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P O Box 20034, Bishopdale, Christchurch. www.headliner.co.nz for 24/7 Markets News 15 MAY 2014 VoluMe 35 No 16

No spend-up Well upbeat Cold spell WA riding in Budget for NZOG lifts sales new wave page 2 page 3 page 4 page 5

Tale of two is now an Budgets American story This week’s Budget will underscore just how far has come in the recovery from the great global financial of five years ago. Theoretically the higher the Kiwi dollar By restraining new capital spending and clamping down on state flies the less the potential for increased departmental programmes that had ballooned under Labour, Finance activity by US investors in Xero shares. Minister Bill English is poised to return the books to a positive state. For the sake of a dry academic argu- A modest fiscal surplus anywhere in the world is downright ment, and those who believe solely in remarkable. either equity fundamentals or technicals Two major shock events (the GFC and the Canterbury earth- as the key drivers of value investing, can quakes) have dominated the six years of the Key Government. This choose to disagree, but the high currency Budget will be quite a milestone in signaling survival from the first is blunting purchasing in NZ equities. In trauma; the second is going to be a multi-decade recovery, so again new spending will be on a leash. this sense, on an expectation that the new The overall position is we’ve put in good foundations and the currency peak is just that, XRO could roof is in place but we’re not quite at the point of splashing out. The become as much the target of the carry- pick-up is evident in jobs growth but it is patchy, great for those in trading speculator as the Kiwi dollar. construction, not so flash in service sectors like retail or media. The currency is riding high partly BNZ chief economist Tony Alexander notes that the latest job because investment in our stable numbers were ahead 3.7% or 83,000 from a year ago which is the economy is attractive, and partly because strongest annual pace of jobs growth since late-2004. “The unem- the US greenback is being mauled. ployment rate held steady at 6% but this is because confidence Some investors in XRO may choose to about finding a job is so high that the participation rate has risen to a record 69.3%. disregard the cost of currency. XERo foUNdER Rod dURy hAS pRodUCEd A flURRy “The employment rate has recovered now to a healthy 65.1% XRO shares are now cycling around NZ$30, rather of NEw AffiliATioNS. from 64.7% in the December quarter, 63.7% a year ago, and now sits than NZ$40. An overseas buyer of 10,000 XRO ords and above the average for the past ten years of 64.6%. The fact that jobs paying US$258,000 while the Kiwi is valued at US$0.86, growth is strong bodes well for retail spending growth and demand would pay US$240,000 were NZD priced at US$0.80. CURRENT STATUS for housing, tourism services etc in the coming year. But from an Times that by three and the difference is $774k / $720k, Xero is now the leading provider in inflation point of view one still cannot say that there is evidence of or $54k. In the US $54k will buy you this year’s new New Zealand and the leading online accounting soft- accelerating wages growth.” Cadillac XTS sedan. ware in and the UK, with annualised Meanwhile, the Australian Federal Budget (due as this issue was The 4-week trading band is now $28-$34. The 100 printing) reflects the situation the ‘lucky country’ is in. In the run-up subscriptions of $29m, $41m and $14m respectively. to Treasurer Hockley’s Budget analysts expected modest fiscal tight- day moving average has flattened. Xero is turning its focus on the important US market. ening. Up until the end of February the underlying budget deficit Meanwhile, none of this seems to be affecting sales. Just going into the US market allowed Xero to raise an was 1.5% of GDP. And the only real option was to attempt to trim The share price might have started to sweat but the additional $180m of capital in October 2013. To look this deficit, through a tightening of policy settings. business is not out of puff. more American there have been board appointments of That will be felt by most households; expected were reductions Somewhere in this time frame, XRO released details New York-based Chris Liddell as chairman and San in benefits and tax increases including a 1% debt levy on high- of operating revenue of $70.1m for FY14, up 83% from Francisco-based Bill Veghte as a director and Peter income earners and increased fuel excises. last year’s $38.4m result. Karpas as CEO North America. “The good news for households is that the debt levy will not be With monthly committed subscriptions growing to There has been a flurry of new relationships, not all imposed on middle-income earners, and that the Audit Commission’s $7.8m, the recurring revenue model means that Xero recommendation to cut minimum wages has been ruled out for in the US. now,” said First NZ Capital. “But the clear message about long-term has started FY15 strongly with $93m in annualised First up (on 31.3.14) was a strategic alliance with fiscal austerity is likely to weigh on consumer confidence, as house- subscriptions (an 81% increase on the $51.5m for the KPMG in the UK. The alliance sees Xero’s online holds re-assess their ‘permanent’ income.” pcp). accounting platform playing a central role in the forma- The analysts added that the tightening is untimely. “Our earlier The net loss for 2H14 is anticipated to be close to tion of a new KPMG division, which will provide select forecast of 2% real GDP growth assumes that the government stimu- 1H14 resulting in a full year loss of approximately online accounting and tax services to small and medium lates to offset the impact of the mining capex cliff. It appears that $35m, compared to $14.4m last year. sized enterprises using the cloud. Interested businesses the government will not only fail to stimulate, but will also probably The strong New Zealand dollar also adversely are able to sign up to the services from this May. It was move the budget in the opposite direction. impacts reported operating revenue given 66% of this a big coup. But wait, there’s more . . . KPMG itself has “This means that there is downside risk to our growth forecast, revenue is denominated in foreign currencies. On a even before considering the hidden tightening that is coming a programme of strategic partnerships aimed at through via the elevated exchange rate, tighter bank lending stand- constant currency basis Xero grew operating revenue by supporting the SME sector. ards and the rising cost of living. We expect to see more RBA rate 92% in the period. On the same day a technical integration occurred cuts to at least make up for the stimulus the government is not Recruiting senior management for growth and filling between XRO and Square, Inc., a US company with a delivering.” out global teams was a key focus and Xero added a suite of business tools aimed at making commerce easy. further 376 employees. Continuedonpage4 Pick up for Kirkcaldie & Stains The department store operator Kirkcaldie & country and online shopping from overseas providers con- Stains found its anniversary year in 2013 overshadowed by tinues to register double digit growth. the difficulties posed by the drawn out tail to the domestic Kirks said they have a considerable number of initiatives retail recession. It was gratifying then to see that the grand directed to boost sales planned for 2H14. old retailer has posted a significantly improved six-month “They are rebuilding their women’s fashion section. They result for the period ended 28.2.14 for both the retail and now have 25 New Zealand brands and are looking at property operations. expanding the international offer with a number of UK The group posted a pre-tax profit of $791,000 (after-tax brands following the success of the exclusive in Wellington profit: $563,000) which compares to a pre-tax loss of Miss Selfridge concept. A new concession, Sportscraft, opened $741,000 (after-tax loss: $531,000) during the pcp. on 16.4.14, exclusive to Kirkcaldie & Stains in the Wellington The retail operations reported a pre-tax profit of region. $231,000, a $458,000 improvement on the 2013 pre-tax loss In June this year, Kirks will launch a furniture store in of $227,000. The improvement was directly attributable to Thorndon Quay, ‘Kirkcaldie & Stains interiors on Thorndon’, the on-going cost reduction programme with expenses down aimed at generating incremental revenue while leveraging 7.4% and a 1% increase in the final margin. back office support. It appears the shadow of the quiet retail mood in the It will also give Kirks the opportunity to reorganise and capital continues. Kirks’ retail operations continue to face expand the offer in the main store and create a more revenue challenges with sales 4.7% down on last year; the comfortable shopping environment. Kirks will launch a KiRKAldiE & STAiNS lAUNChES NEw SAlES Wellington region is still lagging behind the rest of the  Continuedonpage3 iNiTiATivES foR 2014.

