Continuous Disclosure: The good the bad and the ugly of 2020
Covid-19 has driven a rollercoaster ride in sharemarkets this year, with the NZX plummeting in February and March only to bounce back just as quickly.
Since then it has continued to rise, hitting fresh highs. For the year to date, the NZX50 is up by about 12 per cent – something that would have surprised many people if they’d been asked at the beginning of New Zealand’s level 4 lockdown.
But among the ups and downs, some companies have shone and others have been either very unlucky in their management or had poor timing.
Stock Takes talked to four fund managers this week about their views on the good, the bad and the ugly moments in 2020.
It’s probably no surprise that many see the performance of Fisher & Paykel Healthcare as a standout this year.
Mark Brown, chief investment officer at Devon Funds Management, says F&P was the gift that kept giving.
“In some ways they have been lucky but in other ways they have actually managed it enormously well to get production to people who needed it.
“At some point you saw their gross margins had come down slightly because they didn’t actually abuse their customer base by pricing up and savaging them. They had a much longer term view on the world.”
Harbour Asset Management’s Shane Solly points to Pacific Edge as another highlight.
“Pacific Edge and its patience as an overnight success over 10 years. We have a bunch of businesses in NZ that are overnight successes over 10 years. Xero is another one where the stock price is up 84 per cent.”
Solly says Mainfreight’s long term view also paid off this year, while the retirement village sector has stood up well in protecting its residents from the pandemic and is now seeing the payback in increased demand.
Sam Trethewey, portfolio manager at Milford Asset Management, says his worst moment was the Metlifecare takeover.
“Private equity bidder EQT engaged in a scheme of arrangement at $7 pre-Covid and the board allowed them into the tent at that point and then Covid hit. There was a legal fight around the material adverse event clause in the contract and the situation they ended up in was: accept the $6 offer or we will fight you in the courts for however long it takes and burn up money on legal fees.
“Ultimately it came down to who had the deeper pockets and put the Metlifecare board and shareholders in very awkward situation and resulted in a Covid discount being given out.”
For Brown it was Kathmandu’s capital raising.
“They did it at the absolute worst moment in time – I’m sure they felt it was a prudent thing to do at the time – they absolutely diluted shareholders and did this monster capital raising. They were already overgeared given they had bought RipCurl.”
Solly says Covid-19 exposed some businesses that lacked operational and financial resilience.
He says Sky TV had been a loser with Covid-19 accelerating the structural changes already happening, such as the move to streaming service Netflix.
“They have made some tough decisions but it’s going to take time to see whether it actually works.”
Solly says cinema software firm Vista was right in the firing zone.
“It is not bad; it is just ugly. They have a very focused client base. Similarly, things like Sanford – people not eating out overseas so not buying fish.”
He says Covid also showed that Air New Zealand perhaps did not have enough resilience.
“If you look back a year ago – everything was going well to the point where they were talking about a special dividend, paying capital back, but actually it needed to be operated with a bit more resilience. I think having said all that, they have done a good job now of trying to arrest this – there has been some really hard decisions made there.”
Solly says Z Energy is also one that got caught out by the Covid shock.
“Z Energy is one of the businesses people would often put in the mix and think this is pretty sustainable, where is the risk here? People will fuel up in good times and bad, but they didn’t so you’ve got this massive business that had never seen ademand shock.”
He says there was not much the company could do, but it is also a business that facesmedium term structural change as people look to reduce their carbon footprint.
“No matter what framework that takes – electric/hybrid – this event has really dragged forward and highlighted businesses that are really dependent on the good times.”
Trethewey says any company that raised capital in March or April created an ugly situation for shareholders who got very diluted as a result.
“Auckland Airport and Kathmandu both found themselves in very tight spots. Auckland Airport, their debt profile was incredibly short-dated and it forced them into a very large capital raising – 20 per cent of their register and very short notice and at a price … that share price is near double now.
“Kathmandu was even worse. Existing shareholders ended up with about 45 per cent of the business post the capital raising and again the share price has more than doubled since then. It just shows that if you have too much debt or debt maturing at the wrong time, when your revenue dries up then you get whacked.”
Brown says the departure of Sanford’s chief executive in the middle of the Covid outbreak was also an ugly moment for him.
“The loss of that guy for them has been massive, especially at time when you need someone to navigate you out of Covid.
“I think in these times a safe pair of hands and a good handover period … I think that was handled really badly and of course the share price has suffered.”
Castle Point’s Stephen Bennie says it has also been a very ugly year for Kiwis saving for a deposit to buy their first home.
“Residential house prices are becoming a significant social problem for New Zealand.”
Bennie reckons the highlight of the year will be December 31, when the end of 2020 brings down the curtain on one of the most stressful years in living memory.
“Lockdowns, job losses, droughts, harbour bridge closures, families separated, share market crashes, losing to Argentina, travel restrictions, the list feels endless.”
Stock Takes couldn’t agree more. Merry Christmas to all and let’s hope 2021 is a better year all round.
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