The following is a transcript of our live web interactive today with Brian Gaynor, executive director of Milford Asset Management, which manages two KiwiSaver funds. Brian was sharing his views on the sale of sovereign owned entities starting next year.
Hi Brian, welcome back. Last time we chatted, it was unclear whether this SOE sell-off was going to happen. Now it's a go with National having been re-elected. This move is touted to change the investment landscape in New Zealand. How significant is this in your view?
Brian Gaynor: The National Government is determined to sell down some of these SOEs so I expect to see the first IPO next year.
Amanda Morrall: It's a way off yet but what, if anything, should would-be investors do to prepare.
Brian Gaynor: Investors should register their interests now with their brokers or brokers. A large number of investors left it too late as far as Trade Me is concerned.
Amanda Morrall: The weighting of the electricity sector will increase from 9 - 28% reportedly. What kind of allocation would be appropriate in one's portfolio, in your opinion?
Brian Gaynor: That is difficult to answer as it depends on the risk profile of the investors. High risk investors should not allocate too much but low risk investors, who are reliant on dividend income, could go up to 20%. The biggest risk is regulation, excessive regulation has had a big impact on the performance of Telecom's share price.
Gareth Vaughan: Hi Brian. What level of dividends, as a percentage of net profit, do you think the power companies - Mighty River, Genesis and Meridian - will pay? Will it match Trade Me's 80%?
Brian Gaynor: The dividend payout will depend on the amount of capex each company will be targeting. Companies with low capex could pay out up to 90%, those with high capex will pay out much less. It also depends on whether they would want to expand into Australia. One of the problems with electricity generators is that their capex comes in big lumps so investors will have to look at the capex exependiture of each company before they invest.
Amanda Morrall: With respect to KiwiSaver, how much exposure could investors expect to get through that vehicle. Also who are the likely investors in these companies?
Brian Gaynor: Electricity generators are ideal for KiwiSaver funds because they are relatively stable and give good long term returns. I believe that KiwiSaver funds and individual NZ investors will be the main investors in these IPOs. There will be little interest from overseas investors.
Bernard Hickey: Hi Brian. Great to have you here on Interest.co.nz. I am curious about how exposed these electricity companies might be to the weather and global warming. What, if any, are the risks there?
Brian Gaynor: Weather patterns are very important as far as these companies are concerned. We look at future weather patterns in relation to Contact Energy. Dry weather is good for electricity generators becuase it pushes up prices as does a cold winter.
Dave Perano: Increasing demand for electricity in New Zealand requires approximately 150 megawatts of new capacity to be installed annually. Rapidly increasing global prices for fossil fuels; the New Zealand Energy Strategy with its focus on renewable technologies; climate change policies; and a gradual shift from an energy constrained electricity system to one with capacity constraints are all factors underlying a change in the type of generation plant being installed. Where is the money going to come from to fund this?
Brian Gaynor: That is one of the reasons the government wants to sell down shareholders, it wants the private sector to fund some of the future investment costs. These electricity generators already raise money from the public through the issue of bonds. These bonds are very popular with the investing public.
Bernard Hickey: TradeMe floats next week. How attractive is it for individual investors and fund investors? Some wonder whether it's now mature and unable to produce the profit growth built into its valuation now. Your view?
Brian Gaynor: Milford didn't get as many shares as we wanted. We like the position Trade Me is in and believe it still has good growth prospects and a good management team.
Amanda Morrall: Between private investors, KiwiSaver funds and outside interest, will the competition for shares be tight? One fund manager billed it as a "bun fight.''
Brian Gaynor: It all depends on the pricing of the SOEs. If the pricing is attractive then there will be intense competition. The government's objective is to have excess demand but not by too much.
Amanda Morrall: What's a good price in your opinion?
Brian Gaynor: Unfortunately we will only know that when the prospectus comes out. It would be inappropriate to make any statement till then but I gess most investors will compare any IPO with Contact Energy.
Ghost Dog: I hear that AirNZ is considered a risky investment comparatively speaking. However given that it has been bailed-out by the government when they weren't majority share-holders has the market over estimated the risks involved in investing in the 'national carrier'?
Brian Gaynor: Airline companies are higer risk than normal because the industry is very competitive and subject to fuel prices and load factors. I believe most NZ investors know this and it is reflected in AIR's share price.
Bernard Hickey: The Prime Minister suggested during the election campaign he would be able to limit foreign ownership to less than 10-15%. Is there any suggestion that ownership of these shares could be controlled and might that affect the value?
Brian Gaynor: Australia controls the offshore shareholding in Qantas so we could do the same. Many countries have offshore limits on strategic assets. AIR and electricity generators are reasonably strategic to NZ.
Dave Perano: So with say $30 billion worth of investment for a sustainable electricity required in the next 15-20 years, and a MOM (mixed ownership model) how are those bonds going to price? I am keen to know how the reduction in state ownership % will effect this, as the power companies would no longer be proxy for state backed debt.
Brian Gaynor: I'm not sure that there is such a big difference between a company that is 100% or 51% owned by the Crown. Some lenders may believe that if a company is listed then it is better than 100% Government owned.
Gummy Bear Hero: Brian : Will the threat by David Cunliffe to re-nationalise these SOE's affect investor's expectations , will it keep investors away ?
Brian Gaynor: I am not so sure about that. Auckland City bought back Ports of Auckland at a higher price than it originally sold it. The Reserve Bank was once listed on the NZX and it was bought back by the Crown at a good price.
Amanda Morrall: Finance Minister Bill English is hoping the SOE float will convince Kiwi investors to get their money out of the bank and into more productive investment. Is this is going to do it?
Brian Gaynor: Yes there is over $100 billion held in bank deposits by New Zealanders. If the electricity generators have good dividend yields there will be interest from people with money in the bank.
Brian Gaynor: The important point about David Cunliffe buying back SOEs is that he would have to do it under a takeover offer and investors would not be compelled to accept. Cunliffe's policy may actually encourage investment.
Ghost Dog: Is it better to jump in at the IPO 'bun fight' or wait until the dust settles?
Brian Gaynor: It is always better to keep ones options open. Register for shares and then make your decision at the time. Each IPO will have to be judged on its own merit.
David B: Brian, what are your views on the sheer number of these electricity generating companies? Do we, as a small country, actually have too many of them? Is there room in the future for some rationalisation?
Brian Gaynor: I believe that it will be very difficult to sell three electicity generators. One, maybe two, but not three.
Bernard Hickey: Final question from me. Should investors wait for the European economic turmoil to settle before they look at these SOE floats or are these stocks not so dependent on the global outlook?
Brian Gaynor: Yes Europe will impact on investors but electricity generators should not be impacted by events in Europe. They do not export and are going to be more depedent on weather, regulation than Europe.