HoT INVeSTMeNT NeWS oN WWW.HeADlINeR.Co.NZ. PReMIuM MeMBeRSHIP FoR THe MAGAZINe + WeBSITe top tier holds balance sheet strength The major banks have been building up their strength during the summer, with Westpac Group reporting net profit for the March half-year of A$3,622m, up 10% on the pcp. Westpac (WBC) shares fell more than 1% after the bank reported first-half cash earnings rising by 85 to $3.77bn in the face of tighter margins. The result was 3% above consensus expectations although the response is similar to the better than expected ANZ result earlier. WBC followed ANZ´s lead in posting a decline in margins due to competition for home loan customers. The market had anticipated that Westpac would increase its net interest margin, which reflects the dif - ference between its cost of borrowing and the rates at which it lends to customers, says CommSec. This measure, however, fell eight basis points to 2.1%. Westpac Group CEO Gail Kelly said her bank’s result was driven by a strong operating performance from fiNANCE MiNiSTER Bill ENGliSh wAS EXpECTEd To REpEAT fAMiliAR CAUTioUS RhEToRiC iN ThE 2014 BUdGET. each division, supported by a further improvement in asset quality: “Our balance sheet is strong, and we have sector leading positions in capital, credit quality and in pro - Hosing down expectations ductivity. This enables us to further support customers as we tilt towards growth. Over the past six months we have provided more than $41 billion in new lending to Australian retail and business customers. of pre-election spend-up “Customer numbers have grown across all our major brands, and relationships have deepened further. In “An upgrade to GDP growth forecasts should see the However this shortfall is expected to be largely particular, we are increasingly able to support our cus - Government’s books looking in better shape than at offset next year thanks to the stronger outlook for the tomers with long-term investment and retirement the December update,” said Westpac chief economist economy. Consequently the Government remains on solutions and with products to protect their assets.” Dominick Stephens. “This should leave room for both track to deliver a (small) surplus in 2015. The ‘Down Under’ banks have maintained their maintaining fiscal discipline and funding modest new “Beyond 2015 the stronger outlook for the strength since the GFC ravaged Northern Hemisphere spending initiatives beyond 2015. economy and an associated improvement in the tax banks. But every bank has been forced to step up with “In the lead-up to Budget 2014 both Prime Minister take should translate to a more substantial increase in bigger buffers in place aimed at obviating the need for Key and Finance Minister English have been at pains forecast surpluses (even after taking into account a government rescues when the tide goes out. Westpac to hose down expectations of a big pre-election modest increase in spending).” Group’s common equity tier 1 capital ratio of 8.82% is spend-up,” said Stephens. the strongest in the sector. In his pre-budget speech Key emphasised the policy Changes “We have a market-leading capital position that importance of “maintaining fiscal discipline”, while In recent Budgets, much of the attention has been on enables us to strike the right balance between pro - in his own pre-Budget comments English reiterated cost cutting initiatives as the Government focused on viding additional value to shareholders and remaining messages about keeping a lid on government keeping a tight rein on spending and debt during appropriately conservative to invest in future growth,” spending as an important way of limiting interest rate relatively rocky period for the New Zealand Kelly said. rises. economy. Westpac has increased the interim dividend 4cps on “However, momentum in the economy is set to “But with the economy now clearly on a firmer the pcp and 2 cps against the prior half, to 90 cps. The translate into an upgraded revenue forecast. This footing and September’s election looming, this focus div payout ratio is around 74%. would leave the Government room to announce some is surely set to shift (even if modestly) away from Westpac has approximately 585,000 shareholders. modest new spending initiatives beyond 2015 while cost cutting and toward new spending initiatives in at the same time reducing debt and continuing the this week’s Budget. That said, some of the loosening message of fiscal responsibility. in the purse strings might be rather subtle. ANALYST’S view “While we don’t know what form any additional Treasury forecasts spending measures might take, the Government has First NZ Capital/ Credit Suisse said it was a “solid “The Treasury is likely to forecast stronger GDP indicated a preference to retain its focus on spending result from a full multiple stock”; current share growth in this week’s Budget than in December’s on healthcare, education and “safe communities and price is around A$34.45 and the FNZC TP is $34.50. Half Year Economic and Fiscal Update (HYEFU), less welfare dependency”. Their rating is an unchanged UnderPerform. reflecting stronger momentum in the domestic “Announcements in the run up to Budget 2014 “Following the 1H14 result we have raised our economy over the latter part of 2013 and early 2014. have been relatively minor as the Government keeps estimates by 1-2% throughout the forecast period, “Notably it will probably upgrade its migration fore- its powder dry for Budget day. The largest pre-budget increasing our target price from $33.50 to $34.50 casts (a key risk identified in the HYEFU). The HYEFU announcement so far has been $100 million of new with “A solid result, albeit with headline earnings projected annual net migration peaking at around money for the Defence Force. flattered by a very low bad debt charge.” 26,000 with an upside scenario of 32,000 peak. This now “Other smaller spending initiatives already What FNZC liked: “Reasonable revenue growth/ looks rather conservative given our own forecasts of net announced include new funding for sexual violence good margin management; recovering balance sheet migration peaking a touch above 40,000. services, apprenticeships and cochlear ear implants, momentum; ongoing asset quality improvements and “In contrast, Treasury’s inflation forecasts could cash incentives for beneficiaries to move to expanding ROE.” well be shaded down a touch in the near term, Christchurch and more money for NZ Trade and What they didn’t like: “Declining collective provi- reflecting strength in the exchange rate. However, it Enterprise operations.” sion coverage/very low bad debt charge; lack of a remains to be seen whether the Treasury forecasters further special dividend notwithstanding surplus will be completely convinced of RBNZ Governor Bond programme franking credits held. Industry read-throughs: Bad Wheeler’s renewed focus on the mid-point of the The improving Government accounts are likely to debt charges continue to decline (assisted by inflation target (HYEFU forecasts had inflation allow the Debt Management Office to continue to declining impaired ratios and collective provision remaining consistently above 2% from 2015). scale back its borrowing programme. In the HYEFU coverage) driving in particular strong sequential Westpac says the stronger outlook for the economy borrowing requirements were reduced by $4bn out to New Zealand earnings growth.” should more than offset the weaker starting point of 2017. WBC currently trades on 14.2x 12-month pro- this year’s below-forecast tax take. “We think this could be extended in the budget, spective earnings (5% premium to the major bank Core Crown tax revenue was running about 1.8% with potentially another reduction in the bond peer group vs a 3% four-year average premium) and behind December’s forecasts for the nine months programme of around $2bn between 2016 and 2018,” a corresponding book multiple of 2.2x. ended March. said Stephens.

Managing Editor: Warren Head. 8 Sheffield Crescent, PORTFOLIO COMMENT P.O. Box 3762, Christchurch, New Zealand Editorial: (03) 357 0442, fax (03) 357 0426, (021) 340 650. • A2 Corporation $2.85. Forsyth Barr believe a2 • oceanaGold $2.85. Forsyth Barr says OGC Advertising: Ira Rawiri (09) 360 1026, fax (09) 360 1028, E-mail: [email protected] An MG Publications magazine Milk is well placed through its relationship with produced another record quarterly result with Production: [email protected] Synlait to achieve registration for infant formula 1Q14 EBITDA lifting +3% on the back of low Subscriptions: FREEPOST 5003, P O Box 20034, Christchurch. exports to . They think the market has operating costs and high Didipio sales. “The Freephone 0800 64 96 96 E-mail: [email protected] over-reacted in recent weeks on theback of the result is particularly impressive given the Copyright 1979-2014. All rights reserved. No part of this work may be reproduced or copied in any form or by any means (graphic, tech sell-off and potential regulatory risk and continued weakness in the gold price.” But no electronic or mechanical, including photocopying, recording, taping, or information and retrieval systems) without the written permis- sion of the publisher, “Mercantile Gazette Marketing Ltd”, P.O. Box 3762, Christchurch. “The Headliner” is published and circulated 24 upgraded their rating to OUTPERFORM. change in their UnderPerform rating. times a year. All information is provided in good faith with all possible care and attention given to its preparation. Whilst the informa- • delegat’s Group $ 4.00. First NZ Capital like • $4.00. KMD impressed at the tion is derived from sources believed to have been accurate and reliable, no guarantee of accuracy can be given and opinions are DGL’s strong quinella of organic and acquisi- Macquarie Investor Day and the performance subject to change without notice. Mercantile Gazette Marketing Ltd, its directors and employees do not accept liability for the results of any actions taken or not taken on the basis of information in the newsletter, or for any errors or omissions contained herein either tory growth, strong brands and market posi- update was positively received, Yet FNZC to matters of judgement or fact. Those acting upon the information and recommendations do so entirely at their own risk. Mercantile tioning. They see EBITDA doubling between says it doesn’t imply an upgrade and they Gazette Marketing Ltd and/or their directors 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 FY13-19. Their rating is OutPerform with a reduced their rating to UnderPerform, with a (Investment Advisers and Brokers) Regulations 2007, disclosure statements will be available free of charge from any external target price of $4.60. TP of $4.75. adviser or broker quoted in The Headliner or providing a column to the publication. Our full terms and conditions are posted on www.headliner.co.nz. Typeset by MG Publications and printed for the proprietors, Mercantile Gazette Marketing Ltd, Christchurch, NOTE:Headlineritselfhasnoviewonanystockmentioned.Stocksmentionedmaynotsuityourrisk by Guardian Print, Ashburton. International standard serial number 0110-9790. profile.Reportsmaybeabbreviatedandreadersareurgedtoseekindependentprofessionaladvice.

