INJECTION. Canterbury The 7.1 magnitude earthquake has caused significant damage to Christchurch and the BY WARREN HEAD clean up is only just starting. Listed compa- The only silver lining from the cata- nies most likely to participate in the rebuild strophic Christchurch earthquake will are now being identified. be the cash injection from earthquake Stockbrokers Forsyth Barr say, “The eco- cover that will flow into the city and nomic impact is expected to be two-fold. surrounding region over coming Initially, local businesses will be hit hard as months from the Earthquake economic activity slows. Westpac estimates the short-term income loss to be $300m. Commission and private insurers. Someone has to do the work of rebuilding. The 7.1 magnitude earthquake that Forsyth Barr analysts have touched on some struck Canterbury on 4.9.10 brought key stocks, Fletcher Building (FBU), Steel & extensive damage to infrastructure and Tube (STU) and Opus (OIC). property with an estimated 5% of build- “These companies head the list to ings sustaining damage and 20% of resi- benefit from the rebuild.” dential houses being damaged beyond • FLETCHER BUILDING repair. “It is particularly beneficial for FBU as it The revised estimate by the helps to fill in the FY11 earnings hole and we have upgraded our FY11 EBIT +11.7% to Earthquake Commission (EQC) of the $668.7m,” says Forbar. “ FBU is very well total damage is up to $4bn. placed given its provision of construction While this may produce an aston- An Army cordon during Christchurch’s State of Emergency after the services and materials to both the infra- ishing stimulus over the next two years, 4 September 2010 magnitude 7.1 earthquake. structure and residential sectors.” Forbar there will be uncertainty in how much upgraded their recommendation to BUY. of the Christchurch CBD will actually be as far back as Budget 2008. SCF has and push bond rates up at upcoming • STEEL & TUBE rebuilt because build costs may exceed “STU will also benefit from the rebuilding some excellent assets alongside its ‘bad tenders. phase of the infrastructure assets and com- the demand for high end lease costs. bank’ of impaired property loans. O’Donovan added, “The Government “The disruption to Christchurch has mercial buildings and this will help to After an asset sell down the net cost is liable for repairing its own structures underpin the increase in earnings we had been immense,” said Westpac chief to the Crown may be as low as $600m. in Christchurch. On top of this, central already factored into our FY11 forecasts. economist Brendan O’Donovan. The liquids exist to cover the Crown’s government has historically promised to There is now a strong possibility that our He believes the local nature of the earthquake costs. Under its legal struc- cover 60% of the expense of restoring earnings may need to be revised higher, but event, and a high level of preparedness ture the EQC can progressively trade local government infrastructure, some of not to the same extent as FBU. for it, should keep the implications for investments, first from holdings in NZ which is uninsurable. • OPUS INTERNATIONAL financial markets fairly limited. Government Treasury bills (in which it “The NZIER paper on the effects of a “OIC is well placed to provide engineering “The scope of the disaster is manage- services in the rebuild of infrastructure and holds around $250m of liquid assets) major Wellington earthquake put the cost commercial buildings. Our FY11 EBIT is up able, with the total damage bill currently and then on global bond markets. The of restoring some local infrastructure at estimated to be 1% of GDP. The critical 11.0% to $31.9m. However, we see this as a EQC holds around $5bn direct assets $190m. Christchurch City Council’s 2009 short-term one-off benefit, hence the impact infrastructure of the airport, port, tele- and has reserves up to $15bn. This annual report puts the value of infra- on our valuation is minimal.” communications and payments systems strength will enable it to free capital for structure assets at $3.1bn. With initial • TOWER are operational.” use as payments. reports suggesting that the worst of the Tower (TWR) and Pike River (PRC) are not Listed companies sent a salvo of Westpac chief economist Brendan damage is contained to the central city greatly affected TWR insurance losses are quake updates to NZX. The most O’Donovan said, “The fiscal costs and that in most cases repair and mainte- capped at $5.0m ($3.5m after-tax, 0.7cps) severely affected is Lyttelton Port with arising from the Canterbury earthquake nance will be required rather than full with re-insurance arrangements covering the damage to the 810m concrete Cashin rest. Overseas experience suggests that come from a number of sources. The replacement, a cost of around $200m longer term, TWR should benefit from an Quay container berth. Major property EQC covers the cost of housing repairs would seem a reasonable guesstimate. owners Goodman Property Trust, The increase in premiums and more people and rebuilding up to a limit of $100,000 “There will be further effects from looking to insure themselves or increase National Property Trust, Kiwi Income plus GST; initial estimates put the EQC’s increased health and welfare spending insurance cover. Property Trust appear to have come liability at around $1bn. including ACC claims, housing and • PIKE RIVER COAL through well. Retailers Smiths City, “The EQC had $5.6bn of assets as at accommodation benefits and from “PRC was due to load its second coal ship- Kathmandu, Postie Plus, Briscoe, The June 2009, of which about 70% was in decreased tax revenue in the near term. ment on the day of the quake. The shipment Warehouse all resumed full operations, NZ Government securities and bank However, there may be a boost to was only delayed by a day due to damage at some after temporary closures. deposits and 30% in global equities. The revenue over the medium term as con- Lyttelton Port (LPC) and the train line from The payments from the EQC and the West Coast has reopened. Future ship- EQC has the option to sell the securities struction activity ramps up.” ments may be affected if LPC’s coal-handling from private insurance companies will in the market, or put them back to the As at May 2010, Core Crown debt lead to unexpected work for building, capacity is substantially reduced as after- Government in exchange for cash — was $52.6bn, or 28% of GDP. Thus, a shocks have seen LPC trigger its force cartage, plumbing, electrical and IT though this in turn could pressure the cost to the Government of as much as majeure clauses.” companies that were looking at a thin Government’s short-term cash position, Continued on page 2 6-12 months ahead. The stimulus from the EQC and insurers will come on top of the $800m to $1bn in payouts by The Treasury Acquisition a scale step for Ecoya under the Crown Deposit Guarantee Scheme to debenture holders, preference Ecoya is buying 100% of Trilogy Natural Products, an established NZ busi- It appears the Trilogy partners saw their business as a natural fit with shareholders and some preferred parties ness in natural skincare products, co-founded by sisters Sarah Gibbs and Ecoya approached Ross. The two companies have different market following the tumble of South Catherine de Groot in 2002 in Wellington. strengths and there are distribution synergies. Canterbury Finance. The $10m deal is unconditional with settlement on 17.9.10. It is being “Trilogy is a leader in Australasia and it shares similar views to us on In total Canterbury may receive close funded by the raising of new equity and debt. Ecoya executive chairman natural ingredients and the emerging opportunities in the affordable to $3bn of economic stimulus. As a Geoff Ross says the purchase will have no impact on the funds raised for luxury category,” says Ross. “Our respective cultures also have much in the Ecoya brand in this year’s IPO. major Rugby World Cup venue in a common. We can see Ecoya investors being happy with the move, even though it “Trilogy is very active in the UK and Ireland — it is now in selected year’s time the ‘Garden City’ is now a will be dilutionary. It should accelerate Ecoya towards earlier profitability. Boots stores for example — but has no presence in the US. Ecoya hasn’t key priority for resuscitation and In the December 2009 year Trilogy had revenues of $9.3m and is profit- entered the UK yet, but is well underway in the US.” renewal . . . the race to restore the city’s able. Trilogy’s home market strength is in New Zealand. Ecoya’s is in CBD has begun. Ross says the acquisition will reduce Ecoya’s projected losses this year Australia, where it has recently secured space in David Jones department The funds are no strain for either SCF and the combined entity is expected to be profitable in FY12. stores. Trilogy sells through Myer. or the earthquake. Government had Ross says the addition of a brand of skincare products to Ecoya’s Ross says Ecoya is confident of meeting its prospectus revenue fore- allowed for $900m to cover exposure to range of home fragrance and body and bath products is a natural pro- cast with Ecoya currently trading to plan and sales so far for the current the entire finance company sector from gression for the company and one it has been considering since inception.  Continued on page 5

