Investment Portfolio Series New Zealand Income Portfolio

For the month ended 31 May 2017

Objective

To provide direct investment in lower risk, high yielding New Zealand equity securities, maximising stock and sector diversification. Performance is measured relative to the S&P/NZX50 Index Gross with Imputation.

Portfolio Constituents as at 1 June 2017

Core Core Plus Diversified Sector Arvida Group 5.0% Health Care Contact Energy 17.5% 15.0% 15.0% Utilities Fletcher Building 15.0% 12.5% 7.5% Industrials Fonterra Shareholders Fund 7.5% 10.0% 10.0% Consumer Staples Freightways 12.5% 12.5% 10.0% Industrials Goodman Property Trust 15.0% 15.0% 10.0% Real Estate Heartland Bank 10.0% 10.0% Financials Infratil 15.0% 5.0% Utilities Metro Performance Glass 5.0% 7.5% Industrials NZX 5.0% 5.0% 5.0% Financials Restaurant Brands 5.0% 5.0% Consumer Discretionary Z Energy 12.5% 10.0% 10.0% Energy 100.0% 100.0% 100.0% Note: The Core portfolio is not adequately diversified to be used as a stand-alone portfolio. Source: FNZC

Sector Exposure as at 1 June 2017

35%

30%

25%

20%

15%

10%

0% Cons. Dis Cons. Staples Energy Financials Health Care Industrials Info Tech Materials Telecoms Utilities Real Estate

Core Core Plus Diversified Benchmark Source: FNZC

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Performance

Div Yield % * PE Ratio (x) Gross Returns % Volatility Pros Pros May-17 1 Year 3 Year pa 5 Year pa (5 Years) Core 6.9 20.9 0.0 2.5 19.3 19.4 9.9 Core Plus 6.9 16.4 0.5 5.7 17.4 19.5 9.8 Diversified 6.8 17.5 1.3 6.8 18.3 20.6 9.4 Benchmark 6.0 22.1 0.6 6.7 14.2 17.8 9.3 * Dividend yields are 12 months prospective and are gross of tax. Source: FNZC

5 Year Gross Performance in NZD

2,750

2,500

2,250

2,000

1,750

1,500

1,250

1,000

750 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17

Core Core Plus Diversified Benchmark Source: FNZC

Company Details

30 Apr 31 May PE Ratios (x) Div Yield %* Gross Returns % Company Price ($) Price ($) Pros Pros +1 Pros Pros +1 1 Month 1 Year 3 Year pa 5 Year pa Arvida Group 1.29 1.37 15.7 12.5 4.4 5.4 6.2 19.6 n/a n/a Contact Energy 5.21 5.16 23.0 19.9 6.5 6.8 -1.0 1.6 7.8 9.0 Fletcher Building 8.55 7.56 14.1 11.3 7.8 8.4 -11.6 -9.3 0.2 9.3 Fonterra Shareholders Fund 5.98 6.00 12.1 10.5 6.7 6.7 0.3 7.7 4.2 n/a Freightways 7.49 7.62 19.9 18.2 5.1 6.1 1.7 21.2 19.4 19.2 Goodman Property Trust 1.22 1.27 16.0 15.2 7.9 7.9 3.7 -0.1 12.0 10.5 Heartland Bank 1.66 1.74 14.0 13.2 7.4 7.8 4.8 44.0 32.3 34.2 Infratil 2.95 3.04 41.5 25.0 7.7 7.9 3.1 -3.9 15.7 14.6 Metro Performance Glass 1.38 1.36 8.8 8.5 8.7 9.0 -1.4 -18.1 n/a n/a NZX 1.07 1.09 17.5 15.6 8.0 8.2 1.9 16.2 0.0 3.3 Restaurant Brands 5.32 5.67 18.1 17.1 5.8 6.2 6.6 11.1 26.6 27.2 Z Energy 7.45 7.50 14.7 12.6 5.9 11.0 4.4 -5.5 30.3 n/a

* Dividend yields are gross Source: FNZC

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Comment

In May, the benchmark S&P/NZX50 Index Gross with Imputation increased 0.6%. In comparison the Core, Core Plus and Diversified portfolios returned 0.0%, 0.5% and 1.3% respectively. The best performing stock in the Index was Fisher and Paykel Healthcare, which contributed 0.4% to the Index’s monthly return, while the worst performer was Fletcher Building, which subtracted 0.8% from the Index’s return.