Page 2 “The Headliner” 15 MAY 2014 energy stocks Meridian has cashflow growth (MEL) looks likely to achieve or slightly exceed its FY14 PFI EBITDAF — if 4Q hydro production is “average”, says First NZ Capital. “Our financial model indicates FY14F EBITDAF of $571m (4% ahead of PFI), assuming June quarter hydro produc- tion equals the last 15 years average (2,670GWh). The brokerage sees Meridian as on track for a FY15 EBITDAF boost and capex reduction from completion of lEfT: ThE KAN TAN dRilliNG new windfarms. Mill Creek and Mt RiG UNdER Tow. Mercer look to be still tracking to budget with FY15 completion expected for both projects. “But hydrology never sleeps: our modelled EBITDAF can still vary between $510m and $585m depending Pateke-4H oil find upon MEL’s 4Q hydro generation.” Can MEL break away from its his- torical retail underperformance asks FNZC? “Our analysis indicates MEL has upbeat for NZOG the lowest overall retail margins among its peers. A $55m p.a. upside awaits, if it can crack the $10/MWh The pateke-4h well’s location of more However, oil-bearing properties of that the share price is not currently margin gap to its rivals. oil in the area of Tui field offshore the Kapuni F10 reservoir are positive factoring in the Pateke news. MEL’s 1H14 total employee and Taranaki is positive for the listed and the fact that NZO has announced Following the news that the drill other operating expenses were virtu- explorer NZoG and pan pacific that the Tui JV is completing the well at string had broken in mid-March, NZO’s ally unchanged from pcp, after petroleum. The well has penetrated the current depth and is preparing to tie share price fell ~-4cps. Since then, the adjusting for $8m of one-off IPO costs. 749m of oil-bearing f10 reservoir sand it back to the Tui FPSO, Umuroa, means share price has recovered ~+2cps, FNZC look to modest cost reduction which has been described as having that once production commences NZO leaving a gap of 2cps, without including as an upside opportunity from FY15, “excellent reservoir properties will be clawing back that all-up cost. Pateke upside.” and believe cost reduction circa $10m throughout”. The total depth was revised from the They have reassessed their FY14 fore- p.a. might be plausible. This is comparable with the original 5,381 metre target due to the cast in light of the significant shipment Their risked spot-DCF rises 14cps to producing reservoirs at Pateke-3H and high quality of the reservoir encoun- of oil at the end of 3Q14 and the likeli- $1.87, and their fully-paid target price in the Amokura and Tui Fields. tered and to ensure a stable well bore hood that no further shipments will be lifts to $1.85 (i.e. $1.35 for partly- Pre-drill 2C resource estimates recov- was achieved for effective completion made in 4Q14. With the next Tui ship- paid instalment receipts). “We retain erable from Pateke-4H were estimated at and production. ment likely to fall in FY15, revenue of our OUTPERFORM rating on valuation 2.5 million, 375,000 barrels net to Pan Installation of a 6 5/8 inch slotted $7.8m and EBITDAX of ~$4.5m has been grounds, and on the potential for cost Pacific Petroleum. production liner has been completed shifted from FY14 to FY15. savings and better retail perform- Further work is required to determine and operations are currently setting the Forbar’s rating on NZO is ance.” the expected recovery from Pateke-4H, liner hanger. OUTPERFORM. but given the excellent reservoir proper- Analysts at Forsyth Barr view the “The Pateke 4H well appears to be ties initial evaluation suggests a result news flow as positive. “The fact that commercial and there is potential upside consistent with pre-drill estimates. the well is being tied back before the when the well is fully appraised. In Pick up for Further details of resource estimates will target depth was reached indicates addition NZO has two wells to drill be provided in due course when the that the operator is confident of over the coming 12 months and ongoing Kirkcaldie & Stains data has been fully analysed. producing from the Pateke accumula- cash flows from Tui and Kupe.” Continuedfrompage1 Pateke-4H will be tied back to the Tui tion without going the full depth. That The well ended at a total measured store-wide loyalty programme in May as the FPSO for production with first oil also suggests to us that upside from depth of 4,772 metres, including a 749 final part of a IT-CRM investment plan. expected before the end of Q1 2015. the 2.5m barrel estimate is more likely metre horizontal section through the “The programme will give us access to The costs of the Pateke-4H well than downside. reservoir. customers’ spending habits and in turn it offshore Taranaki increased when the oil “At this stage we retain our current Preparations are being made to run will allow targeted advertising and promo- rig putting down the well encountered 1cps valuation but will not adjust our the completion and suspend the well to tions, while at the same time rewarding our downhole difficulties during its drilling. profit forecasts until a more accurate enable production in the first quarter of loyal customers.” Based on the significant additional reserves estimate is available.” That 2015 following the installation of sub-sea work required to mitigate the mechan- said, Forbar note the moderate upside flowline infrastructure and tie-back to oNliNE pRESENCE ical difficulties and drill the two side- should reserves come in higher than the Tui FPSO, Umuroa. ”We are continuing to grow our online pres- tracks, costs have increased beyond the 2.5m barrels. These activities are expected to take ence and by the end of the financial year pre-drilling estimate, and the total Further analysis is required to deter- about 10 days. The well will then be we will have most of our cosmetics offered project cost to New Zealand Oil & Gas mine the expected recovery from suspended and the rig will move to the online with a target of 30,000 individual (including the costs of tie back) is Pateke-4H, but initial evaluation is Oi-1 location. items. The property operations reported a currently expected to be in the range of consistent with the pre-drill 2C resource On current planning Oi-1 is expected pre-tax profit of $650,000 compared to a pre-tax loss of $398,000 in the prior year.” US$40-46m. This estimate will be estimate of 2.5 million barrels (687,500 to spud during the last week of May. updated when more certainty exists The property operations benefited from barrels net to NZOG). • NZOG share price 78c; Forsyth Barr the reinstatement of the rental income for around subsea installation costs. Forsyth Barr says, “It appears to us Target Price 95c. levels 4 and 5 of the Harbour City Centre building (HCC), now leased to . Last year’s result was negatively impacted by the second phase of the rede- TrustPower looks ready for rerating velopment work on the HCC and associated demolitions and repairs and maintenance one of the veterans of the listed IPO/placement allocations is those of CEN and MRP. costs. The redevelopment of levels 4 and 5 energy sector, Trustpower, is closing in unwinding. “TrustPower had a small drop in and common areas of the HCC which on the $7 mark for its ordinary shares • The above-market dividend yields of earnings in FY13 and we estimate it started in October 2012 was fully com- as the stock swings higher in the the IPOs are being normalised. will in May report another drop for pleted in December 2013 and on budget. current quarter. over the past 4 weeks, TrustPower’s shares have underper- FY14.” Over the last few months Kirks have Tpw shares have traded in a narrow formed in the recent rally, they add. There is a lot happening inside this been concentrating on finding a tenant for band between $6.43 and $6.92 a share. “While Meridian Energy (MELCA), company. “The company is turning the ground floor retail space in the HCC The 52 week high is $7.68. Contact Energy (CEN) and Mighty around its retail offering, ramping up which was vacated by the retail business Nevertheless, in the view of River Power (MRP) are up 44%, 26% production from its Southtown II wind last year. They are in last negotiation stages analysts at Forsyth Barr the recent and 21%, respectively, from their early- farm, and has further wind farm devel- with a well known retailer. On 10.2.14 the rally in the electricity sector has left December troughs, TrustPower (TPW) opment opportunities in Australia. group announced the decision to offer the HCC for sale by international tender. Tenders TrustPower despite being “one of the is up a mere 3%. That is despite “Based on these growth sources we closed on 16.4.14 and the company is con- forecast a resumption of EPS growth to most promising companies in the TrustPower having fallen almost as tinuing to work through the sales process. sector”. much (-17%) between April/May and 20% in FY15 and 14% in FY16, signifi- The group balance sheet continues to be The electricity sector has had a December last year as Contact (-19%) cantly higher than the growth rates of robust with shareholders’ funds of strong recovery since early December, and Mighty River (-25%) did.” its peers,” says Forsyth Barr. “TPW is $37,670,000 which represent an equity ratio and particularly over the rainy April In this view a re-rating is inevitable attractively priced at an adjusted P/E of 56.3%. The group held cash and cash period. because it would be backed by earnings of 13.4x FY15 earnings, compared to the equivalents of $3,291,000 at 28.2.14. The Forsyth Barr see three reasons for the growth. sector average of 14.3x. cash inflow from operating activities was rally: Forbar like TrustPower’s strong port- “Our 12-month expected total $859,000, a significant improvement on last • Fears of the implementation of the folio of renewable generation assets, return for TPW (based on our DCF year cash outflow of $918,000 thanks to the Labour/Greens electricity policy “which over a long horizon will valuation and dividend) is +17% the cost reduction programme. have eased on the back of Labour’s become even more attractive”. status quo scenario and is even posi- There was no div given that there is still poor performance in the polls. “From a portfolio perspective, TPW’s tive (+7%) under a single-buyer model uncertainty around 2H14 and still not a • The weight of selling to fund SOE generation exposure complements scenario.” definitive outcome on the sale of the HCC.