HOT INVESTMENT NEWS ON WWW.HEADLINER.CO.NZ. PREMIUM MEMBERSHIP FOR THE MAGAZINE + WEBSITE top tier Broad payout for SCF investors Without finding the elusive major investor so urgently needed to covenants under the debenture trust deed SCF knew it was out of effect a corporate rescue, South Canterbury Finance found itself time. staring at an inevitable receivership. The trustee has appointed Kerryn Downey and William Black of That risk was constant throughout the past 8 months during McGrathNicol as receivers of the South Canterbury Finance charging which the emergency management team, led by former investment group. The Trustee and The Treasury to put in place an arrange- banker Sandy Maier, sought to roll over existing debt, regain the ment for debenture, deposit and bond holders to be paid their full support of household investors and find buyers for major assets. entitlement to principal and interest regardless of their eligibility SCF requested Trustees Executors to appoint a receiver in under the Crown Retail Deposit Guarantee Scheme. respect of the whole of its undertaking and assets and Finance Bondholders are the big winners. They punted (and possibly Minister Bill English cancelled a trip to South East Asia to deal shorted) on bonds where the yields soared to 30-40% in recent with the fall-out from the failure of NZ’s 2nd biggest finance oper- weeks as the recapitalisation deadline loomed. Yet the punt taken ation by bond-holders appears to have come off spectacularly with SCF has 35,000 depositors and debenture holders. In one of the $300m of government funds expected to be paid to them biggest cash payouts of the GFC-meltdown of the finance sector up One surprise was that prior charges totalling around $150m to about $1.5bn will be paid out under the Government’s guar- will also be repaid. But by taking these investors over the Crown Sandy Maier (pictured at the media briefing on antee scheme. The payout was widened to include preference share has a clear run at sorting the asset base. The loans included some SCF’s receivership) went down to the wire. holders and those with preferred charges. The shareholders, led by $100m advanced by PGC’s Torchlight Fund, managed by George its famous elderly millionaire Allan Hubbard who owned Southbury Kerr, renownd for his financial shrewdness and one of the winners with an appropriate capital structure and focused management Corporation,will lose their entire investment. on the day. team. Maier said that the statutory management of Hubbard busi- The debate rages on about whether the Crown’s Retail Deposit “We had largely achieved that goal as well as taking the deci- nesses other than SCF “technically had no impact”. Guarantee Scheme is equitable (to investors in other assets, or to sions to deal with the other elements of the business that are “Having said that the brand connection is a powerful one and the taxpayer) and allowed an inevitable event to only be post- non-performing. Since December last year the company has people became confused as to the relationship.” This made it poned. Possibly, it’s argued, it was flawed from the outset. Well, appointed a new independent chairman and directors and a new harder for SCF to continue to bring in the essential funds flow that that’s all fair comment: life is indeed unfair and the basis of our senior management team to take the business forward. was whittling down the so-called “wall of maturities” looming from very existence is flawed. Ask anyone in Christchurch. “Non-core and non-performing assets have been identified and October. Back in March the liquidity situation was very bleak with We have to remember that the then Labour Government was an active recovery programme has made considerable progress in $1bn of maturities to reduce. Maier said coaxing debenture holders forced into rushing out a guarantee scheme because Australia had realising those assets corralled in the ‘bad bank’.” to rollover by offering a top rate of 8% and this was reduced to shoved one in place post-Lehman Bros collapse. Would funds have In essence, the receivership triggers a ‘cash injection’ back into under $300m. “But now they’ve gone across to the Crown.” flowed out of NZ financial institutions and into Australian banks? the economy and some 60% of that will go to the South Island. Throughout 2010 Maier led a non-stop campaign to right the No government could have taken the risk it wouldn’t have hap- Other financial institutions have been pursuing the SF payouts for company and he has given all in the fight to save the historic pened. The Crown will now achieve a lower cost of funding (effec- re-investment. company. He built two separate teams. tively the rate of interest on government stock) than the 8% being SCF’s impact could exceed $1.5bn but the net cost to Treasury One team for ‘a good bank’, which has loans out to the small- paid on debenture deposits by SCF. rests in the potential size of the financial recoveries that the to-medium business market and rural borrowers. Negotiations to inject fresh capital into the business could not receivers may achieve from sale of SCF’s assets. One for the ‘bad bank’ holding all of the non-performing be completed by the 31.8.10 deadline. But at no time, Maier told a loans funded with massive liquidity pouring in from Mums and business media briefing, did he seek to go beyond that date. It was DEAL IMPOSSIBLE Dads investors from mid-decade. Under the previous manage- the point at which the mess had to be crystallized. Why couldn’t SCF get a recapitalisation deal completed? Partly ment SCF began funding high-risk developers, offering fully capi- “Receivership is disappointing — and we were working very because of the challenges facing the company, which brought forth talised debt, second mortgages, and even no recourse loans. hard up to the last minute to avoid that outcome,” he said. “At hopelessly discounted offers mostly from opportunists or they Mostly to the no-necktie big noters that were to be hardest hit the heart of South Canterbury Finance there is a sound business were so heavily conditioned as to be non-viable. by the GFC. supporting many successful small and medium-sized enterprises. Maier said there were several parties that emerged from a There was speculation of an overseas investor interested in the That is the core business of South Canterbury Finance and a real longer list of about 15 possible investors. “We couldn’t agree on ‘good’ loans which represent about $700m. But unable to complete contributor to the economic wellbeing of that sector of the price and terms in the time-frame. You don’t get there (with a a recapitalisation and restructure and thus unable to confirm to economy.” deadline hanging over your head) . . . and there were some that its trustee, Trustees Executors, in accordance with the terms of its Maier says much of the focus in the last nine months has been wanted to be paid to conduct due diligence.” debenture trust deed, that it was compliant with various financial on re-establishing that element of the business as the ‘good bank’,  Continued on page 7

quake — which was of comparable magni- “The overall effect of an earthquake on Depression, as residents borrowed for recon- Massive Stimulus tude to the Canterbury quake — found that GDP partly depends on when it occurs in the struction.” Continued from page 1 57% of businesses suffered some degree of economic cycle,” says O’Donovan. physical damage; about 22% of premises suf- “When the economy is running at full Inflation $1.5bn appears manageable, said O’Donovan. Earthquakes tend to be inflationary, he warns. fered structural damage, although ultimately speed and supply is the main constraint on Until 2001 the Natural Disaster Fund was “This quake is likely to cause inflation in the only 2% were condemned. growth, a natural disaster could have a small invested in New Zealand fixed interest secu- Canterbury region, particularly in construc- “The median loss was about NZ$12,000 in or even negative impact on GDP. But when rities such as government stock. tion costs. There could also be a spillover to current price terms, reflecting the fact that the economy is running below capacity — as In late 2001 there was an addition to construction costs nationwide, as limited most firms were small (though there were a is the case today, and especially in the con- EQC’s investment portfolio when, following resources are diverted to Canterbury. few very large losses; the largest in the struction sector — the temporary boost to a ministerial direction, the Commission However, the impact on national CPI will survey was $35m). More than half had to demand can be a substantial positive for started to invest in international equities. probably be small. For example, a 20% close temporarily, even if only for a few days; GDP.” The objective of this move was to ensure increase in Canterbury’s construction costs the most common reason given was Although the 1931 Napier earthquake the Commission holds assets outside the would boost national CPI by just 0.13%. employees unable to get to work (e.g. with occurred amid the Great Depression and region that will be directly affected by a “The RBNZ is explicitly required to look schools closed, many parents would have to declining national output, the local economy major natural disaster. Investment in equities through a short-term inflation spike resulting stay at home). Damage to the owner’s home actually grew in the years after the recession, is kept within a range of 27-33% of the from a natural disaster, and will probably was another major reason — again reflecting and local wages rose, on reconstruction Commission’s total portfolio. focus its monetary policy deliberations on the number of small owner-operated firms.” activity. Westpac notes that the affected region inflation ex-Canterbury for the next year or Modelling of the impact of a major “Of course, events such as natural disas- accounts for roughly 13% of New Zealand’s so. However, as always, the RBNZ is charged Wellington earthquake — itself based on the ters highlight one of the shortfalls of GDP as population and economic activity. with preventing any second-round effects on experience of the 1931 Napier quake — esti- a measure of economic wellbeing — it only Christchurch is New Zealand’s second-largest nationwide inflation.” manufacturing centre, and the Canterbury mated that the short-term income loss would measures the flow of activity, rather than region is a major exporter of meat and dairy be equivalent to about 15% of the capital loss. changes in the stock of wealth. The national Financial markets products. Applying the same ratio would put the short- balance sheet has undoubtedly been weak- The RBNZ will seek to shore up confidence in Lyttleton port is the point of egress for term income loss from the Canterbury earth- ened by this event, no matter how the costs the first instance, so any remaining chance of most of New Zealand’s coal exports. A raft of quake at $300m, or 0.2% of national GDP. and benefits are distributed. A substantial an OCR hike in the September Monetary companies reported to NZX varying degrees “Economic confidence is likely to take a boost to GDP is needed just to get the capital Policy Statement has been eliminated. of exposure from minimal damage to some short-term hit. Households are liable for at stock back to where it was before the earth- “Markets will probably factor in a lesser disruption and Lyttelton Port reports ‘tens of least the excess on their insured property, and quake.” chance of hikes at other meetings this year. The millions of dollar of damage’ to its wharves, a few households and businesses may suffer short end of the yield curve can be expected to with the 810m Cashin Quay, a container uninsured losses. This could worsen already- Debt levels/current account deficit fall. Our analysis suggests that long-term rates wharf, breaking its back. tatty balance sheets.” Private insurers have international reinsur- should rise on the fiscal cost of reconstruction. ance contracts in place — as does the EQC, Therefore, the yield curve should steepen. Economic activity — short term Economic activity — medium term though they will only be triggered if its total “We expect the NZ dollar to weaken in the O’Donovan says, “Regional economic activity “The local economy is likely to get a substan- liability exceeds $1.5bn, which is not near term. However, given that the economic will be harmed in the short run — the entire tial boost from reconstruction activity that expected to be the case. Triggering payment impact of the earthquake will be fairly con- CBD and most suburban shops remain will be much larger than the initial income on these contracts could result in a short- tained, any exchange rate impact should be closed, as do schools, universities and other loss,” says O’Donovan. “The rebuilding term improvement in the services balance of short-lived.” institutions. work, if it does amount to $2bn, would be the current account. NZD/USD was down 30pts to 0.7190 “There has been damage to at least one equivalent to 26% of New Zealand’s total “Some of this would be offset by a deterio- when the local market opened on the dairy manufacturing plant, although it is annual construction expenditure. ration in the goods trade balance, as many Monday after the earthquake. expected to return to normal operation within “This will boost national GDP by far more replacement items are imported over the next Some sources tell us to expect a strong cur- days. There is sure to be as-yet unreported than the initial income loss, with a corre- couple of years. rency as earthquake recoveries flow from damage to productive capacity elsewhere. sponding let-down once the reconstruction “There was an increase in debt following international re-assurance companies or local “A survey of the 1994 Los Angeles earth- boom ends. the 1931 Napier earthquake, despite the Great insurance companies.