The NZ equity market underperformed most offshore markets in May in local currency terms. However, once allowance had been made for the strengthening NZ dollar it outperformed most offshore markets in NZ dollar terms. The NZ dollar benefited from the strength in the dairy sector and US dollar weakness which reflected concerns about the Trump administration’s ability to manage its agenda following the firing of FBI director, James Comey. On the domestic front, the NZ equity market was relatively quiet. As expected the Reserve Bank of NZ (RBNZ) left the Official Cash Rate unchanged at 1.75%. Although the RBNZ surprised the market with its rosier economic growth and inflation outlook.

The best performing portfolio stocks in May were: Z Energy (ZEL +4.4%) whose share price continued the rise which started in April following the release of its March quarterly operating statistics. There was no additional news that we are aware of to explain the share price gain over the month; Restaurant Brands (RBD +6.6%) provided disappointing FY18 guidance in April, which saw the stock price fall. However, the share price rebounded in May following strong 2018 first quarter sales performance. Of particular note were KFC NZ and KFC Australia which recorded same store sales growth of 7.1% and 8.6% respectively; Heartland Bank (HBL +4.8%) released its profit for the 9 months to 31 March 2017 which was 13% above that of the prior period, and reiterated that it expects its profit to be at the upper end of its $57.0-60.0 million guidance range. Of particular note was the 11% increase in its loan book over the year; Arvida’s (ARV +6.2%) share price rose following the announcement of its FY17 profit which came in at an adjusted $22 million. Of note was the announcement of a conditional agreement to acquire 8.2 hectares of land in Richmond, Nelson, on which ARV plans to build a $100 million integrated retirement and care facility.

The worst performing stock in the portfolios during May was: Fletcher Building (FBU -11.6%) which lost all of the share price gain, and more, associated with its April share price rebound from the fall associated with its March profit warning. While there was no company specific news we observe that housing related data was weak in both Australia and NZ over May.

Objectives

 To recommend portfolios for direct investment in New Zealand equity securities, comprising lower risk, high- yielding, income generating shares, maximising stock and sector diversification within the constraints of available investment capital.  To recommend an investment strategy which is relatively passive in nature and has a medium-term focus. Benefits

 Provision of structured and diversified portfolios for individuals to gain exposure to high-yielding, New Zealand equities.  Low fee structure. It is envisaged that ongoing transaction fees will be minimal, given the passive strategy of the portfolio.  First NZ Capital Securities Limited (FNZC) does not manage the portfolios once selected, and accordingly no management fees are payable to FNZC.

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Investment Process

 FNZC recommends the portfolios and provides historical performance data for them. However, the data must be seen as historical only and is not necessarily an indicator of future performance.  The FNZC Investment Committee meets monthly to review stock selection and strategy.  The results of the FNZC Investment Committee deliberations will be reflected in the recommended portfolios and communicated along with monthly portfolio performance updates. Portfolio Structure

 As yields vary widely across listed companies, including those comprising the main share market indexes, the weighting of a diversified portfolio meeting the objective of a high income yield is likely to differ significantly from those indices. Accordingly, there is no standard index benchmark.  There are 3 portfolios provided under this series, with each designed for different investible amounts:

Core - 8 stock portfolio $65,000 – $135,000

Core Plus - 10 stock portfolio $100,000 - $200,000

Diversified - 12 stock portfolio > $165,000

(See discussion below on “How to Use the Model Portfolios”)

 A measure of the variability of portfolio investment returns can be obtained by calculating the portfolio investment return standard deviation. While the actual investment return standard deviation will vary depending on the actual stocks in the portfolio, it is generally observed that as the number of stocks increase, the investment return standard deviation declines. However, as the number of stocks increase, the amount by which the investment return standard deviation declines, steadily reduces. Based on an analysis of historical gross returns of New Zealand listed companies, we estimate the following investment return standard deviations for the portfolios: Core 17.5%, Core Plus 16.5%, Diversified 15.5%. This is lower than the standard deviations for portfolios with the same number of stocks drawn from the broader equity market of 20%, 19% and 18% respectively, and the NZ equity market at 16.0%. This reflects the lower share price volatility of the stocks selected for NZ Income portfolios.  No individual company weighting will exceed 17.5% of the portfolio in the case of the Core Portfolio, or 15% of the portfolio in the case of the Core Plus and Diversified portfolios.  Stock selection will change only in the event of a substantial change in FNZC’s investment view, a company’s business mix, where a security becomes overvalued, or as the structure of the New Zealand equity markets changes through new listings, takeovers and other significant events.  The FNZC stock rating system is driven by Total Shareholder Return (defined as dividend yield plus forecast share price change) over the next 12 months. Stocks with Total Shareholder Returns less than 7.5% are rated ‘underperform’, between 7.5% and 15% ‘neutral’ and over 15% ‘outperform’. The NZ Income portfolios are created with a focus on yield, are relatively passive in nature and are constructed to provide diversification. Consequently, it is not unusual for the portfolios to include securities which are rated ‘underperform’. The likelihood of having securities rated ‘underperform’ in the portfolios increases when the market is more fully valued, as at these times the number of ‘underperform’ rated stocks rises under our stock rating system.

