NZ Capital Markets & 3 E’s Facilitating The Trends

Thursday, 18 June 2020, 1:02 pm
Article: Kalkine

Summary

• NZ equity market has been seen to be outperforming several other global indices in terms of revival from March 2020 crash, delivering a return of 28% return since then (as on 15th June 2020).
• NZX-listed companies are embracing capital raising as a weapon to strengthen their balance sheets and foster capital buffers to storm through coronavirus crisis.
• Mixed impact of capital raising has been seen as providing cushion to businesses and stock performance in NZ market.

Economic Boost, Equity Momentum & Enhanced Cash Build-Up

While the Covid-19 pandemic has sent the world’s financial markets into a tailspin, capital raisings to sustain businesses and aid innovation are gaining significant traction, with recent instances bespeaking companies’ approaches to addressing COVID-19 driven challenges to the best of their abilities. The existing scenario calls for several other companies to seek capital in the days ahead to breeze through the crisis. No doubt, better financial positioning of businesses will have a ripple effect on economic revival and visa-versa, and this also makes a mark for stock market trends.

Whether economy and capital markets share a reciprocal relationship or sustain one-way linkage – this has been a subject of debate for the past several years. The emergence of black-swan event ‘COVID-19’ has again ignited this discussion, with some countries exhibiting a synchronous movement between the two, while others are witnessing diverse forces driving the two in an independent manner.

Equity Market and Economy Moving in Tandem

At the time when the US equity market is not checking the hard-economic reality, New Zealand is demonstrating a strong interconnection between the economic revival and the equity market. New Zealand deserves real credit for effectively containing COVID-19 spread via its early intervention and potent elimination strategy.

Also, the NZ Benchmark Index that experienced an immense fall in March 2020 when the economy ran out of steam amid lockdown restrictions, is now springing back on hopes of a speedier recovery with the economic reopening gathering momentum.

NZ equity market has been seen to be outperforming several other global indices in terms of revival from March 2020 crash and has delivered a return of 28% return since then (as on 15th June 2020).

On top of that, the NZ equity market is bolstering confidence into the broader financial market and economy as businesses are raising capital amid COVID-19 driven challenges. This is some way or the other, facilitating the inflow of financial resources into the domestic economy.

Capital Raising Catching the Wave

Having said that, several NZX-listed companies embraced capital raising as a weapon to strengthen their balance sheets and foster capital buffers to storm through coronavirus crisis. While, three popular players deserve closer attention for their capital management decision – airline hub Auckland International Airport Limited (NZX:AIA), fuel distributor Z Energy Limited (NZX:ZEL) and retailer Kathmandu Holdings Limited (NZX:KMD).

The equity raising was undertaken as part of strategic decisions by these firms to stay well-capitalised during current market uncertainties, which include suspending interim dividends, reducing remuneration of board members and executives, and cutting down operating costs.

While Auckland Airport’s equity raising targeted at meeting all operating, investing and financing cash flow obligations to 31 December 2021, Kathmandu intended to deleverage its balance sheet and provide liquidity and funding for medium-term operating requirements via raised funds.

In contrary to these entities, Z Energy’s capital raise aimed at favourably positioning its business to capitalise on opportunities as NZ economy begins to recover from COVID-19 consequences.

Moreover, the mixed impact of capital raising in providing cushion to businesses and stock performance deserves closer attention.

Although AIA and KMD delivered solid returns of over 25 percent and ~42 percent in terms of stock price performance (up till 15th June 2020) since their capital raising announcements; ZEL went against the tide, plummeting by ~7 percent.

Kathmandu Holdings seems to be decently positioned to sail through coronavirus crisis, as evident in its solid 1H FY20 results (46.5 percent surge in Underlying EBIT on pcp) and resilient April 2020 online sales (2.5-3 times higher than pcp).

In contrast, Auckland Airport bore the brunt of stringent travel restrictions in March and April 2020, with 42 percent and 97.5 percent slump in total passenger volumes, respectively. While the Company is facing a tall order amid COVID-19 induced restrictions, burgeoning demand for domestic air travel and a spike in booking and inquiries for flights in the ensuing months may grease the wheels of the travel industry.

Also, recovery in the travel and tourism industry is likely to create a domino effect on fuel demand, which might also change the course for a few energy-related stocks.

Know About Two Recent Capital Raisings in NZ Market

Lately, electricity generation company Infratil Limited (NZX:IFT) and AFT Pharmaceuticals Limited (NZX:AFT) unveiled their plans to raise capital in the NZ market.

Infratil announced an NZD 300 million equity raising, comprising a fully underwritten ~NZD 250 million Institutional Placement and ~NZD 50 million non-underwritten Share Purchase Plan. The Company intends to use proceeds from Equity Raising for the following purposes:

• To provide additional balance sheet flexibility to fund growth investments across its existing portfolio companies
• To take advantage of new opportunities that may arise due to current market conditions.

AFT Pharmaceuticals also announced its plan to raise ~NZD 10 million by Placement and ~NZD 2 million by Share Purchase Plan to repay debt, resulting in interest savings of ~NZD 0.85 million per annum.

Over recent days, speculations were also rife regarding Air New Zealand Limited (NZX:AIR) proposing to raise capital to sail through coronavirus crisis; however, the airline has lately ended the rumours saying it has a NZD 900 million facility currently from the Crown which is yet to be drawn. The Company also mentioned that it continues to evaluate its capital structure and the options accessible to it.

Overall, Capital Raisings might look exciting sometimes, however, investors still need to understand reason(s) behind the capital raising, management’s confidence in the deal, their ability to handle risk profile, returns expected over time post capital raising, and anticipated trajectory for stock price appreciation.

Having said that, You may Quarantine Your Money if You are a Highly Risk-Averse Investor

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