Managing Editor: Warren Head. 8 Sheffield Crescent, P.O. Box 3762, Christchurch, New Zealand PORTFOLIO COMMENT Editorial: fax (03) 365 4255. E-mail: [email protected] • Fletcher Building $8.25 • Pyne Gould Corporation. 42c.PGC An MG Publications magazine . Forsyth Advertising: John Register (03) 357 0476. Barr analysts estimate FBU may gain a is refocusing lending back to core con- Heather Driver (09) 360 1026, fax (09) 360 1028, E-mail: [email protected] 20% share of the materials and con- sumer and commercial sectors and Production: [email protected] struction work emanating from the transforming itself into a financial Subscriptions: FREEPOST 5003, P O Box 20034, Christchurch. Freephone 0800 64 96 96 Chch earthquake, in-filling the intermediary. In its merger (still TBC) E-mail: [email protected] looming shortfall in building activity with two building societies it will be Copyright 1979-2010. All rights reserved. No part of this work may be reproduced or copied in any form or by any means (graphic, elec- in GY11 and high plant utilisation in top-dog with an estimated stake of tronic or mechanical, including photocopying, recording, taping, or information and retrieval systems) without the written permission of the publisher, “Mercantile Gazette Marketing Ltd”, P.O. Box 3762, Christchurch. “The Headliner” is published and circulated 24 times a year. All cement and steel. 70%. information is provided in good faith with all possible care and attention given to its preparation. Whilst the information is derived from • Pike River Coal $1.06 Gordon Ward’s • The Warehouse $3.70. With sales sources believed to have been accurate and reliable, no guarantee of accuracy can be given and opinions are subject to change without below forecast and gross margin down notice. Mercantile Gazette Marketing Ltd, its directors and employees do not accept liability for the results of any actions taken or not taken departure has caused a price blip just on the basis of information in the newsletter, or for any errors or omissions contained herein either to matters of judgement or fact. Those ahead of hydro mining starting. Craigs in the 2nd half, a 90% div payout ratio acting upon the information and recommendations do so entirely at their own risk. Mercantile Gazette Marketing Ltd and/or their directors see hydro mining as a key price cata- and 5c special div are the only current and employees may, from time to time, have financial interests in respect of some or all of the matters discussed. In accordance with the provisions of the Securities Markets Act 1988 and the Securities Markets (Investment Advisers and Brokers) Regulations 2007, disclosure lyst. They forecast $73.6m EBITDA for positives. With outlook cautious, ana- statements will be available free of charge from any external adviser or broker quoted in The Headliner or providing a column to the publi- FY11 and $212.4m in FY12, assuming lysts hedge and go no further than cation. Our full terms and conditions are posted on www.headliner.co.nz. Typeset by MG Publications and printed for the proprietors, Hold. Mercantile Gazette Marketing Ltd, Christchurch, by Guardian Print, Ashburton. International standard serial number 0110-9790. sustained global hard coal prices.

Page 2 “The Headliner” 16 SEPTEMBER 2010 RESULTS REVIEW

KEY NOTES Flying colours for Air NZ Weak demand a major challenge but Air NZ has come through the GFC in great shape. A drop in normalised profit of 22% would usually tion in yield and a 4.7% demand decline, measured in Alliance aggreement with Virgin Blue gets thumbs not be well received by the market, analysts and revenue per passenger kilometres. Fyfe says overall down by Australia. commentators, but Air New Zealand’s (NZX: AIR) capacity was reduced by 8% in response to the lower normalised profit of $92m is the excep- demand. The strength of the NZD reduced Yield growth likely to continue. tion to the rule. passenger revenue by $79m. The result was in line with analysts’ FY10 cargo revenue of $255m is after this, which when combined had a net negative effect forecasts and while the result was down excluding the $103m contribution from the of $250m compared to FY09. on FY09 it represented a strong perform- freighter aircraft which ceased operation in Net cash generated from operating activities, prior ance given the deterioration in pas- March 09 and the impact of foreign to the impact of the rollover of short-dated forex con- senger demand and the relative per- exchange was marginally ahead of FY09. tracts, was strong at $471m, an increase of $116m or formance of other airlines over the past Volumes improved in 2H10, especially in 33% on FY09. year. the Chinese and Australian markets. Net gearing, including capitalised operating leases, The result would also normally not Contract services revenue, including deteriorated 2.3% from 45.0% as at FY09 to 47.3% for herald a turnaround in the trading envi- engineering, contract handling and FY10. ronment but again this is the exception training revenue, increased by $4m prior to Fyfe says weak demand has been a major challenge with the trading performance and forex. in 2010 as economic recovery from the global financial outlook for AIR signalling a possible Forex hedging gains for FY10 were crisis has been slow and difficult to predict. “Air New sharp improvement in earnings over the $12m, against $375m in FY09, resulting in a Zealand’s ability to adapt to changing demand has coming years. $363m year-on-year reduction in benefit. again been a key factor of our continued profitability. An improved outlook for global Air nz CEO rob fyfe The stronger NZD resulted in a net forex “Yields in the second half of the 2010 financial year tourism, fleet flexibility and a strong says the airline has benefit of $113m on the translation of improved 3% on the first half, despite the negative product offering should see earnings significant domestic foreign revenues and costs. impact of a stronger NZD. We expect this growth to continue to improve over the next growth plans. Forex hedging effects more than offset continue into the 2011 financial year.” couple of years, receiving a timely boost from the Rugby World Cup in September and October 2011. The withdrawal of Pacific Blue from the NZ WHAT BROKERS SAY domestic market will also provide a boost to AIR’s load factors. AIR CEO Rob Fyfe says the company’s services First NZ Capital View: Forbar estimate that long-haul revenue fell 17% to between Auckland, Wellington, Christchurch, $1.5bn, based on long-haul pax being down 7%, capacity Queenstown and Dunedin have experienced a steady “Our valuation declined slightly to NZ$1.67 from NZ$1.69 down 8.5% and yields down 10.7%. “The critical path for AIR required it to have the fleet flexibility to match the increase in demand over recent months and this has and we have also decreased our 12-month target price to NZ$1.50 (previously NZ$1.52),” says FNZC. declining demand profile, which enabled AIR to increase given the airline confidence to add capacity back into They have amended their forecasts slightly and now load factors by 1.5% to 83.1% and remain profitable.” these markets. forecast NZ$157m normalised PBUT in FY11 (previously Forbar estimates short-haul revenues declined 7% to “We have significant growth plans for our domestic NZ$158m), although within that forecast they have $1.8bn, based on the net impact from its domestic and jet operation with capacity increasing by 8% progres- increased passenger revenue (primarily from domestic NZ) Tasman / Pacific Island services, which collectively increased sively from September, the equivalent of one addi- offset by higher fuel costs as consumption is now antici- pax by 7%, while yields were down by 5.4%. “AIR’s domestic tional Boeing 737 aircraft.” pated to be higher with the increased domestic and RPKs (Revenue Passenger Kilometres) decreased by 1.6% Fyfe says further capacity will be available with the Tasman capacity. and capacity was cut by 7.2%, pushing load factors up 4.5% arrival of the first new Airbus A320 aircraft in FNZC says AIR remains relatively inexpensive compared to 79.9%. “We believe AIR is through the worst of the negative February 2011. to its peers and also where it has historically traded. “With upside from the exit of Pacific Blue, the proposed alliance impact from the global financial crisis (GFC) and can confi- AIR’s network reach and sales strength in Australia with VBA and also improving demand conditions we reit- dently begin to plan for an improvement in earnings out to will also be boosted by the proposed alliance agree- erate our OUTPERFORM rating. FY12,” says Mercer. “This is based on view that global ment with Virgin Blue to align their businesses on the FNZC says the aviation industry is clearly not out of the tourism is making a modest recovery and for NZ, the 2011 Tasman through a code sharing and revenue allocation woods yet with the focus likely to continue to be on yield Rugby World Cup will add a timely boost to demand.” agreement. recovery over the next six months, especially now with the Forbar have slightly lowered their normalised profit “This combination would provide a greatly re-introduction of capacity. forecasts for FY11 by $4.5m to $147.6m and by $5.1m for enhanced offering to our customers that would stimu- “We assume short-haul yields rise 3% in FY11 (they FY12 to $225.7m. Both well ahead of the FY10 result and late demand and in turn lead to more passengers were down 0.2% in July) and long-haul to rise by 6% (up consistent with Forbar’s view of an improving market envi- ronment and an increase in seat capacity with the arrival flying with the alliance carriers,” says Fyfe. 11.6% in July),” says FNZC. “The monthly operating statis- tics are likely to be the key catalyst in confirming our fore- of new aircraft. The deal was dealt a blow last week with a draft cast yield improvement. “We have increased our dividend forecast for FY11 by decision by the Australian competition and Consumer “In setting our 12-month target price of NZ$1.50 we 2.5c to 9.0cps, reflecting the slight increase in FY10 divi- Commission declining authorisation for the alliance. continue to apply a 10% discount to our composite valua- dend to 7c, but we have left our FY12 dividend forecast of The trans-Tasman market accounts for more than tion (NZ$1.67) to reflect, in particular, the continued 11c unchanged (based on a 50% dividend payout). 20% of all of AIR’s flying making it critical for AIR to uncertainty around demand improvement given global eco- “AIR has come through the challenges of the past compete effectively. nomic conditions.” couple of years in great shape and has remained profit- Passengers on trans-Tasman flights had their check- able,” says Mercer. “The key comparative strength of AIR in times cut significantly with the introduction of has been its ability to adjust its product, capacity and Forbar view pricing to reflect the rapidly changing demand patterns of Kiosk check-in in June 2010. There are 18 self-service passengers and the increased volatility of fuel costs. kiosks in the economy check-in area, and six new The last 12 months have put national carrier Air New “The outlook for AIR has already improved and with kiosks in the premium check-in area at Auckland Zealand’s (NZX: AIR) strategy of being nimble and flexible higher planned capacity and improved yields already occur- Airport. to changing conditions to the test, with the airline coming ring on its long-haul routes, we are forecasting AIR’s earn- Fyfe says that while stabilising fuel prices and through it “brilliantly”, says Forsyth Barr analyst Rob ings to increase sharply over the next couple of years.” reduced operating costs provided some relief, reduced Mercer. Mercer says AIR has kept its product and pricing initia- demand combined with a fall in ticket prices signifi- AIR’s reported FY10 normalised profit of $92m was in tives ahead of its competitors throughout the downturn cantly reduced passenger revenue. line with Forbar’s forecast of $95m, and Mercer says it was and now that the outlook has improved there is scope for a “very good result” given the deterioration in passenger FY10 operating revenue fell by $563m or 12% on it to leverage its superior market position with FY12 on demand and the relative performance of other airlines. course to set a record reported profit in excess of $200m. FY09 to $4.0bn. Excluding the unfavourable impact of More importantly, he says, the trading performance and “Our DCF valuation is 1.72 and because we have a the strengthening NZD and the discontinued freighter outlook have improved for AIR implying a sharp improve- favourable near-term outlook for AIR and out to FY12, we operations, operating revenue was down 8%. ment in earnings over the next couple of years. have maintained our BUY recommendation.” Passenger revenue fell $429m, due to a 7.1% reduc- It s great business as usual. An investment in the right dairy farm with minimal or no debt is still one of the safest and most profitable investments you can make.