“The Headliner” 15 MAY 2014 Page 3 retail insurance THE STRATEGY ‘Go’ for IAG Kathmandu - see presentation on www.headliner.co.nz * in major thrives in insurance move The Commerce Commission has granted clearance to IAG cold spell (NZ) Holdings Ltd to acquire Lumley General Insurance (N.Z.) Ltd. The proposed acquisition forms part of a wider acquisition by IAG’s parent, Insurance Australia Group Ltd, of Kathmandu (KMd) was a standout on trans-Tasman the Australian and New Zealand underwriting businesses of markets last week, rising 7.4% to A$3.77 and 7.9% Ltd, Lumley’s parent. (+29c) to $3.97 on NZX after announcing its 3Q sales The Commission is satisfied that the proposed acquisition grew by nearly 4% due to colder weather in will not have, or would not be likely to have, the effect of Australia and New Zealand. substantially lessening competition, for personal and com- The update was delivered in a comprehensive mercial insurance products. presentation to Macquarie’s Investor Day in . Lumley has a small presence in personal home, contents and motor vehicle insurance, where three main insurance Total group sales for the 13 weeks, 27 January to 27 providers (IAG, Vero, Tower) will continue to operate in New April were $93.0m, up 3.6% Y-O-Y at actual exchange Zealand in addition to a number of other companies pro- rates (12.9% at constant exchange rates). viding general insurance products. While Lumley’s presence Key facts were: is larger in commercial insurance, as with personal insur- • Same store sales for the same period down 0.6% ance, a number of providers will continue to operate in New Y-O-Y at actual exchange rates (up 8.2% at constant Zealand including Vero, QBE, Zurich, Allianz, AIG, ACE and exchange rates). others. • Gross margin for third quarter in-line with prior Commerce Commission Chairman Dr Mark Berry says IAG year. will still need to compete with other insurers on price and quality. “By their nature all mergers create a larger company • Strong trading performance at the end of our with a greater market share. However, that does not mean Easter Sale promotion assisted by: that a substantial lessening of competition in the market − late Easter holiday timing; and KAThMANdU’S liChfiEld STREET SToRE iN naturally follows. In this case the Commission is satisfied − the change to cooler weather in both Australia competition remains.” ChRiSThURCh. and New Zealand. “We have considered submissions from a number of “Winter sale in June/July is our interested parties and we are confident that IAG’s purchase largest promotional event each year, of Lumley will not materially change the provision of serv- and weather is a key variable relevant ices or the ability of customers to shop around as other to relative success of this sale,” said companies will be able to expand to replace Lumley’s posi- tion,” said Dr Berry. CEO Peter Halkett. Jacki Johnson, CEO New Zealand for IAG, welcomed the He added that KMD has had approval and added, “both Lumley and our own intermedi- • a positive start to FY14 and is ated business, NZI, have well-established competitors in New • continuing to invest in strategies to Zealand and our view has always been that the increment to deliver future growth. IAG’s personal and commercial lines business from the trans- “We remain confident of a strong action will not substantially lessen competition.” performance for full year FY14,” said Lumley in New Zealand has complementary strengths to Halkett. IAG’s existing NZI business, she said. Part of the presentation was deliv- Locally the acquisition of Lumley remains subject to approval by the Reserve . ered by Grant Taylor, KMD’s new CIO. IAG is a wholly-owned subsidiary of Insurance Group Ltd, He said Kathmandu’s vertical an Australian general insurance company listed on the ASX. strategy has been a competitive advan- In New Zealand, IAG offers a range of personal and commer- tage but the Best of Breed IT strategy cial insurance products, including domestic home, contents, was heavily reliant on overnight inte- motor vehicle and pleasure craft insurance as well as com- grations and not scalable and had mercial motor vehicle, property and marine cargo insurance. issues with features and functionality IAG supplies the majority of its products under the State, He said the data was accurate . . . ”but AMI and NZI brands. IAG sells its personal insurance prod- accurate yesterday”. The outgrown legacy systems more increased choice meant Kathmandu needed to ucts directly to consumers, primarily through the State and adapt to meet the challenge. Re-platforming system AMI brands. State also offers a range of commercial insur- created a strong need for change. ance policies for business customers. However, the NZI brand His key points mapped a new route for KMD with architecture is the key component to achieving is used by IAG to sell commercial and personal insurance via the aid of a new Microsoft enterprise platform. Kathmandu’s business strategy of growth, entering intermediaries, such as brokers, banks and motor vehicle Microsoft AX for Retail was selected. new markets and improving customer experience. dealers. Currently, IAG provides personal insurance products The legacy systems at Kathmandu would not “A large amount of work has already been success- through a relationship with several banks, including ASB and deliver future requirements and Microsoft was chosen fully completed and is in progress. In Q1 FY15 the BNZ. as a core platform. Taylor said it was a plan for the programme of work to re-platform and build the future — “Step change!” foundation will be completed. What happens next lumley The requirements were now for real time informa- will be focused on content and customer experiences. Lumley is 100% owned by Wesfarmers Ltd, which is an ASX- tion, improved customer information and experiences. Future phases will continue to improve these listed company. Lumley offers a range of commercial and customer experiences and move the focus from personal insurance products through brokers and other ”Expectations of customers have become more intermediaries, including commercial motor, property, marine sophisticated. It’s expected that the availability of backend systems to frontend solutions. and domestic house, contents, motor vehicle and pleasure stock, offers and customer information would be craft insurance. In contrast with IAG, Lumley supplies virtu- accurate and timely across all channels. * Access is by PREMIUM member password - ally all of its insurance products through intermediaries, “Social media, loyalty, in-store technology and contact us on if you wish to activate access. including Westpac and other corporate partners.

marketing and sales channel to more small businesses ship will require investment by XRO if it is to take full Xero is now an throughout the country.” But it got people talking. advantage of the opportunity it offers.” Forsyth Barr commented: “The announcement that Despite the significant coup of partnering with Block American story XRO will be H&R Blocks’ preferred core small busi- and reduced cash burn for Q4, “XRO’s journey remains ness online accounting solution provider is a coup for in its infancy,” they added. “The H&R Block relation- Continuedfrompage1 XRO. This fills a significant gap in XRO’s US product ship will only hit its strides in the medium term. The integration enables customers to link their Xero portfolio by providing an integrated tax solution. It Meanwhile cash burn has reduced, however, this is and Square accounts in minutes, allowing transaction also provides access to H&R Block’s customer base (it primarily a timing issue, with the full impact of addi- data to flow automatically from point of sale from supports the completion of 1 in 7 US tax returns which tional staff hires for the US market to impact cashflow Square to back-office accounting software from Xero. would equate to 4m SMEs). In the US H&R Block from 1H15.” Sellers and small businesses can now save time, which competes with (INTU) and its TurboTax Forbar’s rating remains UNDERPERFORM and their apparently was previously spent manually inputting product.” price target remains unchanged at $24.75. They predict sales. “Like any relationship this will take time to mature a -23% 12-month return (the share price is down 23% on The idea is classic Xero, selling affordable and acces- and the full benefits will only be seen in the medium a 12-month rolling average). sible software to small businesses, as Square’s software term. In the interim XRO will need to integrate its prod- partner platform. Founded only 5 years ago Square is ucts into those provided by H&R Block and develop the headquartered in San Francisco. Maybe this is why the collateral to explain its services to this potential Xero US team headquartered itself in San Francisco. customer base.” Square offers simple and affordable tools so busi- The analysts stress that this is a critical step “if XRO nesses of all sizes can start, run, and grow. The is to reach its aspirations in the US market and the company began with a free credit card reader for customer connections we have forecast it will achieve.” iPhone, iPad, and Android devices, allowing businesses XRO’s latest quarterly cashflow report shows overall to accept credit cards anywhere, anytime, for one low cash burn of NZ$11.3m, which compares favourably rate. Square now offers a full suite of hardware and with the NZ$13.8m spent in 3Q14. Revenues are up software tools including Square Register, Square Stand, +13% on the prior quarter to NZ$20.4m with operating Square Market, Square Wallet, and Square Cash. costs of NZ$14.8m. Capex costs were down 16% on the Which brings us to the XRO alliance with H&R prior quarter to NZ$6.1m. Block, Inc. (NYSE: HRB), the world’s largest consumer tax services provider. fy15 RAMp Up The alliance sees Xero become the preferred core Forsyth Barr expect XRO’s costs to ramp up into FY15 small business online accounting solution in H&R as the full impact of staff acquisitions start impacting Block’s Small Business suite of services in the US. cashflows and an increasing presence in Australia, UK All XRO said was “For Xero, partnering with the and the US drives additional advertising and marketing well-known tax company gives it the opportunity to spend. “This is healthy investment and consistent with increase its brand awareness in the U.S. and expand its XRO’s strategy. We also expect the H&R Block partner- Page 4 “The Headliner” 15 MAY 2014 australia Western Aussie towing building sector n Macquarie and Myer get cold shoulder Total Australian Building approvals came in below expectations, falling 3.5% in March. While this was driven by a 7.5% decline in (MQG) delivered a better than expected multi-unit approvals, single detached result announcing that full year profit rose 49% reflecting dwelling approvals were effectively flat. improved conditions in equity markets, reports CommSec. “For context, activity is still signifi- “The investment bank made a net profit of $1.265 billion cantly higher than last year and fore- in the last 12 months compared to $851m a year ago. shadows a growing number of housing MQG declared a final dividend of $1.60 per share, up from starts towards +190k (vs. long-term the 2013 final distribution of $1.25. The fly in the ointment average of 150k) over the coming quar- from the markets perspective was the guidance. ters,” reports First NZ Capital/Credit Suisse. The group pointed to a full year net profit which is “However, slowing momentum may be expected to be broadly in line with 2014, with a better exacerbated by impending fiscal austerity result in the offing if market conditions continue to improve. and weakening consumer confidence — MQG shares have risen by 4.5 per cent so far this year; but something which needs to be closely moni- this result fell a little short for some investors. tored. “WA is still riding the wave: Regionally, MYER DISAPPOINTS single-detached dwelling approvals were Myer (MYR) was another stock to suffer at the hands of an strongest in WA, rising 2.8% to the highest update, although the response was to a weaker result, level since 2006. It’s hard to see this level of activity being , wESTERN AUSTRAliA. reports CommSec. sustained given the impending capex cliff. “Total sales in the 13 weeks to April 26 came to $646.5m, “But for now, on-going strength should accelerate the NSW -0.2%, VIC -2.7%, QLD -3.1% and SA -1.3%.” a 0.93% fall on the previous corresponding period and below excessive brick inventory unwind (WA is the only state The renovation market is accelerating: “The renovation expectations of $661.8m. where all homes are effectively double brick) which bodes cycle typically lags the new home construction one and we “MYR blamed refurbishment work at some of its top well for industry returns — particularly for BLD after an are beginning to see this story play out with Alterations & stores on the decline. Comparable sales, which exclude the extended period of losses (Midland Brick). Perhaps the Additions data up 1.3% (+11.1% YoY). impact of the refurbishment work, edged higher by a modest strength in activity also goes some way to justify (in part) The analysis suggests that strength in housing turnover 0.24 per cent increase year-on-year. the recent re-commissioning of BLD’s mothballed kiln in foreshadows a +10% improvement in the renovation “MYR said fourth quarter sales would receive a boost WA. Across other states, weakness was broad-based with activity over the coming 6-12 months. from the re-opening of its CBD store and it’s Indooroopilly Store in . Additionally, the flagship store would benefit from the opening of 7,000 square metres of new space as part of the adjacent n ‘Opportunistic’ bid for Goodman Fielder Emporium development.”

