On the ground in New Zealand: Signs of improvement
New Zealand’s recovery remains uneven, but stronger agriculture, infrastructure investment and cheap valuations are creating opportunities.
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After two days and more than 12 company meetings, Tobias and I left New Zealand with a more constructive outlook. However, the path to recovery remains uneven: strong agriculture and tourism are supporting the strength of the South Island's economy, while Auckland lacklustre activity continues to weigh negatively on the North Island.
Housing is soft: approvals are increasing, but new construction is broadly flat. Despite this, rising infrastructure investment and discounted valuations are creating opportunities for recovery.
Agriculture is performing strongly, supported by record dairy prices and the expected distribution of proceeds from Fonterra’s (NZE: FCG) sale of its global consumer and associated businesses. The proceeds are likely to support debt reduction and further investment across the agricultural sector, while a lower New Zealand dollar is benefiting tourism and exporters.
At the Port of Auckland, imports of new cars, farm machinery and heavy vehicles have reportedly risen by around 15%, indicating stronger demand.
However, on the whole economic activity in Auckland remains weak and appears to be bouncing along the bottom. The city accounts for about a third of New Zealand’s economy, making its recovery important to the national outlook. Wellington has started to improve, but a broader recovery will ultimately require stronger activity in Auckland and a nationwide improvement in housing and construction activity.
Infrastructure investment
Civil infrastructure is demonstrating a more immediate positive outlook. Despite November’s closely contested election, our meetings indicated bipartisan support for increased investment in water, roads and data centres.
Channel Infrastructure (NZE: CHI) operates a strategic import terminal at Marsden Point in the country’s north, as energy security and minimum diesel-storage requirements receive greater attention. We believe it is well placed to compete for additional storage projects in New Zealand, while its balance sheet and management team may support acquisitions in Australia.
Opportunities in overlooked companies
After more than a decade of visiting New Zealand, this is the first time I have felt its economy may be better placed than Australia’s. Yet many New Zealand companies remain priced for difficult conditions and are subsequently overlooked by investors.
Vulcan Steel (NZE: VSL) has continued to make acquisitions during a cyclical slowdown in steel distribution. We believe its expanded market position, combined with an eventual recovery in activity, creates scope for a substantial improvement in earnings.
We have owned Mainfreight (NZE: MFT) for some time. Despite difficult conditions across New Zealand and Australia, the company has continued to take market share, leaving it well positioned to benefit as freight volumes recover.
Fletcher Building (NZE: FBU), our largest holding across the relevant portfolios, has sold assets and refocused on core building products under new management. A potential retirement-division sale could leave it in a strong net-cash position, create flexibility for capital management and provide exposure to a recovery in New Zealand construction and housing.
A more constructive outlook
The recovery is not yet broad-based: Auckland remains weak, housing and construction are subdued, and the election must pass before policy direction becomes clear. In saying this, strong agriculture, a competitive currency and increasing infrastructure investment provide reasons for optimism, and we believe New Zealand is closer than Australia to the end of its interest-rate cycle. With many companies still priced for difficult conditions, those that strengthened their balance sheets, improved efficiency or gained market share during the downturn could be well placed as activity recovers.
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Oscar has more than 14 years’ experience in financial markets. Before joining Wilson Asset Management, Oscar worked as a sell-side Analyst at CLSA and three years’ at Grant Thornton working in transaction advisory services.
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Oscar has more than 14 years’ experience in financial markets. Before joining Wilson Asset Management, Oscar worked as a sell-side Analyst at CLSA and three years’ at Grant Thornton working in transaction advisory services.
Expertise
Oscar has more than 14 years’ experience in financial markets. Before joining Wilson Asset Management, Oscar worked as a sell-side Analyst at CLSA and three years’ at Grant Thornton working in transaction advisory services.
Expertise
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