How Far Will Spark’s Share Price Drop?

As I rapidly approach retirement, my financial plans are crystalizing and I couldn’t help be drawn into investigating Spark’s attractive dividend yield of 7.891% as published on the NZX website. Such a yield opens up several options around my strategy such as using it to reduce the reliance of dividend income from other stocks so I can have a greater investment in reliable low yield stocks or high growth low yield stocks.

I’ve never been attracted to the idea of investing in Spark as they act like a monopoly (high prices, not agile for a number of their divisions, and low levels of growth), but with a yield of nearly 8%, I would get my money back on the investment even if Spark became permanently unprofitable after 13 years (100[% of investment] / 8[% annual ROI] = 12.5 years, not accounting for inflation). While Spark certainly has more competition coming in its future, I don’t foresee this whale being beached-as within the next few decades.

The first thing I noticed about Spark (when I went to confirm the dividend yield calculation on the NZX website and check the share price) is that their share price is in a downwards pattern. This (combined with a high dividend) gave me concern that this could be a dividend trap or signs of serious headwinds, which gave me a place to start my research.

Upon looking at the H1 FY21 financials, it looks like there was an 11.4% drop in income compared to the H1 FY20. According to the financials released, most of this drop was in their Voice (mobile is listed separately) and Broadband products. In Spark’s Investor Presentation however, they state that the drop is due to decline in mobile market due to boarder closures and loss of roaming revenues, and fewer people migrating to NZ which affected the broadband and prepay markets.

Personally I can’t see how boarder closures would cause people to use less broadband when everyone had more reliance (and spending) on work from home services over the period. Perhaps fewer people working from home since lockdowns finished could be an explanation for this?

I also can’t see how lack of population growth would cause a reduction of broadband; it should be static, if anything. This makes me wonder if Spark are making excuses rather than offering reasons for the change.

I do have a slight concern that people could be wising up to cheaper alternatives offered by competitors, such as cheaper broadband & mobile rates, which might cause people to cancel their packaged services with Spark.

Nevertheless, for the purpose of this initial research I will assume that the numbers are solid and what we’re seeing is just a drop back to normal levels post COVID lockdown.

Let’s assume that the last H1 is indicative and proportional to H2, and relatively little growth will follow (nil). In fact, we can assume that following years are likely to be equal to FY19. From this, I estimate a long term average NPAT of $400m per year, growing in line with inflation.

As I’m happy with an ROI of 5% at the moment (though realistically I would probably want more to mitigate the risk that unpaid earnings might find their way into the retained earnings part of the balance sheet), a PE of about 20 is a sufficient upper limit on which to base a value investment in Spark. This would give Spark an upper market cap of $8bn which is a share price of $4.28.

However, as mentioned earlier, I would really need more than 5% ROI, so I would probably make a deduction from that price relative to the dividend payout ratio to find the maximum price I’d be willing to pay. Assuming Spark have an 80% payout ratio on their dividends vs earnings, this would put the suggested trading range of Spark shares between $3.42 and $4.28. Given that the market seems to historically agree with this back-of-the-beer-mat quick analysis, I’m not going to look too much further into the stock until it drops down to more sensible levels and enters the range in which I’d consider buying.

Before I wrap up so I can go biking, I just wanted to leave a note that it’s possibly worth investigating if Spark are a dividend trap stock, as they are offering a dividend above 5% of the share price, and the share price is trading at only a little over a PE of 20. In other words, without dipping into treasury reserves or debt, I can’t see how they can afford to maintain the dividend that they are paying – though this needs a proper analysis to confirm this, I see Simply Wall St have similar concerns in their analysis that the “…dividend is not well covered by earnings…” and Spark has “…a high level of debt…”. It’s always good to double check your own analysis against someone else’s research after you’re done.

Summary: Revisit Spark shares as a potential investment once they fall below $4.28, check debt levels and whether the dividend is sustainable.