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“The Headliner” 16 SEPTEMBER 2010 Page 3 results review

Delegat’s Wine Trading FY10 Result Winning strategy for Wine Trading P&L FY09 FY10 Change ($m)

Wine Sales 223.8 221.1 -2.7 Oyster Bay brand COGS 108.4 106.2 -2.2 Wine Trading Gross Profit 115.4 114.9 -0.5 There is now no doubt whatsoever that Delegat’s Operating Costs 62.8 71.4 +8.6 Group’s efforts to promote the Oyster Bay brand globally amount to a winning strategy. Wine Trading EBITDA 52.6 43.5 -9.1 The group has a single brand export wine strategy, which has enabled it to maintain relatively stable Depreciation 11.8 10.1 -1.7 export prices in local dollar terms in key markets Wine Trading EBIT 40.8 33.4 -7.4 such as the UK, Australia, Canada and the US. The strategy for FY11 is to lower case volumes Interest Tax 18.1 14.5 -3.6 (from 1.95 million cases to 1.75 million) while increasing the average cash price to a targeted $122 a Wine Trading NPAT 22.7 18.9 -3.8 case. Source: Forsyth Barr Delegat’s reported a FY10 trading profit of $18.9m, which was held to a 16.7% decline on FY09, despite a global recession and despite very tough times for NZ KEY NOTES wines generally. The entire NZ wine export industry managed a 5% Excess in global wine exports tests lift in the value of wine exports at $1.04bn but profit- strength of the Oyster Bay brand . . . ability is falling. Fortunately, in the sense of a self- which wins with stellar sales. correction, the 2010 vintage is down by 7%. TNZ Export cash volumes to be cut back Winegrowers chairman Stuart Smith says this is “a Jim Delegat Leaves the market dumbfounded but higher price of $122/case is the critically important step in rebalancing the sector’s once again. supply demand balance.” objective. Broking analysts regard Delegat’s result as better ments are causing an unnecessary blurring of the role Very good operating profit. Dividend than expected. A final and full-year dividend of 8cps of accounting profit,” says Mercer. “By making paid. puts Delegat’s shares on a gross yield of 7%. adjustments to ‘fair value’ of asset and liabilities and Although Jim Delegat has held an unyielding posi- then booking them through the P&L account, the tion that the company was well placed to come blended profit is misleading. In FY09, it overstated Delegat’s have reviewed the UK position and through the financial crisis in good shape, the market the underlying profitability and in FY10 it under- decided to cut back volumes and push a price has been nervous for months. As a result, at $1.67 the stated it. increase through (up to £1 per bottle. Orders have shares are selling on a normalised price earnings ratio ‘’While we are all in favour of the accounts making come in for Christmas and as far out as Easter 2011 at of 8.9x, well below market median. reverence to inappropriate valuations on the balance the higher price. We could do the numbers on the reported profit sheet, these should be marked down as abnormal The strongest market for Delegat’s was North which was -63% at $11m but that is to take a quite adjustments and not feature at all in the actual America with case sales increasing by 76% from distorted view because it is impacted by the (non- trading results.” 203,000 to 357,000 and it should be able to leverage cash) adjustments under NZ-IFRS to fair value. In All in all the trading results confirm a strong FY10 profitability on further growth in volumes. fact, it is rubbish and we know readers are concerned result. Over the year a world wide excess of wine has Jim Delegat says the long-term strategy is to lead at the IFRS effects. sent wine prices plummeting. “Delegates is a dif- the New Zealand category growth and establish Market analysts agree. Rob Mercer, of Forsyth Barr, ferent wine company to the norm,” says Mercer. “It Oyster Bay as one of the world’s great Super says the IFRS adjustments “quite frankly are mis- has built an export business on selling just four SKUs Premium wine brands. “We have made significant leading”. (Sauvignon Blanc, Chardonnay, Pinot Noir and progress towards our strategic goal over the last To help reconcile the underlying trading profita- Merlot) and over the past year it added a fifth decade and have achieved some notable milestones bility of the wine business, Delegat’s produced (Sparkling Wine). during the 2010 financial year, including sales volume trading result summary (see table). “This compares to other wine companies exporting growth of 76% in North America and the establish- Based on this, Delegat’s FY10 trading net profit multiple labels and varietals with in excess of 20 ment of in-market sales teams in Canada and New after tax declined by $3.8m to $18.9m. “Given the SKUs,” says Mercer. (SKU= Stock Keeping Unit). Zealand.” challenges the NZ wine industry faced over the past In FY10, Delegat’s case volumes increased by 12% Delegat’s acknowledges that the New Zealand year, this is a very food result and demonstrates the to 1.95 million cases vs. 1.74 million in FY09. wine industry faces challenges with the supply imbal- underlying strength of DGL’s export wine business,” “Impressively, the average case price only fell by 10% ance which is driving low price bulk wine exports said Mercer. from $125 to $113/case, of which over half of this and the increasing prevalence of retailer’s private Forsyth Barr reconciled DSL’s normalised profit of decrease was due to the appreciation of the NZ dollar label wines. The industry also faces significant head- $18.9m and its reported profit of $11.1m. “In FY09 the vs. the GB pound and US dollar,” says Mercer. “To winds in the form of: cumulative pre-tax impact from IFRS-related adjust- sell 12% more volume and only lose 10% on the • An uncertain and slow recovery from the global ments to fair value of biological assets/produce and average case price was an extraordinary effort.” recession. other adjustments, boosted its pre-tax profit by The Australasian wine glut has impacted open • Sustained weakness in key export market curren- +$12.2m, whereas the reverse has occurred in FY10 sales with case volumes down 12% to 721,000. cies, particularly the Pound Sterling and Euro. with a negative impact of -$14.2m. Discounting at deeper levels has existed for many • Increasing duties and sales taxes on wine and “We have a major concern that the IFRS adjust- months. alcohol, particularly in the United Kingdom.

