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Investors crying over spilt milk as share prices wobble

Just when we thought there was a light at the end of the proverbial, Aucklanders are staring down yet another level 3 for seven days and the rest of the country level 2.

By Amanda Morrall and Hamesh Sharma

OPINION: Just when we thought there was a light at the end of the proverbial, Aucklanders are staring down yet another level 3 for seven days and the rest of the country level 2.

Covid-19 fatigue is undoubtedly setting in while markets remain largely resilient but investors last week felt a few sharp cracks in the pavement open up.

After a sustained high, the NZX saw its first pull back in some time, falling 7 per cent over February, not quite an official correction (which is 10 per cent) but close.

Creeping interest rates globally, a higher New Zealand dollar, and a less-than-frothy reporting season, are all building pressure.

On top of that, we’re continuing to experience a sell-off of this country’s biggest electricity generators from popular exchange-traded funds (ETFs) that were driving artificially high prices. Even though New Zealand has been enjoying a relatively low impact of Covid-19 on the economy, our global trade and supply lines are ailing.

Closer to home, former market darling A2 Milk is starting to curdle.

A2 plunged another 15 per cent on Thursday after lowering its full-year outlook for the third time. As expected, it was a challenging six months with revenue down -16 per cent to $677 million and operating earnings sinking -32 per cent to $179m.

The 2021 outlook disappointed the market, with profit margin set to be up to 5 per cent weaker than previously expected.

A2’s issues are being driven by the lack of Daigou trade; significant cross-border trading that takes place outside formal channels. This form of selling was a major boon for infant formula producers selling to the Chinese market.

Restrictions on air travel, plus freight cost inflation, border and custom bottlenecks, have severely handicapped trade markets.

A lot of pessimism is being reflected in its current share price which has more than halved since September last year. While A2 still is a top-quality brand, it will likely take time for management to rebuild confidence with investors and for normal business conditions to be restored.

New Zealand King Salmon (NZK) is suffering a similar fate.

Share prices remain depressed after reporting a weak first-half-year result. Profits are down -58 per cent from the same time last year due to sales disruption, higher freight costs, and increased marketing spend.

The company won’t be paying a half-year dividend (which is never well received by investors) and no outlook comments are being provided due to Covid-related uncertainty.

Covid aside, NZ King Salmon produce a premium product and demand remains solid both in New Zealand and overseas. Nevertheless, there remain some serious challenges. Warming water temperatures has increased salmon mortality rates and reduced supply.

NZK has tried to move it salmon farms to cooler waters, something which require government approval and has so far been unsuccessful. This is an example of climate change directly impacting a business negatively.

On the bright side, Spark, another Kiwi darling, is shining. Shares were up on the back of a solid report, with Spark forecasting operating earnings of $1.1b to $1.13b for the 2021 financial year.

While management initially took a conservative stance during Covid, they also reiterated their dividend guidance to be at the top end of the range, at 25 cents per share. Investors searching for income will no doubt be attracted to its 5.3 per cent cash dividend yield at the current share price of $4.67.

Underlying mobile phone services revenue remains strong and competition with Vodafone looks to have eased. Looking ahead, the impact of 5G will be watched closely by investors as it starts to be rolled out.

With 2020 in the rear view, investors may think the worst is behind us but 2021 looks like it could be a rollercoaster, especially if our fate is intermittent lock downs.

There will be a number of winners and losers to emerge as we climb out of the Pandemic. Investors need to accept that volatility goes with the territory.

Hamesh Sharma is a portfolio manager for Pathfinder Asset Management. Amanda Morrall is head of client services. The above views should not be construed as personalised financial advice and represent those of the authors.

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