An important trend is New Zealand companies choosing a secondary listing on ASX. Expect more to dual list in the next few years as they seek capital from Australian fund managers, who must invest in ASX-listed companies to meet their investment mandate. The strong relative performance of New Zealand’s economy adds to the interest.
The impressive NZ electricity provider, Mighty River Power, set the pace with a $1.35-billion IPO in May 2013. The petrol retailer, Z Energy, followed with a $741-million IPO and Meridian Energy finished a strong year for NZ companies on ASX with a $1.1-billion IPO.
Intueri Education Group flew the NZ flag this year with a successful $162-million IPO in May. Its $2.16 issued shares hit a 52-week high of $3.01 in August and have since eased to $2.50. Intueri is the largest vocational education provider in New Zealand.
This column also wrote favourably in August about the NZ adventure wear retailer, Kathmandu Holdings. It has eased from about $3 a share then to $2.70, but has good long-term prospects as more baby-boomers buy its clothes for overseas travel.
I have favoured Mighty River Power since it listed, including it in features income portfolios, and believe it is the pick of the NZ stocks for long-term, conservative investors. It has ideal characteristics for income seekers who buy defensive utilities for yield.
Mighty River is not the bargain it was when this column wrote about it in March, at $2.04. It last traded at $2.77. I wrote then: “Mighty River Power also looks a touch undervalued at current prices. This utility can tick higher this year and suits long-term income investors who seek higher-yielding defensive stocks in their portfolio.”
Chart one: Mighty River Power
Mighty River produces about 17 per cent of New Zealand’s electricity output and has an excellent market position. Fund managers had been concerned about New Zealand’s general election and the potential for regulatory risks had a new Government won office. But the return of the incumbent conservative Government in September removed some earnings and balance sheet risk for Mighty River, and also a headwind for its share price.
Mighty River’s recent capital management initiatives reflect its balance sheet strength. It announced a 5-cent per share special dividend and a proposed $50-million on market share buyback, and lifted its target payout.
Macquarie Equities Research wrote in November: “For FY16, we think it is possible the company will look to pay out all of the FCF (free cash flow) again through a combination of special and ordinary dividends.”
It added: “Mighty River Power remains one of the cheapest in the sector on a price to book and price to discounted cash flow basis. Its capital efficiency moves should be welcomed by the market, as well as its recent strive to simplify and improve its disclosures and guidance.”
Macquarie has a 12-month share price target of NZ$3.30, and its expected FY15 dividend yield is around 6 per cent. Note that the NZ imputation credits can only be used by shareholders to offset NZ income tax liability.
The market is well aware of Mighty River’s improving outlook: the one-year total shareholder turn (including dividends) is 56 per cent to November 13, 2014, according to Morningstar.
Also, the near-term outlook for electricity providers in New Zealand is weakening as new entrants increase competition and pressure profit margins. Mighty River could face flat energy volumes and slightly lower prices as consumers use less energy and take advantage of price competition to get better deals.
Nevertheless, there is enough to suggest Mighty River can continue to lift dividends and eke out further capital growth, albeit at a slower pace in the next 12 months. It is one of the best-quality NZ companies to list on ASX in recent years.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis are at November 13, 2014.