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Page 4 “The Headliner” 16 SEPTEMBER 2010 annual meetings resources RAKON DARES TO DISCUSS Job done when Pike River THE SHARE PRICE turns on hydro hose There have been many surprises from $300m in equity and debt to fund the Pike River Coal over the past few years start-up of probably the most advanced If you’re a share trader the chances are but none as unexpected as the news coal mine in the world and an out- you’ve probably sold your holding in that Gordon Ward, who has been CEO standing environmental achievement at electronics manufacturer Rakon. Judging and managing director of the company that. from comments at the annual meeting since May 2007, will leave PRC with The start-up of the hydro-mining you won’t be missed. effect from 1.10.10 operations is now imminent and there- Those who are longer term in their Ward has led Pike River from its after PRC will be ramping up to full investment horizon are being undeniably initial conceptual design 14 years ago production. Roadways are complete, stoical. and is regarded as one of and hydro infrastructure is Rakon’s results for the March FY10 the sharpest and most almost complete. With year were an after tax loss of $5.4m with a articulate of NZX 50 CEOs. monitors installed it will positive EBITDA of $4.3m. “This result He is among the best com- be all go. Craigs puts pos- was forced upon us by the Global municators and certainly sible steady state produc- Financial Crisis as almost all of our cus- also one of the best battlers tion at 920kt. tomers adjusted to life under a new fiscal in his specialist role of “The success of the regime,” Rakon chairman Brian Mogridge the economic values that flow. Rakon has taking resource related pressure hose is a key told last Friday’s annual meeting. a very sound long game and that hasn’t enterprises through pro- price catalyst,” says Craigs. “While last year produced a financial altered in fact it has improved given the tracted development work Prior to the latest news result we don’t wish to repeat, it was serious stress testing of the past 2 years. to a successful outcome. their BUY signal carried a something of a hiccough along our “The only thing that has altered has He was Finance $1.39 target price. planned path, caused by factors beyond been our share price and while we would Manager with NZ Oil & Ward told Headliner that our control.” prefer that to be more representative of Gas for many years and the start up of the hydro- He then showed the meeting a graph of the value in our plan we are realistic about led its creation of Pike mining would be “like a EBITDA results and said Rakon is moving the world equity markets current status.” River Coal as a subsidiary Gordon Ward has led dream come true” and back to the growth path emphasized at He said Rakon’s directors and team operation, then as a stan- Pike River from its with the mine project on the time of the 2006 flotation and 3 years members own nearly 40% of the company dalone business funded by initial conceptual the home path it was ago when it purchased FCP in Europe. and have great confidence in its plans and its IPO. design 14 years ago. simply time for a change. “Importantly the EBITDA for the second future. “We definitely eat our own At various stages of the past two After enjoying a challenge-driven job he half of FY 2010 was $7m ahead of the cooking. We are not driven by our share years Pike River required critical further did not see his future in running a EBITDA for the first half of that year.” price, we are driven by our plan.” funding from shareholders to continue ‘steady-state- operation for the next During the last two years Rakon He drew comparisons with Mainfreight the development of its hard coking coal several years. reduced team numbers and costs. “But we where he is also a director. “While their underground mine, first after the col- He said the transport chain post- also believe in our plan and know that results currently far exceed ours it took a lapse of vital ventilation shaft under quake was OK, with the Midland rail during difficult times is the right time to while for Mainfreight to prove its plan construction and then the need to tunnel link operating and damage at LPC invest in both growth and R and D when and for the market to accept its consist- through an unexpected solid rock expected to be repaired shortly. Once our competitors are not. So last year our R ency of purpose. Mainfreight began life 10 graben to reach coal seams. hydro extraction commences, Pike will and D spend of $10.5m was the same as years after Rakon but listed on the stock These events slowed access to the move to monthly shipments and “the the previous year . . .” Rakon also raised exchange a decade before.” A graph main areas where hydro mining could world coal price is looking good.” $65m of capital to build in Chengdu showed how long it took for the market to be initiated and the slowed ramp-up He has nothing set but the success of China. value that plan and delivery of the same. and delayed export shipments necessi- Pike River opens opportunities for him It was once taboo at AGMs to talk tated the raising of an additional $90m to seek a new venture in NZ or go over- about the share price. Yet Rakon’s weak THE PLAN this year to fund working capital, seas. He has a young family at school share price had to be a central topic. At “Given our past and high market share in including a $10m placement and $40m and at university in Wellington. $1.19 the market in Rakon shares is supplying the GPS market Rakon is often rights issue. NZOG committed to a con- He emphasized the talent of the PRC severely discounted on the 2009 high of thought of as a supplier to device manu- vertible bond to refinance a US bond management team. Mining manager $1.65 while 2008’s peak of $3.98 now looks facturers such as GPS, Smart Phones and facility and now holds a 2-year option to Peter Whittall has been recently to have been super-hyped the like; and yes we do supply those firms purchase Pike River coal. spending 3 days a week learning the “There is no doubt that in the heady and have a high market share in all cases. Early this month, over the same ropes at PRC’s Wellington offices and 2 days pre the GFC that our shares got over- “But since our purchase of FCP in 2007 weekend as the Canterbury earthquake, days at the mine. bought and driven to very high prices, but we have broadened our base and now PRC shipped from Lyttelton its second The PRC board thanked Ward for his then so did most stocks,” said Mogridge. have a very significant presence in sup- 20,000 tonne shipment to Indian cus- “significant contribution to the growth Now we would argue that we have been plying the infrastructure/ data network tomers, worth $6m. of the company over what has been an seriously oversold as investors have markets. It is very important to under- Ward can be truly proud of his 23 extended and often difficult period of moved from growth stocks to income stand this because besides adding balance years with Pike River and its former mine development.” stocks. to our earnings potential the fiscal results owners NZOG. He took PRC and NZOG An announcement regarding a suc- “Yes Rakon’s share price has fluctuated, from the device market and the network to the NZX Top 50, raised more than cessor is expected this week. but our plan hasn’t and its chances of market are quite different.” success have only been enhanced by the Both categories are forecast to grow GFC and the global trends in Data very strongly and are linked as more Distribution handheld devices demand more band- “I’ve always seen the people who own width and therefore more enhanced net- shares as being divided into two broad works. However, the price pressure on categories; shareholders and share traders. critical network products is much less and The former are there because they know a very small percentage of the overall and understand the company and its plan build cost as opposed to the demands in and want to gather the economic benefit consumer goods to constantly reduce the that delivering on a sound plan will bill of materials. provide. Three years ago 80% of Rakon profits “The traders look to make money out came from devices and 20% from high of shares not necessarily the company, reliability, such as aerospace, whereas they may be individuals who just buy and today devices are 40%, high reliability is sell daily or institutions who have to meet still 20% and the networks now represent quarterly results targets for portfolio 40% and growing. values. “All these new and growing smart “Although these latter two are vastly devices and their networks, anywhere in different in form they both influence the the World must have as their heartbeat short-term price of a share while the frequency control products of very high holders are there for the long game and specification, as made by Rakon.”

Acquisition a scale ness globally we will be more powerful together than we would be as separate busi- step for Ecoya nesses.” Both sisters will be staying in their current Continued from page 1 roles during an earn-out period and are then year around double what they were for the likely to be in an advisory role. When the same period last year. 2011 calendar year’s EBITDA is finalised an Founded in 2002 Trology has had 32% earn-out payment will be made, Ross says. The annual compound growth since 2006. The maximum earn out payable will be $10m half range of 40 products is sold in 3500 stores in of which will be paid in cash and half in Ecoya 16 international markets throughout shares issued at $1 each. Australasia, the UK, Ireland and Asia. The Equity part of the deal is underpinned Trilogy CEO and co-founder Sarah Gibbs by The Business Bakery LP and Craigs says the respective management teams have Investment Partners. closely-aligned views. “We can see Trilogy’s The unchanged Ecoya business plan is to growth continuing within Ecoya in the near extend the product range and grow into US future. We have worked hard to build Trilogy and selected Asian cities. Ecoya products are into a leader in natural skincare in Australasia now in Hong Kong department store chain and an award winning, respected brand in the Lane Crawford and Beverly Hills Four Seasons United Kingdom and Ireland. Hotel and other stores in Los Angeles. “We believe that in developing the busi- Ecoya shares opened the week at 80c.

“The Headliner” 16 SEPTEMBER 2010 Page 5 UPCOMING DIVIDENDS AND INTEREST — NEW ZEALAND moneymarket

Company record Ex Div imputation Name Class period CPS date 5pm date payable Credit CPS Senior retail bonds