How to Use the Model Portfolios

The model portfolios can either be used as a recommended list or as a guide for portfolio construction.

 The FNZC Investment Committee does not believe that the Core portfolio has adequate diversification to be used as a stand-alone portfolio. However, if it is used in conjunction with other equity portfolios such that

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total equity exposure (including Australian and global shares) is spread over around 15 shareholdings, across a mixture of industries, then we consider that adequate diversification has been achieved.  The weightings to each stock are kept constant until the FNZC Investment Committee decides to alter the stock weighting. We do not recommend that users of the model portfolios constantly adjust portfolio weightings as stock prices change, to the recommended stock weightings. We recommend that a stock weighting be re-weighted to the recommended level once the weighting deviates by more than 2.5 - 5%, subject to a minimum trade size of around $5,000. Therefore, larger portfolios have more ability to rebalance to the recommended weightings.

Taxation

 We briefly outline below the current tax rules applying to investment income derived by NZ resident taxpayers from NZ equities. This is provided for general information purposes only and does not constitute tax advice.  NZ does not tax dividend income twice. It operates a dividend imputation system. If the company pays tax to the Inland Revenue Department on profits earned in NZ, that company will attach “imputation credits” to the dividends it declares. These credits represent the tax paid at the company tax rate on the post-tax dividend payment.  Resident withholding tax is deducted at source. The amount of withholding tax is calculated as 33% of the gross dividend (cash dividend plus imputation credits), less the amount of imputation credits paid by the company.  Realised capital gains from the sale of NZ shares are not subject to tax in NZ as long as the investor is not a share trader. A share trader is explained in the Income Tax Act as an investor who is in the business of trading shares and who purchased the shares for the purpose of realising a capital gain.

Security Descriptions

Security Brief Description Arvida Group Arvida Group (ARV) is a retirement village group with an emphasis on providing a continuum of care from independent living through to aged care services. ARV has 26 villages and care facilities across NZ. Contact Energy Contact Energy (CEN) is New Zealand’s second largest electricity generator and second largest energy (gas, LPG and electricity) retailer. Electricity is generated through a diversified range of generation assets (hydro, geothermal, gas fired thermal plant) located throughout New Zealand. It also has options to build wind generation. Fletcher Building Fletcher Building’s (FBU) operations are primarily focused on Australasia in infrastructure, building products, distribution (70 outlets), laminates & panels, steel and pipe products. FBU dominates most of the industry sub-sectors it operates in, with high market shares. FBU also has global operations in North America, Asia and Europe. Fonterra Shareholders Fonterra Shareholders Fund (FSF) allows investors in the Fund an opportunity to earn Fund returns based on the financial performance of Fonterra Co-operative Group Limited (Fonterra). Fonterra is a global dairy nutrition company which is co-operatively owned by 10,500 farmers. Fonterra processes around 85% of NZ’s milk production, to produce a range of commodity and consumer dairy products for NZ and international markets.