Goodman Fielder has advised the ASX and NSX markets that materially undervalues Goodman Fielder and is opportunistic it has copped a takeover bid. and they told Wilmar and First Pacific that. n strong in parts It has received a non-binding, highly conditional proposal The board of Goodman Fielder says it remains focused on to acquire all the issued equity in Goodman Fielder by way maximising shareholder value and will be constructive in Ord Minnett expects Harvey Norman to report a third- of a scheme of arrangement at a proposed price of A$0.65 relation to proposals which are consistent with this objec- quarter total sales increase of 3.6% on a year ago, with per share. tive. like-for-like (LFL) sales up 2.3%. “Although Harvey Norman The proposal was received over the weekend from Wilmar In the meantime, Goodman Fielder is committed to the is cycling a positive comparable (2.0% LFL), a less compet - International, a 10.1% shareholder of Goodman Fielder, execution of its strategic plan and has: itive environment and continued support from housing jointly with First Pacific Company Ltd, a -listed • accelerated initiatives under Project Renaissance to should assist growth, while international operations to be investment management company. deliver an additional A$25m in cost savings, primarily supported by the weaker Australian dollar. he proposed scheme is conditional on, among other through headcount reduction in the fourth quarter of “The home category is likely to remain strong, with things, due diligence, unanimous recommendation by the FY14; computers and audio visual to be supported by potential board of Goodman Fielder, and approval by the boards of • progressed a strategic review to explore options to max- inflation and broader replacement cycles, although their Wilmar and First Pacific. imise the value of its New Zealand Dairy business; and outlook is likely to remain challenged. Wilmar and First Pacific also requested exclusivity in rela- • commenced a review of strategies to optimise the daily Home categories have been a focus, with growth to be tion to the proposal. Goodman Fielder directors “carefully fresh delivery model in its Baking business to deliver led by whitegoods, cooking and bedding and furniture to considered the proposal, together with its advisers, and has greater cost efficiencies. be somewhat softer, with housing a driver. met with representatives of Wilmar and First Pacific . . .” The Goodman Fielder has appointed Credit Suisse as financial The weaker AUD may support electronics inflation. New Goodman Fielder board believes that the current proposal adviser and Herbert Smith Freehills as legal adviser. TV technology and strength in tablets to assist audio visual and computers, although computers remain tough. In local currency by country, Ireland and Australia n Bid for Aquila expected to grow LFL sales with NZ to be in-line with the pcp.” In Australia, we forecast 3Q14 LFL sales growth of China’s Baosteel Group and (AUR) announced their “Our unrisked valuation is $3.62/shr for AQA shares,” said 0.5% (cycling 3.4%), with support from a less aggressive intention to make a joint offer worth $3.40 a share for the FNZC. “While AQA’s focus has been on the development of competitive environment and continued strength from shares in Aquila that they don’t currently own. the Eagle Downs hard coking coal mine (it hasn’t had the housing, although the first positive comp in multiple Baosteel is one of China’s largest steelmakers and already funds to develop the iron ore operations), this offer high- periods to be a challenge. owns 20% in Perth-based Aquila. AUR, whose operations are lights the strategic value of the iron ore assets. Our risked “In New Zealand, we expect 3Q14 LFL sales in local cur- mostly in Queensland, is Australia’s largest hauler of coal. valuation is $2.55/shr. rency to be roughly flat (cycling +1.5%) as the consumer AQA shares were at $3.37 a rise of 37%. “The bidders noted the potential for the Anketell port improves slowly and competitive pressures increase. Baosteel and Aurizon are to make a $3.40 cash offer. development to 350mtpa with the potential to provide “In Ireland, we forecast local currency LFL sales to con - Current share price is now around A$3.37. infrastructure solutions to other West Pilbara mining tinue mid single digit LFL growth. The weaker AUD to The $3.40/shr cash offer is conditional upon 50% projects. support reported sales from international operations.Ords minimum acceptance and FIRB approvals. There is no NDRC “Our modelling assumes 40mtpa. A fourth Pilbara iron ore maintain an Accumulate recommendation.” condition associated with the offer and no finance condition. port would not be positive for long run iron ore pricing.” “The joint bidders agreement sets out that if the bidders Meanwhile CEO Tony Polli’s position is unclear. “For the can move to compulsory acquisition (>90%), then Aurizon bidders to get over 50%, they will need to purchase an addi- n CSR has momentum will own ~15% of the shares and Baosteel will own ~85%,” tional 30.2% of the shares from a possible pool of 80.2% (of notes First NZ Capital. which CEO Tony Polli holds 28.9%). If Tony Polli does not CSR has outperformed the market by 10% over the past qtr, “Baosteel is currently a 19.8% shareholder. If the bidders support the offer, then the bidders will need to get ~59% of largely driven by consensus upgrades of +18% in YEM15. get control but can’t get to compulsory acquisition, then the ex Polli shares (30.2% from an available pool of 51.3%). “While it may be tempting to take some profits, we still Aurizon will own ~10% of AQA and Baosteel will own the “The offer is near our un-risked valuation ($3.62/shr) and believe the consensus is too low over the next two years,” balance.” we note that shareholders who accept the offer will bear says First NZ Capital. “We expect positive earnings In an accompanying presentation, Aurizon noted that it none of the execution/financing risk. momentum, complimented by undemanding valuation multi- did not aim to be a long-term shareholder in AQA but rather “We raise our target price to $3.40/shr, in line with the ples (absolute; relative) to drive further stock outperform- to gain an opportunity to own, develop and operate the WA offer price and maintain a NEUTRAL rating.” ance.” Their rating is OutPerform. iron ore rail and port infrastructure.

n Banking on rural book Edison on overseas equities Bendigo and Adelaide Bank (BEN) will purchase the Victorian gov- n Thunderbird Resorts are go ernment’s agribusiness lender Rural Finance Corporation for $1.78bn. Year Revenue EBITDA PBT EPS DPS P/E Yield The purchase will be partly funded with a $230 million institu- end ($m) ($m) ($m) (c) (c) (x) (%) tional capital raising, which is expected to be completed by mid- July. 12/12 111.8 16.4 (6.2) (0.39) 0.0 N/A N/A BEN will acquire Rural Finance’s $1.695 billion loan book, along 12/12 adj 58.2 4.4 (9.6) (0.42) 0.0 N/A N/A with its 11 offices across Victoria. 12/13 59.3 6.1 (6.6) (0.40) 0.0 N/A N/A Following the Rural Finance acquisition announcement, FNZC/CS have upgraded EPS estimates by 1% in outer years (corresponding 12/14e 62.0 8.0 (2.4) (0.17) 0.0 N/A N/A 7% upgrade to cash earnings) with an unchanged $12.20 target 12/15e 68.0 10.5 1.0 (0.02) 0.0 N/A N/A price and Neutral rating on the stock. They describe the deal as “A strategically sensible incremental Thunderbird Resorts is a research client of Edison Investment Research. acquisition (geographically in-market, diversifying the existing quite concentrated Rural Bank agri exposure) that is modestly EPS accre- Thunderbird Resorts operates gaming and hospitality busi- are unchanged. Thunderbird Resorts is well positioned in tive (we estimate 1% FY15E) and operationally quite digestible nesses in Peru, Costa Rica and Nicaragua. Its casinos and its core markets and a combination of selective expansion (loan book acquired equivalent to 3% of 1H14 loans).” slot parlours have over 3,100 gaming positions and gaming in high IRR projects and positive underlying gaming cash BEN is currently trading on 12.2x 12-month prospective earnings accounts for over 80% of revenues. In July 2013 it sold its flows should enable it to continue to reduce debt and (equating to an 11% discount to the major banks vs a 9% four-year operations, which accounted for 45% of EBITDA. finally move into profit from 2015. average discount; 3% discount to vs a 9% four- “2013 results were a tad ahead of our estimates with “The 2014 adjusted EV/EBITDA is only 6.1x and the val- year average premium) and a corresponding book multiple of 1.1x key metrics — EBITDA and net debt — moving in the uation is underpinned by $66m of real estate (net c $1.30 (major banks 2.2x, BOQ 1.3x). right direction” says Edison Research. “Our profit forecasts share) with a potential break-up value of over $3/share.”