Auckland International Airport FINAL 4.45 08/10 06/10 22/10 1.9071429 from TrustPower Air NZ FINAL 4.00 10/09 08/09 21/09 1.7142857 TrustPower is considering making an offer of Senior Barramundi FINAL 1.71 10/09 08/09 24/09 0.3943 Bonds to the public. Cavalier FINAL 11.00 01/10 29/09 15/10 4.7143 Further to this, it has appointed ANZ National Bank Contact Energy FINAL 14.0 03/09 01/09 27/09 6.00 and Forsyth Barr as Joint Lead Managers for the pro- posed issue. Colonial Motor Company FINAL 9.00 15/10 13/10 26/10 3.8571428 It is intended that Senior Bonds for an amount up to Delegates Group FINAL 8.00 01/10 29/09 15/10 3.4285714 $75m will be offered, with the option to accept up to a EBOS FINAL 17.50 10/09 08/09 08/10 7.50 further $25m of oversubscriptions at TrustPower’s dis- Fletcher Building FINAL 15.00 01/10 29/09 20/10 3.2142857 cretion. The Senior Bonds will have a term of approximately Freightways FINAL 7.00 17/09 15/09 30/09 3.00 seven years, maturing on 15 December 2017. Goodman Property Trust INTERIM 1.935 16/09 14/09 30/09 NIL The net proceeds of the Senior Bonds will be used for Hellaby FINAL 5.00 05/11 03/11 12/11 2.1428571 general corporate purposes of TrustPower including repayment of debt, and lengthening the maturity profile ING Property Trust FINAL 2.125 31/08 01/09 14/09 0.5072 of total debt facilities. ING Medical Properties INTERIM 1.75 03/09 01/09 17/09 0.19 A fixed interest rate for the Senior Bonds will be Kingfish INTERIM 2.12 10/09 08/09 24/09 NIL determined prior to the opening of the offer following a Kiwi Income Property Trust CONV NOTE N/A 2.25589 15/09 13/09 20/09 NIL bookbuild process to be undertaken by the Joint Lead Managers. Interest will be paid on a quarterly basis. Lyttelton Port FINAL 2.90 15/10 13/10 28/10 1.2428571 The Senior Bonds will be direct, unsecured, unsubor- Marlin Global FINAL 2.00 10/09 08/09 24/09 0.8571429 dinated debt obligations of TrustPower ranking pari Michael Hill International FINAL 2.5 01/10 29/09 11/10 N/A passu with existing bank debt and senior bonds. National Property Trust FINAL 1.0594 17/09 15/09 01/10 NIL It is intended that the key terms and conditions of the Senior Bonds will be the same as those senior bonds Nuplex FINAL 11.00 01/10 29/09 08/10 NIL issued in December 2009 and January 2010. Northland Port FINAL 3.00 17/09 15/09 24/09 1.2857143 It is expected that full details of the offer will be New Zealand Experience FINAL 2.50 24/09 22/09 08/10 1.0714 released and the offer will open in the week com- New Zealand Wool Services International FINAL 1.00 29/10 27/10 11/11 0.4285714 mencing 20.9.10 once a simplified disclosure prospectus has been registered. NZ Exchange INTERIM 3.75 22/10 20/10 29/10 1.6071428 Interest in the offer may be registered by contacting NZ Oil & Gas FINAL 5.00 17/09 15/09 01/10 NIL the Joint Lead Managers: ANZ National Bank Limited NZ Refining INTERIM 2.00 16/09 14/09 23/09 0.8571428 on 0800 269 476 or Forsyth Barr on 0800 367 227. Opus International INTERIM 3.40 17/09 20/09 30/09 1.4571428 Port of Tauranga FINAL 20.00 17/09 15/09 01/10 8.5714285 Salvus Strategic Investments FINAL 2.50 08/10 06/10 22/10 1.0714286 Manukau taking Sky City Entertainment FINAL 9.25 10/09 08/09 17/09 3.9642857 Sky TV FINAL 7.00 03/09 01/09 10/09 3.0 over-subscriptions South Port NZ FINAL 12.50 24/09 22/09 02/11 5.3571429 Manukau City Council launched a bond issue to raise up to $250m with the right to accept up to a further $100m in over- Steel and Tube FINAL 5.00 17/09 20/09 30/09 2.1428 subscriptions. This bond offer has already met with a positive Team Talk FINAL 10.00 08/10 06/10 15/10 4.2857142 response, and the council is now accepting over-subscriptions to Telecom FINAL 6.00 03/09 01/09 17/09 N/A take the offer to $350m. The minimum interest rate has been set at 6.45% p.a. with Tourism Holdings FINAL 2.00 22/10 20/10 29/10 0.8571428 an issue margin of 1.90%. Turners Auctions INTERIM 5.00 14/09 10/09 21/09 2.1429 The proceeds will go towards general financing for existing Auckland councils and after 1.11.10, for Auckland Council, says Vector FINAL 7.50 03/09 01/09 13/09 3.2142857 Leigh Ayuton, CEO Manukau City. Before 1.11.10, the council will Warehouse Group FINAL 8.50 05/11 03/11 17/11 3.64285714 on-lend some of the net proceeds from the sale of the bonds to Warehouse Group SPECIAL 5.00 05/11 03/11 17/11 2.142857143 other existing Auckland councils. The council is carrying out the bond issue at the request of the Auckland Transition Agency. The funding will help provide the assets and facilities that will help in the future development of Auckland region and provide infrastructure. MONEYMARKET INTEREST RATES Local governance in Auckland is going through huge change, with the new Auckland Council to be established on 1.11.10. The Call 30D 2 M 3 M 4M 6 M 9 M 1 Yr 18 M 2 Y 3 Yr 4 Yr 5 Yr bond offer is secured over the rates revenue of Manukau and taken over from 1.1.10 by Auckland Council. Equitable Group Debenture Auckland Council will, therefore, have considerably more Minimum Investment $2000 3.0 4.0 5.5 7.25 7.5 8.0 8.0 8.25 8.5 assets, but also considerably more liabilities, than Manukau City Council, having inherited the assets and liabilities of Manukau F&P Finance New Funds 4.5 4.25 5.0 5.75 6.25 6.5 7.0 7.25 7.25 7.25 City Council and those of the other seven existing Councils. Reinvested Funds 4.5 4.75 5.5 6.25 6.75 7.0 7.5 7.75 7.75 7.75 Auckland Council will also, by virtue of being a local authority, have the same rating powers as those which Manukau City Forsyth Barr Cash Council has but it will have them in respect of the districts and Management Fund regions of all of the existing Councils, and not just the Manukau $3,000-$19,999 2.50 city district. $20,000-$49,999 2.75 Consequently, it will have a considerably larger rating base. $50,000-$249,999 3.25 The net effect of all of this is that Auckland Council’s risk profile $250,000+ 3.50 may be significantly different from that of Manukau City Council. It may be that Auckland Council is more creditworthy than Gold Band Finance Manukau City Council, says the Investment Statement but there up to $4,999 2.0 2.0 4.5 7.25 8.75 8.95 8.95 8.95 is also a risk that Auckland Council will be less creditworthy Over $5,000 2.5 2.5 5.0 7.75 9.25 9.45 9.45 9.45 (and therefore less likely to be able to meet its obligations under the Bonds) than Manukau City Council. Guardian Trust 0.2 0.59 1.26 3.13 5.34 6.16 6.36

Marac Finance $1,000-$49,999 4.25 4.75 4.75 5.5 5.5 5.25 6.25 7.0 7.25 7.5 7.75 7.75 $50,000-$250,000 4.75 4.75 4.75 5.5 6.0 6.25 6.25 7.0 7.25 7.5 8.0 8.0 MARAC in

Mutual Credit Finance 8.0 9.25 9.5 9.75 9.75 9.75

National Bank Investment Holden deal $5000-$9999 3.0 3.0 3.5 3.25 3.5 3.5 5.2 5.4 5.5 5.5 5.75 6.0 Pyne Gould Corporation subsidiary MARAC Finance is further $10,000-$49,999 3.0 3.0 3.5 3.5 4.5 5.1 5.2 5.4 5.5 5.5 5.75 6.0 expanding its vehicle financing distribution having secured the $50,000+ 3.0 3.0 3.5 3.5 4.5 5.1 5.2 5.4 5.5 5.5 5.75 6.0 rights to promote Holden Financial Services, Holden Finance and Holden Insurance. PGG Wrightson Finance The agreement with Holden New Zealand (Holden) builds on Up to $10,000 4.95 5.45 5.9 6.2 6.95 7.7 8.2 8.2 8.2 8.2 MARAC’s recent acquisition of GMAC NZ’s (GMAC) retail motor $10,000+ 5.15 5.65 6.15 6.4 7.15 7.9 8.4 8.4 8.4 8.4 vehicle book. GMAC was the previous provider of branded finance $100,000+ 5.25 5.75 6.25 6.5 7.25 8.0 8.5 8.5 8.5 8.5 to the Holden dealer network. Holden is the third largest motor vehicle distributor in New Southern Cross Building Society Zealand, with a 33-strong dealer network nationwide. Holden is Fixed Term Interest Rates also the distributor for Isuzu trucks, New Zealand’s number one $1000 -$250,000 3.15 3.9 4.4 5.0 5.1 5.1 5.4 5.4 5.5 6.0 selling truck brand with 10 dedicated dealers throughout the country. SBS Bank $1000-$250,000 3.0 3.0 4.0 4.0 5.0 5.0 5.25 5.25 5.5 5.5 MARAC’s CEO Jeff Greenslade says MARAC and Holden have had a close working relationship stretching back many years. Tower Managed Funds “This transaction lifts the relationship to a higher level and Cash Fund 0.68 2.54 furthers MARAC’s strategy of being the major provider of finan- cial solutions to New Zealand families and small to medium- UDC Finance $5,000-$99,999 3.6 3.0 3.0 4.75 4.75 4.1 3.9 4.8 5.1 5.75 6.25 6.4 7.05 sized businesses. $100,000+ 3.85 3.0 3.0 4.75 4.75 4,2 4.0 4.8 5.1 5.75 6.25 6.5 7.15 “It also aligns with the strategic direction of the company to become a bank through the proposed merger with Southern Call 30D 2 M 3 M 4M 6 M 9 M 1 Yr 18 M 2 Y 3 Yr 4 Yr 5 Yr Cross Building Society and CBS Canterbury.”