Where Is The SCL Share Price Going? Part I

On the 12th of September Scales shares (NZX:SCL) were worth $4.92, but I stated that SCL are worth $4.60. They are now trading at $4.59 at the time of writing this. It seems that the market is operating under the same assumptions that I made with my September valuation.

That’s good because we can apply those same assumptions to upcoming results to find out what they are likely worth and if it’s worth buying at these prices.

I originally arrived at $4.60 based on the fact that under typical conditions they’d be worth $5.00, but needed to be worth less than that to offer 8% ROI as they were having a bad year due to COVID related issues.

Unfortunately it looks to me like those COVID related issues (namely getting fruit pickers from abroad) are still present. Looking at the dates that apples need picked, it would be sensible to assume that this issue will not be resolved in time for the season, and that we can assume disappointment in the next results announcement.

In addition to this, the measures (opportunities) resulting from this (namely pruning orchards and developing premium varieties) may mean that Scales won’t be up to capacity until 2022 (albeit a higher capacity than former years).

It could be argued that Scales will probably be worth between $4.60 and $5.00 next year, which means that currently they are worth between $4.25 (offering an 8% ROI on a price of $4.60 next year) or $4.60 (offering an 8% ROI on a price of $5.00 next year). I think this is supported by the trading range over the past month (which is a low of $4.26 to a high of $4.65).

Unfortunately I don’t think it’s as simple as the market would have it. There are a number of variables to add to this and to throw a spanner in the works, Scales are currently in the process of making an offer for a winery business, which I will likely discuss in my next article…


When Will SCL’s Orchards Reach Maturity?

There was a lot of redevelopment done on Scales’ orchards as a reaction to the lack of pickers available due to COVID19 lockdown restrictions. With foreign seasonal workers unable to get into the country, Scales took the opportunity to redevelop orchards, performing a lot of pruning and switching to higher value apple species such as the Dazzle variety.

Page 14 of the 2020 Annual Report states that:

…redeveloped orchards [will] reach maturity from 2023 onwards.

Page 14 of the 2020 Annual Report, paragraph 2.

More Headwinds For a2 Milk

ATM have had a bad run of late. After suggesting that all is well, followed by a mass sell off of shares from the board of directors, the board then declared that the situation was not too clement for ATM’s milk sales.

Despite the directorate touting the collapse of the Daigou market as the reason for a drop in sales, I can’t help wonder if increased competition lending itself to lower margins has assisted recent failings in profit.

Despite this I held my position with the view that ATM will recover post covid19. I accept that the playing field is now different with competition appearing, but competition is normal in business, and the share price had already fallen to a level that accounted for this. Besides, it’s a growth market with plenty of room in China for many players in MBS alone. Also ATM have other things going on in their growth plans such as the move into milk processing which I think derisks the business. I’m a big fan of vertical growth for companies that are big enough to swallow the entire output of upstream production, because although initially expensive and risky due to lack of inhouse experience, vertical growth derisks business in multiple ways, and offers an avenue of growth.

That aside, there is now a new problem emerging, which suggests that the Daigou market may not return post vaccine as I had expected. (Probably rightly so, given the racial issues that were reported) China appears to be urging students not to apply to Australian universities. This is a big problem for ATM because it’s believed that Chinese students make up a big part of the Daigou market.

Personally I’m not going to sell my shares on this news, mainly because I can’t bare crystallizing my losses at this price (which I acknowledge is a really bad way to think), but also because doing so doesn’t effect my long term strategy and I’m willing to wait to see how the company is in 5-10 years time.

That said, with all that’s gone on and what’s to come, I am not a happy shareholder and won’t be buying more ATM shares (not only because it doesn’t fit my strategy for retirement income in the near term).


2 Cheap Cars To List On The NZX

On the 26th of Feb 2021 2 Cheap Cars (and associated trading company NZ Motor Finance representing the finance arm) are due to list on the NZX under the ticker NZA (registered company name: NZ Automotive Investments Limited). This will be the 3rd used car retailer available to purchase on the NZX.