“The Headliner” 15 MAY 2014 Page 5 moneymarket Just talking about it always helps The merest suggestion that the central bank could added Martin. “Still, it will be the Bank’s goal that by was the speech by RBNZ Governor Wheeler in which intervene in the currency markets overhung financial threatening such action it will not need to implement he reiterated his point from the April OCR review i.e. markets last week. within 24 hours the Kiwi dollar it. that future OCR hikes are highly dependent on the went from a peak performance to being the weakest The subsequent release of NZ labour data level of the NZ TWI, says Martin. performing major currency provided no reason for the NZD to halt its decline. “The high exchange rate, along with new Kymberly Martin markets strategist at BNZ said While activity indicators in the report were very economic data, will be a factor in our assessment of the initial catalyst for the decline was comments from strong there were limited inflationary indicators. The the extent and speed with which the OCR needs to be RBNZ Governor, Wheeler, in a prepared speech. NZD/USD fell from 0.8740 before stabilising around raised.” This is due to the probability that a strong “Ostensibly the speech was focused on the NZ dairy 0.8680 overnight. It was notable NZD weakness did currency will depress inflation in the tradable sector, sector, but seemed a thinly veiled vehicle to reinforce not extend overnight. Support for the NZD/USD is thereby limiting overall inflation. the RBNZ’s views on the NZD. now seen in the 0.8630-40 window. Once these comments had set sentiment, the subse- She says the market latched onto the following Despite Fed Governor Janet Yellen’s speech quent labour market reports provided yields with statement. “If the currency remains high in the face of prompting a rally in US Treasuries, there was only further excuse to extend their decline. While the worsening fundamentals, such as a continued weak- the briefest of response from currencies. “The speech reports showed soaring employment growth, there ening in export prices, it would become more oppor- was purposely vague, but expectedly dovish. were minimal signs of wage (inflationary) pressures. tune for the Reserve bank to intervene in the currency Ingrained lethargy appeared the overall theme in “Due to the stubbornly high NZD we believe there market.” currency markets in a relatively data-light night of is significantly increased risk the RBNZ pauses soon It has been a long time since the ‘i’ word has been trading. in its rate hiking cycle. However, we see the July used, and not one the Governor would use lightly, The initial catalyst for the move lower in NZ yields meeting as more likely than June. However, we would warn against complacency on the OCR front. A near-term pause would not change the medium- UPCOMING DIVIDENDS AND INTEREST — NEW ZEALAND term trajectory for the OCR, in our view. “The market now prices only around 130bps of Company Record Ex div i mputation OCR hikes in the coming two years. We still see at Code and Name Class period CpS date 5pm date payable Credit CpS least 200bps over this period. Consequently, we continue to see hedging value in current 2-4-year ASBPA PREF INTERIM 0.7758 05/05 01/05 15/05 0.3017 rates. We would also caution that the currency is a ASBPB PREF INTERIM 0.6624 05/05 01/05 15/05 0.2576 double-edged sword. The OCR outlook could look AUG Augusta Capital INTERIM 1.00 16/05 14/05 23/05 0.3889 quite different if the NZD were to fall sharply from its elevated levels (which it inevitably will, at some CDI CDL Investments FINAL 2.00 02/05 30/04 16/05 0.7778 stage).” MCK Millenium & Copthorne Hotels FINAL 1.20 09/05 07/05 16/05 0.4667 PCT Precinct Properties INTERIM 1.35 21/05 19/05 05/06 0.2377 PFI Property for Industry INTERIM 1.75 19/05 15/05 28/05 0.5071 RBD FINAL 10.00 13/06 11/06 27/06 3.8889 Expectations TUR Turners & Growers FINAL 5.00 22/05 20/05 29/05 1.9444 ZEL FINAL 14.30 23/05 21/05 04/06 5.5611 are elevated

OVERSEAS House price expectations remain elevated in the latest ASB Housing Confidence Survey, with a net 48% of respondents ANZ ANZ Banking Corporation INTERIM AUD 83.00 13/05 09/05 01/07 expecting house prices will keep rising higher in the year BIT Bankers Investment UNITS INTERIM GBP 3.60 02/05 30/04 30/05 ahead. Although slightly below where expectations were at the HFL Henderson Far East INTERIM GBP 4.40 09/05 07/05 30/05 same time last year, it is still a high reading by historical WBC Westpac Banking Corporation INTERIM AUD 90.00 16/05 14/05 02/07 standards for the survey, which dates back to 1996. ASB chief economist Nick Tuffley says the New Zealand housing market remains tight, with the level of house list- ings remaining at extremely low levels by historical stand- MONEYMARKET INTEREST RATES ards. “But the slight easing in price expectations is occurring Call 30d 2 M 3 M 4M 6 M 9 M 1 yr 18 M 2 y 3 yr 4 yr 5 yr at a time where we are also observing a slightly lower ANZ investment level of sales. Some respondents are likely expecting some $10,000+ 2.80 2.80 3.25 3.50 3.75 4.00 4.10 4.75 5.00 5.25 5.50 5.75 moderation after the price rises recorded over the last year or so, but very few expect prices to fall,” Tuffley says. ASB Bank Expectations of house price gains are still the strongest $5000-$9999 2.00 2.25 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 in Canterbury, although not as bullish as a year earlier. $10,000+ 2.80 2.85 3.25 3.50 3.75 4.00 4.10 4.30 4.60 5.00 5.25 5.50 Expectation is also growing for interest rates to keep rising over the next 12 months, with a net 70% of BNZ Bank respondents expecting interest rate hikes, as opposed to $2000-$4999 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 55% in the February survey. $5000-$1m 2.80 2.85 3.25 3.50 4.00 4.00 4.25 4.50 4.75 5.00 5.25 5.50 The increase in the Official Cash Rate at the Reserve Co-operative Bank Bank’s March 13 meeting was well signalled over the pre- $2000-$9,999 2.90 3.60 3.70 4.00 4.05 4.70 4.95 5.20 5.45 ceding months, he adds. “However, there is nothing like an $10,000-$50,000 3.00 3.70 3.80 4.10 4.15 4.80 5.05 5.30 5.55 actual mortgage rate increase to convince homeowners that rates are rising,” Tuffley says. f&p finance “Back in January, a net 51% expected higher interest $1,000-$25,000 3.25 3.85 4.10 4.10 4.35 4.45 4.75 5.10 5.35 5.60 rates over the coming year. That was quite a high number, $25,000-$250,000 3.25 4.00 4.25 4.25 4.50 4.60 4.90 5.25 5.50 5.75 but in the April quarter survey that number has jumped to 70%. The RBNZ continues to signal it expects to deliver forsyth Barr Cash further hikes over the next few years. Borrowers are Management Fund getting that message loud and clear.” $3000-$19,999 2.00 Is it a good time to buy? $20,000-$49,999 2.50 Sentiment about buying a house has improved over the $50,000-$249,999 3.00 last three months, but still remains negative, with a net $250,000+ 3.25 4% of respondents believing now is a bad time to buy. That’s a small improvement on the net 9% recorded in the Gold Band finance February survey. and Christchurch remain the $500 - $4999 2.00 2.00 3.00 5.00 5.50 5.75 6.00 6.00 most pessimistic — cities where the housing market is the $5000+ 2.50 2.50 3.50 5.50 6.00 6.25 6.50 6.50 tightest. “A net 4% of respondents now believe it is a bad time Fixed Term Interest Rates to buy. That’s a slight improvement on the preceding $1000 -$20,000 3.55 3.55 3.80 4.00 3.85 4.25 4.40 4.65 4.90 5.15 5.40 quarter, but it is still a weak result. The combination of $20,000 + 3.65 3.65 3.90 4.00 3.95 4.25 4.50 4.75 5.00 5.25 5.50 high house prices and increasing interest rates is not great for house affordability — the mix continues to weigh on Mutual Credit finance 5.25 5.75 6.75 7.50 7.50 7.50 confidence,” Tuffley says. The divergent sentiment around the country reflects SBS Bank the different dynamics at play in each region. While the $1000-$250,000 4.00 4.00 4.40 4.40 4.85 5.10 high LVR restrictions and mortgage rate increases are Tower Managed funds common to all markets, factors such as house prices and Cash Fund 0.56 2.43 2.48 2.62 affordability, the rate of house price appreciation and the supply/demand balance all vary from region to region. TSB Bank The RBNZ’s tightening cycle will push up mortgage $5000-$9999 3.00 3.00 3.10 3.90 4.00 4.10 4.25 4.65 4.80 5.50 rates, which in turn will help keep demand for housing $10,000+ 2.75 3.00 3.25 4.00 4.10 4.25 4.50 4.75 5.00 5.75 in check. However, the supply side of the housing market equation is equally important. More dwellings UdC finance need to be built to house New Zealand’s growing popu- $5,000-$19,999 2.00 3.00 3.00 3.35 3.55 4.00 4.05 4.20 4.75 5.00 5.35 5.80 6.25 lation and help restore balance to the market. The $20,000-$99,999 3.40 3.00 3.00 3.35 3.55 4.00 4.05 4.20 4.75 5.00 5.35 5.80 6.25 strong pick-up in building consents over the past year $100,000+ 3.55 3.00 3.00 3.45 3.65 4.10 4.15 4.30 4.85 5.10 5.45 5.90 6.35 suggests this process is getting underway, but it needs Call 30d 2 M 3 M 4M 6 M 9 M 1 yr 18 M 2 y 3 yr 4 yr 5 yr to continue, Tuffley says.