Page 6 “The Headliner” 16 SEPTEMBER 2010 australia INDEX

Page Gillard confirmed as Aussie PM Air New Zealand 3 Christchurch Quake 1 Australia’s first female Prime Minister briefing on their decision. Robert Quake Notes Julia Gillard having won the post-Elec- Oakeshott and Tony Windsor say they Currency 8 tion contest for the support of inde- will oppose any parliamentary plot to • Paymark reports EFTPOS payments Delegats 4 pendent MPs has formed a bring down a Gillard-led were down 43% on the day of the Ecoya 1 government. government but political Christchurch earthquake and down In contrast to the market observers are noting the slim 18% on the Sunday in the Canterbury Manukau City Council 6 excitement at her initial margin held by Labor. region, compared with the same time Marac 6 move to overturn the Gillard earlier secured the last year. Stores that would normally be Moneymarket 6 unpopular former PM support of the sole Green experiencing an increase in sales due to Kevin Rudd, the ASX was Party member in the House Father’s Day trading were hit particu- Mood of the Markets 8 deadly dull in its reaction. and another independent larly hard, with gift stores down 81%, Pike River Coal 5 The All Ordinaries Index and will govern by 76 seats camera and photo shops down 79% slid 50 points to 4613. over the Liberal Coalition’s and electronics stores 77% compared Portfolio Comment 2 The 48-year-old redhead 74 seats. with last year. Rakon 5 from Victoria secured the Liberal leader Tony • Tower is expecting insurance claims South Canterbury Finance 2 support of two independ- Abbott, 52, who is remaining arising from the Christchurch earth- ents from rural seats that are as Leader of the Opposition, quake will be NZ$5m, before tax. TrustPower 6 expected to gain huge asked in a gracious-in-defeat “Tower has a number of reinsurance investment for their states Pictured: Oil painting concession speech for Labour arrangements which effectively limit as part of the A$43bn com- of Julia Gillard at to be a “better Government” the loss from any one specific event,” Biggest RISEs mitment by the Labor Party the Tweed River than the one that has gov- reports Forsyth Barr. “The total number to rural broadband. Their Gallery in northern erned for the past three of claims will not be known for a while Week ending 10.9.10 Price Rise decision has resolved New South Wales. years. But he was still as customers are continuing to inspect ANZ Bank $30.25 +75c Australia’s hung Parliament astounded, he said, that their own properties and assessments Westpac $29.30 +70c and ended the country’s longest election. Labor could roll out a $43bn broadband of damage and cost of repair will take policy without detailed cost analysis. some time to be scheduled and tallied.” Fletcher Building $8.25 +50c ”Come on, come on, love me for the money Gillard campaigned on a promise to bring Steel & Tube $2.50 +30c Come, come on, listen to the money talk access to medical specialists via the Money talks, yeah, yeah…” — AC/DC. Internet by rural communities in Broad payout for Abano Healthcare $5.30 +27c Australia’s outback states Henderson Far East $6.80 +25c The independents have made no other The plan for a National Broadband SCF investors commitment to support government poli- Network will see Telstra phase out its Templeton Emerging Market $12.35 +23c cies which will include the watered-down, existing copper-wire network. Telstra Continued from page 2 Pacific Brands $1.32 +20c but still controversial, plan to impose a shares were flat at A$2.86 on heavy trades. Why was there a deadline with the Trustee Cavalier $2.76 +20c 30% tax on iron ore and coal projects as an Gillard campaigned on a promise to bring under the debenture Trust Deed for 31 August? offset for a corporate tax reduction, infra- access to medical specialists via the “It was the day we had to certify to the Trustee Mainfreight $6.99 +19c in respect to the required certificate of compli- structure projects and better retirement Internet by rural communities in ance with various covenants in respect of the Opus $1.72 +17c benefits. Australia’s outback states. June balance date. It was our reporting day for Nuplex $3.38 +16c Shares in BHP Billiton and Rio Tinto Few will be betting on the new our accounts.” traded flat after the independents gave a Government lasting the full three years. With more liabilities than assets, the direc- tors could not sign off that certificate. “It Biggest FALLs became logical to do the appropriate thing. Our relationships with government is quite straight- Week ending 10.9.10 Price Fall forward — there is a contract from the Caledonia $33.60 -37c US economy firmer Government to individual investors in SCF. It is depositor insurance.” AMP $6.33 -27c Optimism returns on better than (i.e. the services sector — which is Maier dismissed speculation there had been EBOS $6.75 -11c expected US data. Rock on? asks bigger than the mfg sector) dipped a an attempt at a capital rescue with the David Crow, Senior Interest Rate fair way and is in negative territory. Government. “Forget what you read on the Strategist at ANZ. US equity markets So the news is not all good, and there’s blogs.” Subscribe to rebounded last week on lower than still some ‘wood to chop’ before we “I have never abused that (relationship) by expected initial jobless claims and a give the jobs market the green light. saying ‘Rescue Us’. The deal was always that we “The Headliner” smaller than expected trade balance. With the unemployment rate still at would seek a private sector solution.” It seems likely that (all) that SCF needed was Magazine & website “Although the level of claims is still 9.6% (having been above 9% for 16 $100-300m in new capital to give a recapitalised reasonably high relative to the months), there’s still some way to go business a chance. But who would know if there Subscribe now at only NZ$120.00 pre-GFC era, this is the third straight before we break out the champagne. was a future beyond December 2011? Some week they have either fallen or held “While it’s pleasing to see an bidders may have wanted to see the Government (incl GST), for 24 issues of “The steady, engendering confidence among improvement in US jobs data, it is guarantee extended beyond then. The receivers Headliner” magazine and some commentators that the jobs perhaps the bond market’s response to will now try their luck at finding a package premium membership (by user market is improving. Recent jobs data it that has been more telling.” Indeed, buyer who could then reduce entry costs by name and password) to our has certainly been encouraging — 10yr Treasury bond yields are around selling off SCF’s best assets including Helicopters investment news and research indeed, non-farm payrolls was cer- 30bps off the lows seen in late August. NZ, Scales Corporation and Dairy Holdings. website www.headliner.co.nz And in the remains of this day, there may Add NZ$30 if international subscriber tainly not as weak as expected . . . and “Is this the start of a sustained wave well be hope that the ‘good bank’ based on we did see a tick up in the employ- higher in yields? It could be — but it performing loans may live on for another requiring an mailed edition. Subscribers ment sub index of the ISM manufac- probably isn’t. As noted, there’s a day. Because, as Maier told Headliner “one may also download the magazine online. turing survey. long way to go yet before we can of the largest finance company operations in “However, the employment index of declare the jobs market in good health, the country is still lurking in there some- Please start my subscription for 12 months the ISM non-manufacturing survey and US inflation is still falling.” where.” (24 Issues) and continue thereafter until countermanded in writing to: mood of the markets Name...... Continued from page 8 (12.50m) and EBITDA was -11% at cant growth potential for the business. assessment stated at the half-year to $1.91m ($2.15m). “Overall trading condi- This placement, whilst at a major dis- Address...... $109.975m. Market reaction: +1 to 3.4c. tions remain challenging in both coun- count to market, is not expected to have Just Water International has tries. The underlying base of customers any lasting effect on the overall market ...... announced a net loss of -$19.2m in FY10, is strong, and there is a focus on man- capitalisation of SmartPay but ensures ...... in contrast to a net profit of $1.8m in aging margins and controlling costs. that the company strengthens its balance FY09. JWI has taken its Australian busi- “Based on the actions taken already, it sheet, ensures it has the working capital Email:...... ness off the books in preparation of its to meet its sales obligations and pro- is expected the company will turn ■ Payment enclosed sale. There was zero dividend, as JWI around in the 2011 with a markedly vides a solid basis to implement its will focus on debt reduction Net bank improved EBITDA.” growth plans.” ■ Please bill me debt at year end was $25.5m. Debt has L&M Energy raised $1.4m in a share ■ I hereby authorise you to debit my remained constant over the past year, purchase plan, adding to its July place- CAPITAL MOVES AMEX/VISA/DINERS/BANKCARD and it is expected to reduce significantly SmartPay has raised a further $4.3m ment. The funds were raised to set up in the 2011 year. through a placement of shares that will production testing and confirm the level No...... Although EBITDA increased in the be used as working capital to meet cus- of reserves in the Ohai gas field in second half of the year, and is expected tomer orders and deliveries. Southland. Production is expected to be Expiry Date ...... to continue to improve in 2011, the 2010 “The capital markets have been very under way by year end. results are unacceptable, says Tony difficult over the last year, with low New Zealand Oil & Gas intends to Signature ...... Falkenstein, managing director. investment into smaller companies buy back 2.2% of its issued capital (8.5m The New Zealand operation had flat listed on the share market, making the ordinary shares) to strengthen its share Please post coupon to: sales of $23.97m ($24.10m) and ran a loss ability for SmartPay to raise $4.3m a price, which it considers is “significantly Subscriptions: MG Publications PO of $773m compared with a net profit of huge endorsement of its direction, below fair value and doesn’t reflect a Box 20034, Christchurch 8543. Label $3.21m last year. The second half strategy and announced performance,” reasonable current valuation of the your envelope: Free Post Authority EBITDA of $2.3m compares to $1.9m in says managing director Ian Bailey. “The company”. Purchases began from 10.9.10 no. 5003 Cristchurch. Or email the first half. “Although better, this placement, at 2c per share, was made to and may continue up until 30.6.11. [email protected] second half result is still not acceptable,” a number of private individuals and Goodman Property Trust raised Fax 03 357 0426. Subscribe online said Falkenstein, and significant costs investment companies, and will $45m through a private debt issue. The www.headliner.co.nz have been taken out of the business in increase working capital and support seven-year bonds will pay 7.58% pa and Subscription freephone: 0800 649 696 the last few months, positioning the the balance sheet, providing funders are rated BBB+ Standard & Poor’s. The Tel: 03 358 3219 New Zealand operation for an improve- and shareholders with a more robust proceeds will be used to repay bank ment in 2011. company.” debt and diversify the trust’s funding To arrange a gift subscription call Income in Australia was $11.49m Bailey added, “We see further signifi- sources. the freephone number above “The Headliner” 16 SEPTEMBER 2010 Page 7 mood of the markets Quake causes economic distortions