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Freightways Freightways (FRE) is a nationwide provider of express package services throughout New Zealand (approximately 40% share), with complementary business servicing the information management and business mail sectors. Key brands include New Zealand Couriers, Poste Haste, Sub 60 and Castle Parcels. Freightways has grown organically and via acquisition, with the most recent expansion being document destruction and information storage facilities in Australia. Goodman Property Goodman Property Trust (GMT) is one of NZ’s largest listed property trusts and Trust invests in industrial property and business parks. Most of the portfolio is located in Auckland. It has over $2.1 billion invested in property assets and a BBB credit rating from Standard & Poor’s. The Trust is managed by Goodman NZ Ltd, a wholly owned subsidiary of ASX listed Goodman Group Ltd. The Trust carries a PIE tax status. Heartland Heartland New Zealand (HBL) was formed on 7 January 2011, as a result of the amalgamation of CBS Canterbury, Marac Finance Ltd and Southern Cross Building Society. HBL became a registered bank in December 2012 and currently has an investment grade BBB (outlook stable) credit rating from Fitch, which was re- affirmed in November 2015. Infratil Infratil (IFT) is an NZX listed holding company specialising in long-lived, growth infrastructure assets. Currently, IFT is an owner and operator of businesses in the renewable energy, airport, public transport and social infrastructure sectors. Its assets include a 50.5% stake in Trustpower, 67% of Wellington Airport, 100% of NZ Bus which operates in Auckland and Wellington, 20% of Metlifecare and 50% of RetireAustralia. Recently, IFT acquired a 48% stake in Canberra Data Centres. Metro Performance Metro Performance Glass (MPG) produces a range of customised glass products, Glass predominantly used in the residential and non-residential construction applications. MPG’s share of the residential market in NZ is 68% and 32% of the commercial market. As all glass used in NZ is imported, net profit can be sensitive to movements in the NZD/USD exchange rate. NZX NZX (NZX) operates NZ securities, derivatives and energy markets. The company operates in five segments: Capital Markets, Soft Commodities (through Clear Grain Exchange), Agricultural Information, Funds Services (through superannuation, KiwiSaver and Exchange Traded Funds) and Market Operations. Restaurant Brands Restaurant Brands (RBD) is engaged in the operation of quick service and takeaway restaurant concepts in NZ, Australia and the Pacific. RBD operates through five segments: KFC, Taco Bell, Pizza Hut, Starbucks Coffee and Carl's Jr. Z Energy Z Energy (ZEL) markets petroleum products. The company offers petrol (37% revenue), diesel (36% revenue), jet fuel (13% revenue) and other products such as LPG, bitumen and lubricants (14% revenue). ZEL serves airlines, trucking companies, mines, shipping companies and vehicle fleet operators through an extensive distribution network throughout New Zealand. Important Note This summary briefly describes the companies represented in the Portfolio Series but it does not, nor does it attempt to, contain everything material that there is to be said about the companies and their businesses.

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Limitations and Disclaimer This publication has been prepared by First NZ Capital Securities Limited (“FNZC”) for distribution to clients of FNZC on the basis that no part of it will be reproduced, altered in any way, transmitted to, copied to or distributed to any other person without the prior express permission of FNZC.

The information, investment views and recommendations in this publication are provided for general information purposes only. To the extent that any such information, views, and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any person. We recommend that recipients seek advice specific to their circumstances from their adviser before making any investment decision or taking any action.

This publication does not, and does not attempt to, contain all material or relevant information about the subject companies or other matters herein. The information is published in good faith and has been obtained from sources believed to be reliable, accurate and complete at the time of preparation, but its accuracy and completeness is not guaranteed (and no warranties or representations, express or implied, are given as to its accuracy or completeness). To the fullest extent permitted by law, no liability or responsibility is accepted for any loss or damage arising out of the use of or reliance on the information provided including without limitation, any loss of profit or any other damage, direct or consequential. Information, opinions and estimates contained herein reflect a judgement at the date of publication by FNZC and are subject to change without notice. FNZC is under no obligation to update or keep current any of the information on this publication.

Research may include material sourced from Credit Suisse Group. To the fullest extent permitted by law, Credit Suisse Group shall have no liability to FNZC or clients or prospective clients of FNZC or any other person in relation to such research material.

All investment involves risk. The bond market is volatile. Bonds carry interest rate risk (as interest rates rise, bond prices usually fall, and vice versa), inflation risk and issuer and credit default risks. Lower quality and unrated debt securities involve a greater risk of default and/or price changes due to potential changes in the credit quality of the issuer. The price, value and income derived from investments may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance or investment returns. Reference to taxation or the impact of taxation does not constitute tax advice. The levels and bases of taxation may change. The value of any tax reliefs will depend on investors’ circumstances. Investors should consult their tax adviser in order to understand the impact of investment decisions on their tax position. Where an investment is denominated in a foreign currency, changes in rates of exchange may have adverse effect on the value, price or income of the investment. The market in certain investments may be unavailable and/or illiquid meaning that investors may be unable to purchase, sell or realise their investments at their preferred volume and/or price, or at all.

FNZC, its employees and persons associated with FNZC may (i) have held or hold securities mentioned in this publication (or related securities) as principal for their own account, (ii) have provided investment advice or other investment services in relation to such securities within the last twelve months, and (iii) have other financial interests, including as a shareholder of the First NZ Capital group of companies, in the matters mentioned herein. Investors should assume that FNZC, its related companies and affiliated persons and Credit Suisse Group, with whom First NZ Capital has a strategic alliance, do and seeks to do investment banking business with companies covered in its research reports. Specific additional disclosures will be made in relation to companies where First NZ Capital has a transaction role and publishes research.

This publication is intended for distribution only to market professional, institutional investor and retail investor clients in New Zealand and other jurisdictions to whom, under relevant law, this publication lawfully may be distributed. It may not be distributed in any other jurisdiction or to any other persons. First NZ Capital Securities Limited is a NZX Firm.

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