NZA are listing as a “Compliance Listing” which means that the listing will not involve a capital raise. Such listings are usually either to give existing shareholders a lucrative point of exit, but can be for other reasons (such as a fair way to establish a price for shares, or the opportunity to do capital raises at a later date).

Personally I’m not going to jump in until there is more public performance(growth) history available with which I can make a more sound judgement. Sure there’s probably some good data to work with in the IM with the listing, but my personal preference is that there are a few years of history that has been publicly released each year because it’s harder to contest and it also shows how well management are able to produce accurate guidance.

Additionally, as shareholders usually look for an exit when prices are approaching a peak, it’s possible that current insiders think that the business might be fully valued with little growth ahead. This may not be the case; it might be that early investors are simply looking to capitalize on their original investments so they can retire, or whatever; but for me, there’s no need to take this risk.

I’ll wait a year or so before investigating this properly.


Why I Think Summerset Is A Buy Right Now

There are no surprises in Summerset’s FY20 announcement, with Underlying NPAT being almost exactly on guidance (released Dec 2020), though truthfully I was hoping for a bumper result due to record sales being published a month after the guidance was announced.

Not a very exiting result, but not bad when you consider that no sales could be made during the lockdown. Also, it’s been nice to see total NPAT increase by 32% against FY19, the difference of which being that total NPAT considers increase in value from property revaluations.

With a market cap of $2,876m against FY Underlying NPAT of $98.3m, excluding cash in the bank, that puts SUM on a ratio of just under 30. This is expensive based on Underlying earnings, or cheap based on NPAT. So depending on your reason for purchasing, SUM could be viewed as expensive or cheap; but here’s the crux: even if you’re investing based on the value of return in underlying value (i.e. not investing based on increasing NTA), NTA has an effect on NPAT: as property prices go up, customers must pay more to buy in, which means more profit. Additionally, as property prices go up, it becomes more favourable for potential customers to unlock the value in their homes and move into a Summerset property.

So what’s peaked my interest in Summerset recently? Well, because of my job I have a unique insight into the property sales data in a way that isn’t available to most. I was recently stunned by the latest sales data while I was investigating what I thought was a gross inaccuracy in some property price estimation software using this data. It seems that property prices are going wild, and my own home looks like it’s increased by 20%-30% within the last 2 months. I’ve not done a fully analysis, but I’ve looked at enough data to see that prices are going crazy.

Given that SUM’s share price doesn’t seem to have fully factored this in (based on a lack of change in the past 2 months), I think that SUM are a great buy right now for anyone with a longer term outlook (at least a year). Based on Underlying NPAT, a PE of less than 30 would require a return of +20% on next year’s earnings. Looking at Summerset’s prior performance and current state of the residential housing market, I think this is entirely possible. Even though risks from changes to the LVR scheduled in March could impact this, I feel comforted by the extended period of low interest rates which (as any property investor will tell you) makes property investment hum.


Retail Data Released From Stats NZ Today

Retail sales from December 2019 – December 2020 rose by 4.9%. This bodes well for retail stocks, though it’s worth checking that the share prices / announcements haven’t already accommodated this growth. Notably ASB’s analyst suggests that this pullback from Q3 data doesn’t give a positive outlook, but does suggest stability. Personally, I agree, but suspect that the over-all positive growth signs opportunities to outperform for particularly successful retailers, such as HLG.

In the same release of data, Stats NZ reported that:

The momentum of higher spending on motor vehicles continued into the December 2020 quarter with another solid increase of 12%… after the 13% lift in the September 2020 quarter.

Stats NZ (Email), 23 February 2020

This bodes very well for stocks that are involved in the sale of vehicles, though again, it’s worth doing a little bit of research into whether this is now reflected in the share price, and of course if such stocks fit within your investment strategy.

Normally I’d do this research to determine if any such stocks look like a good “buy” right now (and publish it here), but I’m currently not in the position to buy stocks until after April; hence the lack of recent articles here.


