By Roger J Kerr
The question I get asked the most these days from the boys at the rugby club to elderly relatives is whether “Mighty River Power shares will be a good buy”?
In terms of dividend yield and a generally safe utility stock they should deliver a better financial return performance than 3.5% interest on the bank deposit.
However, therein lays a complete commentary on the current state of investor confidence and expectation in New Zealand.
Retail investors have been starved of quality investment alternatives to low-yielding bank deposits over the last six months and are seeking something that will be safe, however yield over 6%.
Mum and Dad investors also have to be warned that Mighty River Power’s profits can be hit by hydrology risk - that is, a drought in the central North Island means less water flowing down the Waikato river they have all their dams on, thus less hydro generation.
In the wet years they do well as their hydro dams are the cheapest generators in the country, provided the wholesale electricity price holds up. Of course, the Mighty River Power share price will still be subject to general equity market risk and movements.
The Government, as seller of the shares, needs the Mighty River Power IPO float to go very well for many first time share investors so as to increase demand for the subsequent Meridian and Genesis partial privitisation issues.
Corporate bonds fill the gap for yield return when bank deposit interest rates are low and where many investors are full-up credit wise on bank bonds.
After absolutely no new corporate bond issues for six months, there are currently two new issues coming to the market with Trust Power subordinated and Z Energy senior bonds. Both will offer healthy credit margins over five and seven year swap rates, however neither issuer is credit rated and therefore retail investors would only ever have them as a very minor part of a fixed interest investment portfolio.
The new LGFA wholesale bonds have filled a need for institutional fixed interest investors this year with a yield pick-up on NZ Government Bonds. LGFA credit spreads to swap and NZ Government bonds continue to reduce, adding another attractive dimension to them as an investment.
Despite many retail investors allocating funds for the Mighty River Power IPO, there would still be strong investor demand for quality corporate bonds in the five year term.
I would anticipate the Mighty River Power shares will be 200% subscribed, therefore scaling back will still leave a lot of investor money looking for a safe return.
Big corporates are not exactly increasing debt levels these days with major new expansion projects; therefore future corporate bond issues are likely to be existing issuers refinancing maturing bonds.
It makes you wonder why other prominent corporate names like Fonterra, Chorus, Telecom NZ, Fletcher Building, SkyCity, Transpower and Port of Tauranga do not issue wholesale or retail bonds to spread their funding risk and reduce dependence on bank lenders.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
7 Comments
The National Government seems committed /dependent on the sale of a number of state assets. I think that even most Mum and Dad investors are aware the Government in terms of future sales can’t really afford to allow the first of their sales to be flop both in subscriptions and return for investors. I suggest that Mark Zuckerberg would find it difficult to publically list another company.
Facebook is not a good example, do you really think they ever intended to list another company? Did you ever consider the strategy was to maximise wealth in two stages...by taking too much off the table they ensures any future IPOs in the social media space would be tainted... capital starvered... facebook has the capital to buy up any potential compepititors IP. If they can't action a successful IPO they can't get to the scale to compete with facebook.
For the same reason I believe the government shouldn't sell it, I expect MRP will be a good buy. The sorts of prices mooted do not seem high in terms of replacement cost, or multiple of earnings, for a company with relative oligopoly pricing power and supplying an essential service. While some electricity use is getting more efficient- lightbulbs for example- I expect plug in cars will find a place in the next 10-20 years, along with other oil replacement options.
The barriers to entry for competitors still look high, unless some of the new technologies like solar or geothermal are both more abundant, and cheaper, than I imagine.
So yes, I'll be buying some. and expect the 200% oversubscription is less than what will eventuate.
Roger J. Kerr
I wish you and John Key would stop using that expression "Mum and Dad investors". It's nonsense! I think a lot of "ordinary" Mums and Dads do not have spare cash for investments. A Challenge: Prove to me that such people exist. Who are the investors in this country?
Roger J. Kerr
I wish you and John Key would stop using that expression "Mum and Dad investors". It's nonsense! I think a lot of "ordinary" Mums and Dads do not have spare cash for investments. A Challenge: Prove to me that such people exist. Who are the investors in this country?
Insulinoma, dont be so sure , there are plenty of ordinary older ( over 50) Kiwis with cash . We are ordinary Mom and Pop investors ( my wife and I have 3 children) , and I will be taking a punt on this float . I am a bit older than most people with kids, I married a younger woman and we started started a family later than most of my peers, but we have no net debt, all our investments are cashflow positive , and I am too heavy in fixed property and need to diversify .
Having said that ,my main reason is that Bank deposit rates are pathetic , and I need to do better with my cash other than let it rot in the ANZ
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