Stock Takes: Inflation is coming. What to look out for when prices rise

Inflation is coming.

Results of this week’s NZIER Quarterly Survey of Business Opinion added to a growing list of leading indicators that have pointed to inflation picking up.

“The increase in both costs and prices points to rising inflation pressures, which is underpinning expectations of interest rate increases from the Reserve Bank over the coming year,” NZIER said.

The survey led a handful of banks to bring their official interest rate forecasts forward to November, with most having previously predicted the Reserve Bank would hold fire until next year.

Investing in times of rising inflation poses challenges for fund managers as they seek to preserve and enhance their clients’ purchasing power.

Sam Dickie, senior portfolio manager at Fisher Funds, expects those companies with “pricing power” – the ability to raise prices by at least the amount that their costs are going up by, while not losing business to their competitors – to be well sought.

“It turns out that those companies tend to have wide moats and are run by very good management teams,” he said.

While it’s no longer listed on the NZX, the Kiwi accounting software company Xero is an example of a company with good pricing power, he says.

“Vista (the cinemas software company) is another one, and even the retirement villages have decent pricing power,” Dickie said.

At the other end of the scale were the utilities, which tended to have no pricing power at all.

In energy, the big power companies are selling a commodity, and consumers can easily flick from one to another.

Then there are the second and third round effects of inflation on those yield-sensitive stocks.

“If we do go into a sustained inflationary environment, we are going to see a sustained pickup in global interest rates – that is not going to be good for the defensive companies in New Zealand that have no growth, so that’s going to be the likes of your utilities, the property sector, and the so called bond proxies.”

The whole inflation debate kicked up a gear last November when the big pharmaceutical companies revealed the likely efficacy of their respective Covid-19 vaccines, which changed market expectations about when economies could recover.

Pushpay surprise

News this week that the chief financial officer of Pushpay, Shane Sampson, had resigned to become CFO of Serko took the market by surprise.

Sampson is a highly experienced operator with over 30 years of experience and will surely be missed by Pushpay, especially given their new chief executive Molly Matthews has no previous experience of running a listed company.

Also from an optics angle, it’s not a great look for Pushpay that Sampson’s first comments about Serko included this quote from an NZX statement: “Serko is a remarkable combination of a well-established company with a long track record of market leadership and growth but also one that is in a position to step change that rate of growth globally”.

“Pushpay will be feeling its nose well and truly out of joint, at the strong implication that it is not the company that Sampson sees in a position to step change its global growth rate,” Castle Point Funds co-founder Stephen Bennie said.

He said Sampson’s departure showed a “surprising lack of faith” in the business.

East Imperial lists on LSE

Kiwi drinks company East Imperial has listed on the London Stock Exchange by way of a reverse takeover of a company called Bermele, which was originally formed for the purpose of acquiring pharmaceutical and biotechnology businesses.

East Imperial said the move would bolster the Kiwi brand’s presence on the global stage.

Founder and chief executive Tony Burt, a former chief executive of M&C Saatchi New Zealand, said the company had successfully relisted with a market value of £30 million ($59.1m).

East Imperial has also raised £3m ($5.91m) of new funds by placing 30 million shares at 10p a share to finance future growth plans.

Burt said East Imperial had set its sights set on becoming global leaders in the premium mixer category.

So why a London listing?

“We’ve always had ambitions to come to London for our next chapter,” Burt says.

“Obviously, it is a world-leading premium market, and it also gives us good access to capital and reaching a truly global investor base.

“I feel this was recently proven with the recent success in our placement and the fact it was oversubscribed.

“We also think our listing will raise the awareness of the East Imperial brand, what sets us apart, and continually contribute to our story and growth ambitions.”

Bermele’s change of name to East Imperial is expected to take place on July 19.

2degrees roadshow

New Zealand telco 2degrees is undertaking a “non-deal” roadshow in New Zealand to introduce potential investors to the company as plans for an initial public offer (IPO) and possible dual listing take shape.

An AFR article expressing concern about the company’s ability to generate the cash flow required to pay dividends was dismissed by a spokesman close to the IPO process, who told Stock Takes that a dividend plan had not been presented.

“The company has not landed on a dividend plan and it follows that it can’t have presented a dividend plan,” he said.

“The presentation in the non-deal roadshow does not include any forward looking statements of any kind.”

In its latest result, 2degrees said its full-year 2020 underlying earnings rose 6.5 per cent to $180m on total turnover of $700m, while its net profit before tax was up 15 per cent at $32.9m.

“Clearly it has got the ability to land on an appropriate dividend policy when the time comes and will do that in the IPO process,” the spokesman said.

The non-deal roadshow is understood to have highlighted the fact that the company had spent $1 billion on its network to date.

It described the New Zealand scene as “a stable three-player mobile market”.

In March, the telco’s Seattle-based, Toronto-listed parent company Trilogy International Partners, said was “exploring a partial public listing” of the 2degrees on the NZX and ASX in the second half of this year.

AIA cold water

News of a takeover bid by a consortium of infrastructure investors for Sydney Airport raised the question the airport’s Kiwi peer, Auckland Airport (AIA) could also be a target, causing a brief flurry in its share price early in the week.

Brokers Forsyth Barr could not rule out a potential future bid for AIA, though it pointed out several key impediments:

(1) the Overseas Investment Act (OIA) creates a major hurdle for offshore buyers, as it did for Canadian Pension Plan Investment Board’s (CPPIB) partial bid for AIA in 2008

(2) politics will likely interplay with the more subjective aspects of the OIA, in particular the new national interest assessment, and

(3) the number of New Zealand-based infrastructure acquirers that could participate in a bid is limited (these include but are not limited to: NZ Super, ACC, and Infratil) given the size of AIA.

On the national interest assessment hurdle, the then relevant ministers (David Parker and Clayton Cosgrove in the Helen Clark led-Labour Government) ruled against the CPPIB bid for 40 per cent of AIA in 2008 under the OIA as the proposed investment failed the ‘benefit to New Zealand’ test.

Since then the OIA has been strengthened; it now includes a mandatory “national interest assessment” for airports.

“This raises the bar further and lowers the likely success of potential offshore bids for AIA,” Forsyth Barr said.

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