Canterbury’s 7.1 magnitude earthquake on Saturday directors believe Rakon earnings will be within the 4.9.10 is an outlier event of the first order. range forecast by equity market analysts’ of an EBITDA MARKET TREND It has many facets: between $25m and $30m. Share price: $1.19. • As an economic shockwave for GDP growth whilst the country is fighting to stave off recession. In RESULTS Canterbury there may be SME failures galore. Div Cushions Soft Result Tourism impacts are unclear. The Warehouse Group reported a net profit after tax • As a $4bn financial boost for construction, fur- excluding unusual items of $83.2m compared to $85.2m nishing, plumbing, IT, infrastructure and roading in F09, down 2.4%. Net profit after tax in 2H10, businesses that were looking at a dire year ahead but excluding unusual items, was $26.2m ($28.4m in 2H09). will now have full order-books. Group sales for the 52-week trading year were $1.67bn • A correspondingly immediate positive impact for the down 2.8% on the previous 53 week trading year. listed market with last week’s top performers Chairman Keith Smith says “the 2010 year once again involved in either construction or refurbishment. demonstrated the company’s resilience in difficult Steel & Tube rose 13.6%, 30c to $2.50, followed by times with the group continuing to deliver consistent healthy increases for Cavalier (+7.8%, 20c to $2.76) and earnings and strong cash flows.” Fletcher Building (+6.5% or 50c to $8.25). The rise in Showing confidence in its ability to continue gener- 10.9.10 27.8.10 Fletcher Building helped the market to close up 54 ating solid operating cash flows in both the short term NZX 50 Index 3,161.00 3,007.44 points for the week at 3161.00 and it alone accounted and longer term WHS lifted the payout ratio from 75% 90 Day Bank Bills 3.19% 3.23% for 26 points of this increase. to 90% of adjusted net profit. A final dividend of 8.5cps Govt Stock April 2015 4.69% 4.41% “It was only last week that NZIER forecast 20,000 takes ordinary dividend for the year to 24cps, up 3cps ASX all ords 4,600.70 4,404.10 jobs being lost in the construction sector due to the lack or 14.3%. There is also a special dividend of 5cps, in of current large projects,” says Forsyth Barr. addition to a special dividend of 1.5cps paid in March Dow Jones 10,462.77 10,150.65 Briscoe rose 3c to $1.25 on its better than forecast 2010. Dividends will be fully imputed at 30%. FTSE 100 5,501.64 5,201.56 $9.3m interim profit result yesterday. Shares in The Reported net profit after tax for 1.8.10 year was GoldUS$/oz 1,246.50 1,236.00 Warehouse rose 1c to $3.70 following its lower than $60.2m including a non cash charge of $22.8m required expected net profit of $83.2m, -2.4%. The payout ratio as a direct result of Government-announced changes to increase from 75% to 90% cushioned the reaction. the income tax deductibility of depreciation on certain 2.00cps) reflected a 60^ payout policy. Market reaction: NZ Oil & Gas’ 6.7% rise to $1.28 was attributable to buildings. This compares to last year’s reported net +3 to $1.25. the launching of its share buy-back on Monday. Pike profit of $76.8m which included a $7.4m post tax River Coal shares fell 4c on Friday to $1.06 on the charge relating to the exit from fresh food and liquor. Loss more than Doubles unexpected news CEO Gordon Ward has resigned Smith says the non cash charge was included in our Allied Farmers’ unaudited operating loss of $77.59m effective 1.10.10. Ward was the key figure in the devel- Financial Statements to achieve compliance with (2009: $34.20m loss) for FY10 includes a $21.39m impair- opment of the new underground mine near International Financial Reporting Standards. WHS ment of goodwill in its investment in subsidiary Allied Greymouth. The company may name a new CEO as directors joined the growing list of unhappy business Nationwide Finance which was placed in receivership early as next week. leaders who question the appropriateness of this charge on 20.8.10. Telecom shares finished the week off only a cent at and the application of the relevant standard and its As at 30.6.10, Allied Nationwide Finance was under $2.05 after an initial setback related to the roll out of the effect on reported results and financial position. Smith the control of Allied Farmers and therefore its result, an Ultra-Fast Broadband (UFB) Initiative. felt adjusted earnings is a more appropriate indicator of after tax loss for the year of $19.33m, has been consoli- “Crown Fibre Holdings (CFH) has shortlisted 14 underlying performance. A sales update for Q1 F11, dated in the group accounts. Since then $21.4m good- parties following a review of the refined proposals ending 31.10.10 is due for release on 12.11.10. Market will related to this investment has been written off. received in August,” notes Forsyth Barr. “From this reaction: +1 to $3.70c. Corporate expenses for the year include one off shortlist, CFH has selected Alpine Energy (Timaru), The acquisition costs of $5.984m, directly related to the pur- Central North Island Fibre Consortium and Surge for Briscoe chase of the Hanover Finance and United Finance Northpower (Whangarei) for prioritised negotiations. Briscoe Group announced EBIT growth of 30% for the assets. The chickens have come home to roost on that Delving into the detail, it appears that Telecom, and the half year to 1.08.10 on the back of an aggressive mar- saga with impairment losses of $20.20m on the ex lines companies, have been told to sharpen their pencils keting campaign that has driven higher sales from Hanover Finance and United Finance assets recognised for the remaining areas (82% outstanding). Whilst from BGR’s Rebel Sport stores. Rod Duke, group managing in the 2010 result Telecom’s point of view this may appear disappointing, director, said “most retailers would be thrilled with that Allied Farmers Investments, the asset management at least it is still in the running.” result in what continues to be a tough retailing environ- subsidiary which holds the assets acquired from ment.” Hanover Finance and United Finance, incurred a loss of. GUIDANCE NPAT of $6.64m for the half-year ended 1.08.10. This $21.69m, mostly ($20.20m) of impairments on property Windflow Technology has revised its loss for FY10 to compares to the $6.52m for the prior corresponding and loan assets. Since the interim financial statements $7.95m, from the previously estimated range of $5m– period (pcp) a year ago and is in line with market guid- there have been $85.75m of additional impairments $6m. The larger loss reflects costs of remedial work for ance. The result includes a non-cash tax adjustment of recorded, $65.54m of which has been attributed against a customer, NZ Windfarms, as well as a reassessment $2.64m as a result of the recent tax changes. Excluding the fair value of the assets acquired last December. The of the company’s 5-year warranty costs. this adjustment NPAT for 1H10 was $9.28m or 42.3% only scrap of good news, if it can be called that, is that Rakon’s annual meeting was told that the outlook higher than 1H09. this decreases the $175.52m provisional fair value for FY11 looks positive across all fronts and at this stage A fully imputed interim dividend of 3.00cps (pcp: Continued on page 7 currency Kiwi dollar dances to offshore beat What drives the NZD/USD exchange rate value day-to-day was The outlook for GDP growth and thus inflation risks in the aptly demonstrated in the aftermath of the Canterbury earth- second half of 2011 certainly do not justify any continuation quake. in the loose/highly stimulatory monetary settings. Mr Bollard It could have been expected that the global newswires has a real challenge to make the media commentators under- flashing a major earthquake in New Zealand would have stand that he is not tightening monetary policy with the OCR caused an immediate reaction to sell the NZ dollar, as poten- increases; actual market interest rates (what banks are paying tial disruption to the economy would be a negative. As it for retail deposits) have been at 4.50%/5.00% for many transpired there was very little impact on the forex market months. He merely needs to lift official interest rates to catch and the NZD continues to move up and down in response to up to where market interest rates are already sitting. Whilst AUD, commodity price and US sharemarket movements. The the local financial markets widely expect an OCR pause this Kiwi has moved up to the top-end of its long-established Thursday, offshore market participants may be a little sur- trading range at 0.7300 against the USD. prised and conclude that the NZ economy is not travelling A stronger AUD to 0.9250 against the USD following too well. Therefore, some NZD weakness should be expected, improved US and Chinese economic data was the main dependent on how changeable the RBNZ’s outlook on the NZ impetus behind the NZD gains last week. Both the NZD and economy is. A more dovish than expected forward view on the AUD have failed to sustain their gains at these higher levels in NZ economy from the RBNZ may suggest interest rates lower the past. The forming of a cobbled together coalition Labor for longer and thus Kiwi dollar selling. Government in Australia has also had limited impact on the The economic and financial news out of Europe has not AUD exchange rate. any weakness in global commodity and equity prices. been as positive over recent weeks with the impressive The mining rental tax remains very unpopular in Australia The direction of the AUD against the USD will remain as German growth numbers this year tailing-off somewhat of and with overseas investors; however, it will still be imple- the dominant influence on the NZD/USD rate over coming late. There are renewed concerns with the quality of assets mented under the Julia Gillard Government. The increase in months. Any pull-back in commodity prices will be accompa- and capital levels of many European banks, therefore further global hard commodity prices has for the meantime over- nied by a stronger USD internationally against the Euro, thus EUR weakness from $1.27000 against the USD should be ridden any negatives for the AUD from the mining super tax. a further reason for the AUD and NZD rates to fall against the expected. A lower Euro exchange rate will pull both the NZD The Reserve Bank of Australia remains upbeat on the outlook USD. and AUD rates back from the top of their trading ranges at for the Australian economy, albeit qualified with some con- The local currency market will be focused on the Reserve 0.7300 and 0.9300 respectively. cerns about the fragility of the global economic recovery. Bank of New Zealand’s Monetary Policy Statement on Similarly, the USD currency value internationally should The moneymarkets in Australia have done a remarkable Thursday 16th September. The Canterbury earthquake event benefit from any aggressive FX market intervention by the about-turn in the last few weeks and are now pricing-in has ended any possibility of an OCR increase up from the Japanese monetary authorities to stop the Yen strengthening further official interest rate increases instead of decreases. current 3.00% rate, for the meantime. However, Alan Bollard below 84.00 to the USD. Threats of intervention to sell the The Australian dollar continues to benefit from speculative still has to remove the emergency monetary stimulus settings Yen have not been affective to date; however, history tells us buying when global investors have the “risk on” button put in place 18 months ago and get official interest rates up that the Yen can suddenly jump to a whole new level when pressed in times of upward movements in world equity to where the true market price for money is trading at i.e. the banks and investment houses are instructed by their gov- markets. However, as has been seen in the past when the AUD 4.50%/5.00%. The effectiveness of monetary policy manage- ernment to also sell Yen. The Japanese Government is cur- records rapid gains well above 0.9000 to the USD, the market ment, signalling and implementation is severely compromised rently in disarray with a leadership challenge, however, when sentiment and direction can and does change abruptly when if the official rates are 2.00% below the real market levels. they get their act together they desperately need a weaker the sharemarkets reverse downwards. Whilst the Australian Whilst the RBNZ may be temporarily pausing with the Yen to help their big exporters be more competitive interna- economy is certainly stronger and performing to a higher removal of the stimulus for good reason, they still have to do tionally. The Japanese economy, like New Zealand’s, is highly level than all others, it remains particularly susceptible to it. dependent upon export-led growth.

Page 8 “The Headliner” 16 SEPTEMBER 2010