Inflation Risk In NZ

As I approach retirement, inflation (which was formerly my friend) is becoming my foe. While saving for retirement I’ve used cheap debt (mortgages) to fund various investments which have returned higher rates than the cost of the debt. Essentially I’ve leveraged the bank’s money to profit, rather than my own (comparatively pitiful) savings. This has had a two-fold benefit over the years. Firstly it has enabled me to get rich from someone else’s money, and secondly inflation has made the cost of my debt lower as time goes by. For example, a $240k mortgage to buy a $300k house 10 years ago isn’t much when the house is now worth $1m and my salary is double what it was.

Unfortunately inflation is the enemy of the retired. The value of the savings a retiree has are eroded by inflation. So as a “young” retiree (I’ll be nearly 40 when I retire next year) my retirement strategy will have to consider inflation. Whilst my strategy does consider inflation (I plan to have a component of my income to cover my costs and another component to grow), recently proposed political policies have made me concerned. Specifically I’m concerned that inflation may not be evenly spread across all asset classes, which creates risk to business (and therefore potentially my investments) and risk to my future living costs / lifestyle choices. I’m also concerned that inflation may be greater than the growth on my income.

It’s important to be aware of inflation whether you’re retired, planning retirement or currently investing because it will probably affect your strategy / opportunities.

Lewis Hurst

Let’s look at the inflation risks that are present in the current economic and political environment (existing policies put in place by the current government are in darker text, while policies proposed in the recent Climate Change Report are accented in a lighter colour. As I’m an opinionated fellow, I couldn’t help adding my opinion of the policy, but I’ve put this in italic so you’re free to ignore the italic text if you wish):

  • Increased minimum wage. This should cause general inflation as people have more money to spend, which creates increased demand and an ability to pay more for any particular goods or services. It has been hypothesized by economists that distributing more money amongst the poorest of the populace is the best way to spur an economy as all the extra money gets spent, vs. more affluent people who may save some of the additional money.
    At the time I thought this was a bad policy because the inflation would cancel the some of the gains, and therefore there are better ways to achieve what the policy set out to achieve. Additionally the policy was risky because it could put many businesses out of business. The policy also came at a really bad time with COVID19. However, after the policy was implemented, most businesses seemed to be able to handle the new costs, so it was probably the right thing to do (although I think there was a lot of luck in the success of this policy).
  • Quantitative Easing (QE, AKA Printing Money). There is currently a massive amount of QE going on in NZ and around the world. Both QE and increasing the minimum wage are policies that create general inflation.
    I believe that Western countries around the world have been using QE in a battle to reduce the value of their currency, in order to make themselves more competitive exporters and at the same time deflating their debt with the inflation that goes along with QE.
  • Banning oil exploration. This policy is inflationary because it reduces supply of oil, which therefore pushes the price up.
    I believe that this is another of Labour’s policies that does the opposite of what was intended because it doesn’t reduce demand, so demand will just be fulfilled from oil imports – which will create more strain on the environment as extra fuel is used to import the fuel. The argument for the policy was to create strain on the market to produce motors that use alternative fuel sources, but as NZ has no such motor industry, will import the fuel anyway, and is too small to influence foreign motor industries, I believe that no such technology will emerge from this change. Again, there are better ways to achieve what this policy set out to achieve.
  • KiwiBuild. This policy is inflationary because builders were attracted away from the NZ private sector (who would have otherwise been building houses) to build houses for the government. This inflates the price of builders as it creates extra demand, while at the same time not increasing supply as those builders would have otherwise been fulfilling private demand for housing. Increasing the cost of builders makes new housing more expensive.
    Additionally the government bought houses from the private sector for political reasons, so they could tout the success of the failing build rate of the KiwiBuild policy. This temporarily inflates the price of housing because it creates temporary extra demand as the private sector bids for housing against the government.
    Another Labour policy that did the opposite of what it was intended to do, whilst at the same time adding inefficiency into the market in terms of admin cost, and in the case of houses that were built as part of the KiwiBuild policy, placing houses where people didn’t want them – further increasing house prices due to an effective reduction of supply due to lack of housing in areas that required it.
  • Reducing the amount of dairy cows to reduce methane emissions. This will reduce the supply of meat, which will inflate the price.
    I imagine it would be better to put restrictions on the thing they are trying to regulate (the emissions) rather than the thing creating the emissions. That way the free market can find the best way to reduce emissions, leaving the reduction of herds as a last resort.
    There is talk suggesting that NZ dairy farms have lower emissions than foreign farms. If this is true, this will be another Labour policy that does the opposite of what it intends, because demand for dairy will not decrease, so foreign supply will fill the gap, resulting in an over all increase in emissions.
  • Phasing out natural gas. This will decrease the supply of energy, increasing the demand on other sources such as green electricity. Probably a good thing, but this will cause inflation in the price of alternative sources as supply decreases.
  • Ban the importing of cars with combustion engines. Again, reducing supply increases prices.