Page 6 “The Headliner” 15 MAY 2014 Boardroom INDEX Page New CEO for Mighty River Power Australia 5 Currency 8 Mighty River Power’s current GM of Operations, Fraser Whineray, has blood into the leadership of one of New Zealand’s largest listed been appointed Chief Executive and will take up the role on 1.9.14. companies. IAG 4 MRP chair, Joan Withers, said Whineray was a “standout candidate” “Fraser has been a key contributor to our achievements over Kathmandu 4 from the global search started in 2013, carried out by Egon Zehnder, recent years in driving performance and achieving greater resilience which attracted strong interest from high-calibre candidates in our business — particularly with bringing more than 2,800GWh Kirkaldie & Stains 1 including chief executives from both New Zealand and Australia. of reliable renewable geothermal generation into our operations, Meridian 3 “This was a unanimous decision from our board and we are confi- which now makes up more than 40% of our business.” dent that Fraser is the right person to succeed our foundation chief The structure of the remuneration package is consistent with Moneymerket 6 executive Doug Heffernan and lead the next phase in the evolution of MRP’s remuneration policy. Mr Whineray will receive a base salary of Mood of the Markets 8 Mighty River Power. Fraser has proven his leadership qualities and $850,000, and he will also be eligible to receive short and long-term credentials in driving world-class performance in our operating busi- incentives. He will have the opportunity to earn an annual short- NZ Oil & Gas 3 ness, which makes up a large portion of Mighty River — and is fun- term performance incentive of 35% of the base salary ($297,500) Overses Equities 5 damental to our financial results.” subject to meeting stretch targets across key performance areas set Mighty River Power’s operations include the nine hydro stations by the board using a balanced scorecard approach. The Long-Term Portfolio Commment 2 on the Waikato River and five geothermal power stations in the Incentive (LTI) component has a potential annual value of up to Top Tier 2 central North Island that harness natural resources to generate $200,000, and its structure is consistent with the company’s share- renewable energy equivalent to the annual consumption of about one based LTI plan with a three-year vesting period where vesting is TrustPower 3 million New Zealand homes. subject to meeting financial and shareholder return performance Westpac 2 “Fraser has been a champion of safety, implementing our major hurdles determined by the board. hydro re-investment programme and successfully integrating our new Mr Whineray graduated BE Chem Hons (Canterbury), MBA Xero 1 geothermal plants into our portfolio.” (Cambridge), GRADDIP DY.SCI.TECH Distinction (Massey). Doug Heffernan will be leaving the company on 31.8.14 after 16 He is currently MRP’s General Manager, Operations. Since 2008 he years as chief executive, with his tenure covering the full 2014 finan- has been a non-executive director of NZX-listed Opus International Biggest rises cial year and results relating to the prospective financial forecasts in Consultants. Prior to that he was: last year’s IPO. Mr Whineray will be Chief Executive Designate from • 2008 - 2011: Mighty River Power, General Manager, Generation Week ending 9.5.14 Price Rise 1.7.14 reporting to Doug Heffernan. • 2006 - 2008: Carter Holt Harvey, Director Operational Westpac $37.87 +67c Whineray joined the MRP executive team in 2008 from Carter Holt Improvement TrustPower $7.05 +35c Harvey and currently holds responsibility for the company’s hydro, • 2005 - 2006: Crystal Solutions, Chief Executive geothermal and gas-fired generation operations and wholesale • 2003 - 2005: New Zealand Dairy Foods (Puhoi Valley Cheese), Abano Healthcare $7.00 +25c markets portfolio. Prior to CHH he held a number of senior roles in General Manager Kathmandu $3.88 +25c • 2002 - 2003: , Mergers and Acquisitions the dairy industry, and with Credit Suisse First Boston — gaining a Comvita $3.50 +20c diversity of domestic and international experience covering FMCG, • 1997 - 2002: Credit Suisse First Boston, Investment Banking performance management, strategy, capital markets and mergers and (Sydney, Wellington) AWF $1.71 +16c acquisitions. • 1993 - 1997: New Zealand Dairy Board (, , Delegats $3.95 +15c Heffernan, expressed confidence in Fraser’s ability to provide fresh Wellington) Biggest Falls n SKYCITY CFO Returning to UK n Transition of CFO Week ending 9.5.14 Price Fall Xero $30.20 -175c SKYCITY Entertainment Group Ltd announced that Chief Financial Diligent Board Member Services, Inc. announced that Carl Blandino will Officer James Burrell has resigned for family reasons and is returning to step down from his position as Chief Financial Officer to pursue other ANZ $35.65 -105c the UK. opportunities once the company becomes current with its financial $9.32 -45c CEO Nigel Morrison said Burrell has ably led the SKYCITY Finance reporting obligations for the year ended December 31, 2013, which the team and has made a major contribution to the company. Many mile- company anticipates to be by May 30, 2014. Contact Energy $5.48 -32c stones have been achieved during his three years with us. Mr Blandino will remain with the Company through July to ensure a Network TV $6.41 -29c “In Auckland, we have negotiated with Government to build the New seamless transition of his responsibilities. Zealand International Convention Centre, opened new restaurants that Alexander Sanchez, Diligent’s Controller, will serve as interim Chief Airwork $2.52 -21c are winning industry awards, we have refurbished our hotels and we are Financial Officer (Principal Financial and Accounting Officer) effective Ryman $8.68 -21c finishing off the Federal Street rebuild. During James’s tenure at after Mr Blandino steps down from that role. SKYCITY we also have sold our stake in the Christchurch casino and Mr Sanchez joined Diligent in September 2013 from Zara USA Inc., $3.91 -18c acquired the second casino licence in Queenstown. In Adelaide as part where he served as CFO. Before Zara USA Inc., Sanchez was with Sirius of the renegotiation of our casino licence, we are building a six star XM Satellite Radio and with PricewaterhouseCoopers, LLP. hotel on top of our river-front casino and are opening new signature Sanchez has over 15 years of experience providing a broad range of SuBSCRiBE TO restaurants. In Darwin, we have extensively refurbished our Casino financial reporting, auditing, accounting and business advice. He is a Resort. Certified Public Accountant licensed in New York and New Jersey. “THE HEAdLiNER” “James has contributed to these achievements, all of which sDiligent will commence a search for a new Chief Financial Officer. strengthen our role as a provider of safe and fun entertainment and MAGAZiNE & wEBSiTE making the cities we operate in more vibrant. “While we are disappointed to be losing James as our CFO, we Subscribe now at only NZ$120.00 respect his family decision to return to England at the end of June n Veritas appoints new CFO (incl GST), for 24 issues of “The after being away from home for 6 years — 3 in Hong Kong and now 3 Headliner” magazine and in New Zealand. He and his wife Sue have a young family and they want Veritas Investments has appointed Adrienne Roberts to the role of Chief premium membership (by user to be closer to their extended families. Financial Officer. Roberts has a B.Com and CA and has previously worked name and password) to our “The board and management of SKYCITY wish them all the very best with Ernst & Young, Fosters Group as Finance Manager, Vitaco Health as investment news and research for their future together in England. Financial Controller and Commercial Manager. Until recently she was website www.headliner.co.nz “We have commenced with Heidrick & Struggles (smonks@heidrick. with The Better Drinks Company (formerly Charlie’s Trading Company) com) the process of recruiting a new CFO to replace James,” concluded where she was CFO both during the time Charlie’s was an NZX-listed Add NZ$30 if international subscriber Morrison. entity and subsequently as a subsidiary of Asahi Group. requiring a mailed edition. 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In their succinct reply, Precinct said it did. the freephone number above “The Headliner” 15 MAY 2014 Page 7 mood oF the markets Gliding the peaks but the air is cooling BY WARREN HEAD believe FBU’s price already captures more than the full The trans-Tasman sharemarkets are starting their own value of the expected earnings growth. The price was -4% MARKET TREND version of what the Americans call tapering; in this case to $9.32 after Forsyth Barr released a report and they a little less money coming in and a bit more leaving. remain sellers above $9.60. After a beautiful start to the year, when the markets They also noted the 19% rise in share valuation of have set record levels, valuations (share prices) are a Genesis Energy since the IPO and listing on NZX and little stretched. have cut their outperform notice to underperform. We see this in the almost predictable rise-fall-rise-fall in The Pateke 4H well has been a thriller of a ride for the several leading shares as investors skim the peaks. A Tui JV, included deviated drilling, soaring costs, and lesson from the world of gliding: eventually the thermals payola in a reasonably good reservoir that will pump cash lose their heat and while deferred as long as possible flow in to the coffers of such companies as pan pacific descent is inevitable. Yet there may be more altitude to petroleum and NZ oil & Gas. The JV is completing the come from this week’s Budget. well at the current depth and is preparing to tie it back to It was not surprising to see that the best percentage the Tui FPSO, Umuroa. The shares are trading at 77.5c. gainers in share valuation were two small fry. Investors Full story is inside. took another swig of Moa Group which made an 11.3% had a mixed week. Its shares gain (+6c) to 59 and Scott Technology added 10.06% dropped 21c to $8.68 (the aforementioned ‘toppy factor’) 9.5.14 25.4.14 (+16c) at $1.75. Airwork had the worst run of the weekly but it has also kept the good news flow going with word NZX 50 index 5152.67 5153.96 decliners, -7.7% or 21c to $2.52. it entered into a long-term lease with Auckland iwi Ngati 90 Day Bank Bills 3.38% 3.33% One of the best performers was trans-Tasman retailer Whatua Orakei to develop a new 300-resident develop- Kathmandu, up 6.9% or 25c to $3.88 following a powerful ment on former navy land valued at $6.8m on Auckland’s Govt Stock March 2019 4.00% 4.23% presentation to the Macquarie Investor Day. See story North Shore. Ryman expects the development to be a ASX all ords 5442.10 5515.50 inside this issue. Some of the momentum came from mixture of resthomes, dementia care and hospital care. Dow Jones 16,583.34 16,361.48 current sales performance. Revelling in the retail condi- FTSe 100 6814.57 6685.69 tions that