Regardless of political views, these policies are inflationary. Having a quick look at the list, it seems that existing policies are generally inflationary, with a leaning towards inflating transport and housing; while proposed policies could cause inflation in food, energy and transport.

To summarize my position, as I intend to get part of my income from rental income, NZX.SUM, NZX.SCL and gentailers, I only have transport costs to worry about. Still, with all this additional inflation, I may need to ensure that the growth rate of my income is more heavily weighted. This means that I may need more money to be able to retire safely. As usual, I’ll be playing it by ear, and evolving my strategy to my situation as it changes.



Thinking About Buying ATM Shares?

If you’re thinking about buying ATM shares right now, beware.

While ATM shares may seem attractive based on a price to earnings view, there are some disparaging signs that make them less attractive. Specifically today’s data from Stats NZ showing that “New Zealand’s biggest goods export, dairy products, fell $377m (19 percent) in December 2020, compared with the same month in 2019”.

I’m not saying that this makes ATM a bad buy, just that anyone considering buying ATM shares should consider this in their analysis.

It’s important to note that I’ve not done any analysis on whether ATM is a buy right now, because as previously mentioned in my other articles, I plan to retire soon and need to invest in stocks that pay dividends now, not in 10 years time (though it may transpire that I will have room in my portfolio for such a stock next year, depending on how things go).

If I were to do any analysis, I would be modelling results based on MBS and CBEC growth with recent evidence considered, then if that was unfavourable (or if I was managing a portfolio with a risky element and looking for higher gain), I would model how the price would look post-COVID. This model would be a DCF style analysis and would have a significant risk premium in consideration.


My Portfolio On The 13th Of January 2021

I’ve been stocking up on some Fisher Paykel Healthcare (NZX.FPH) shares over the past few days, so I thought I’d update my pie chart to get a visual representation of my portfolio as it has previously proved useful to me.

The chart isn’t as useful to me as it has previously been because I’m not so fussed about having a balanced portfolio at this stage. This year is mainly about accumulating growth stocks (particularly those growing this year) so I can get as much of a discount as possible to next year’s prices, in preparation of selling up some angel investments to enable my retirement by the end of next financial year.

My case for investing in FPH is because it’s a long term growth stock, which means that even if it falls after proliferation of COVID vaccines, it should recover the position within a few years. However, it’s my believe that this perpetually expensive stock is likely to surprise on the up-side. The reason for this is that the last guidance provided made some conservative assumptions, and the COVID situation has got worse since that guidance was released. Additionally, my research suggests that vaccine deliveries are not happening very quickly when the global population is concerned. I suspect that COVID will be around a long time to come, so FPH is a good bet.

I feel happy to be overweight in FPH and SUM (because of the way the residential property market is going), but am disappointed that I didn’t buy more EBO shares back when I had identified them as good value.