cold, wet, weather brought for a business that RESUlTS GoldUS$/oz 1287.40 1300.80 specializes in wrapping its customers up snugly in ther- Z Energy filed its first full year result as a listed business. mals and outdoors jackets, Kathmandu experienced a It was widely seen as a good result, with ZEL delivering sales surge. Group sales are up 13% (at constant currency) on its promises, which was pretty much the theme Z put increase throughput rates to 3.5 Mtpa by the end of the on the pcp for the first 13 weeks of 2H14. And the on their announcement. FY14 EBTIDA was $212m (after year and will continue generating strong free cash flows. strongest trading months (as for many clothing retailers) adjusting for hedging gains) $5m ahead of prospectus. In New Zealand, gold production was 56,088 ounces lies ahead. The 2H14 profit is highly dependent on its Fuel margins also improved by 8% to 17.1c per litre. Yet which was expected and lower than the previous quarter Winter sale which is still to come. the market dropped the stock 9c to $3.82. Is this because Z on account of a lower mill feed and processing lower Stockbrokers Forsyth Barr say they like KMD’s strategy stuck $21m into a diesel operation? The market has liked grade ore, has significantly lowered operating costs and and the growth opportunity, but believe this is being the steady roll-out of petrol stations on good locations but improved margins in the lower gold price environment. factored in by the market. They have revised their rating biodiesel production will take Z (albeit modestly) into the Augusta Capital posted a NPAT of $1.99m for FY14, to UNDERPERFORM “as KMD appears expensive”. upstream side of the supply chain so analysts will see compared with a profit of $5.44m in 2013, reflecting Their countervailing view is that Kathmandu is thus risks. Christchurch sharebrokers Hamilton Hindin Green marginally increased operating earnings from the directly vulnerable to warm weather and it also “needs to demon- recalled that “Solid Energy learnt the hard way that owned investment portfolio, less a $2.19m decrease in strate traction in untested international online business.” returns in the biodiesel sector are not guaranteed, property valuations ($1.86m increase in 2013). The funds They are also signalling reduce notices on five other chewing through $60m in five years for little return.” management results include $0.41m of acquisition costs leading stocks: Auckland Airport (AIA), fletcher Lower New Zealand power generation, a tough retail incurred in respect to the purchase of KCl property ltd Building (FBU), The warehouse (WHS), port of market and a strong NZD trimming value on translation and investment property Titles ltd previously Tauranga (POT), and Genesis Energy (GNE). of Aussie-based earnings, all helped nudge Trustpower’s announced and settled on 1 April 2014. Distributable cash They see Auckland Airport as overpriced. The new net profit down 7% to $115.1m for FY14. EBITDAF were profit was $4.63m (2013 $4.99m) -7%. move to stub sales of tax-free fags as hitting Auckland $277.4m, compared with $294.8m in the pcp — a decrease Airport’s retail revenues and net profit to the tune of $7m of 6%. Operating revenue was 1% higher than prior GUidANCE to $8m p.a (-4% p.a.). Forsyth Barr says, “The announce- period at $811.7 m. Total electricity volume sold by TPW expects to report a Net Loss After Tax (NLAT) for ment will refocus investor attention on other risks (such in New Zealand through mass market retailing and time the year FY14 of -$79.9m (previous guidance of NLAT of as the diminishing difference between online and duty- of use sales was 3,512GWh, compared with 3,683GWh, a -$59m to -$55m). FY2014 ‘Underlying EBITDA’ guidance free prices and the loss of duty-free sales to trans-Tasman decrease of 5%. “The majority of the decrease related to remains unchanged at between -$8m to -$5m and it has travellers if these routes were to be reclassified as lower time of use sales. This market was very competitive met its target of reducing bank borrowings below $12m at domestic (as occurred within the European Union).” during the reporting period as competitors looked to 31.3.14. Fletcher’s cop a reduce notice because the brokers place surplus product at low margins.” Mercer Group advised that sales growth has not been reported solid 3Q14 sales as rapid as anticipated, and with two significant stainless growth with strong results at Noel Leeming and Blue fabrication contracts being delayed (but now signed), n DOW ON A PEAK: In a seesaw week on Wall Street Sheds; however, Red Sheds and Torpedo7 results were combined with the added costs the company took on in the Dow reached a new all-time record on Friday 9.4.14.. seen as disappointing. A flat week at $3.37 per share. anticipation of this growth, an EBITDA of around $1m is The Dow’s close of 16,583.3 narrowly topped a prior oceanaGold Corporation reported record quarterly likely for this year. Mercer has received Callaghan Institute record set on 30.4.14 of 16,580.8. For the 10th week the revenue of $170.4m EBITDA of $101.0m and net profit of funding approval for $1m, payable over the next 2 years S&P 500 has alternated between gains and losses — the $58.9m for 1Q14 — achieved on sales of 94,050 ounces of for its proprietary sterilisation technology called S-Clave. longest such streak in nearly 20 years, said First NZ Mercer will use this to co-fund further development in Capital. European stocks fell from their highest level in gold and 7,752 tonnes of copper. OGC’s liquidity position New Zealand with an aim of getting it to market in 2-3 more than six years as companies posted earnings that rose to ~$92m including $42m in cash after a net repay- missed analysts’ estimates. ment of borrowings of $20m. Managing director Mick years. Wilkes, said the Didipio process plant is well on track to  Continuedonpage7 currency Sting in the Kiwi’s tail from Aussie Budget? The sting has come out of the Kiwi dollar’s upward momentum stated a preference for the AUD/USD exchange rate to be nearer over recent days. Evidence of the waning interest to buy and 0.8500 to support GDP growth in the post-mining boom era. hold the NZ dollar was seen last week when the Kiwi failed to Overall economic performance since would not support the RBA follow the AUD higher when stronger than expected Aussie jobs being all that comfortable with the current exchange rate at numbers were released. 0.9350. A lower AUD/USD rate over coming weeks will pull the The NZD/AUD cross-rate decreased from above 0.9300 to Kiwi dollar down with it. 0.9200 as a result. The absence of NZD buying was due to the There is now considerable focus on the RBNZ’s 12 June warning shoot aimed at the FX markets by the RBNZ a few days Monetary Policy Statement as a lead to future NZD/USD exchange prior where Governor Wheeler stated that intervention to sell rate direction. If the FX markets maintain a strong Kiwi dollar NZDs would be “opportune” should the rising Kiwi continue to with the TWI Index over 80.00 over the next four weeks, the diverge away from its economic fundamentals, i.e. falling export RBNZ would be under considerable pressure to deliver on their commodity prices and terms of trade. The NZD/USD exchange threat of FX market intervention. Everyone knows that direct rate has retreated to 0.8600 after reaching highs of 0.8780 on 6 selling of the Kiwi dollar is using a peashooter against an ele- May. phant and is unlikely to have any impact. However, the RBNZ There is potentially a further sting in the tail for the Kiwi Governor has a far more potent weapon at his disposal in the dollar this week with the delivery of the Australian Government form of surprising the markets by cancelling the previously sig- budget on Tuesday 13 May. A severe tightening of fiscal policy is nalled third 0.25% OCR increase scheduled for June. expected and required in Australia to rein in a AUD50 billion The Kiwi dollar could plunge by two to three cents in blowout in this year’s Federal budget deficit and a projected response to a surprise “no hike” decision on 12 June. There is no that they will cut their official interest rates to zero and AUD30 billion deficit for the year to 30 June 2015. Whilst seem- question that the higher than expected NZD value through the embark on unconventional monetary policy stimulus measures ingly a loss of control in Australian Government finances has first part of 2014 must cause the RBNZ to lower their current (i.e. European style quantitative easing) in June. The Euro occurred, the reality is that Australian Government debt as a inflation forecasts for 2014/2015. Likewise, the sharply lower exchange rate has already weakened from $1.3950 to $1.3750 percentage of GDP remains one of the lowest in the Western Wholemilk Powder prices without a corresponding NZ dollar over recent days and seems set to reduce further towards world. Nevertheless, a much tighter fiscal policy may lead the depreciation forces the RBNZ to lower their GDP growth forecast $1.3000 when the policy initiatives are announced. The US financial markets to conclude that the RBA will be under for the same period. The conclusion is that the current RBNZ economy continues to expand, even though Janet Yellen at the increasing pressure to compensate the economy with an off-set- guidance on the extent and timing of OCR interest rate increases Federal Reserve appears overly cautious about how robust the ting looser monetary policy. will need to be revised lower due to the changing economic improvement in employment really is. Over coming months the Whatever way the austerity measures are interpreted, the events and developments since March. The RBNZ may decide to FX markets should mark the US dollar stronger against all cur- conclusions from the Australian budget this week will have to be still increase the OCR on 12 June, however, clearly signal to the rencies as the evidence of superior US economic performance negative for the Aussie economy and thus negative for the AUD markets that future OCR increases in 2013 are much less likely transpires. in the currency markets. The Aussie interest rate markets are due to the inflation risks reducing. In the meantime, events in Whilst the NZD/USD rate has remained above 0.8500 for only pricing in very small increases in their OCR over the next Australia and a stronger US dollar globally over coming weeks longer than anticipated a few months back, the current changing two years, after the budget they may well start to price-in the that drive the Kiwi dollar lower in the markets may save the circumstances with the NZ economy, the Australian budget, possibility of interest rate cuts to help the Australian economy RBNZ from having to make a brave decision on 12 June. renewed Euro weakness and general USD strength all add to recover out of its current doldrums. The RBA has previously The European Central Bank has provided a firmer indication further Kiwi depreciation towards 0.8000 over coming months.

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