Business & Investing: Synlait Milk warns a volatile market means it can’t forecast when its sales will recover, Plus Global banks and stocks hit by a US hedge fund in trouble

Investors punished Synlait Milk shares yesterday after the company reported a 76 percent fall in net profit for the six months to the end of January, seeing its shares fall 6 percent to close at a new low of $3.34.

The company offered a particularly downbeat assessment of its outlook saying current conditions would ultimately weigh on its full year result.

“Our first half was challenging, and we continue to find ourselves in a period of significant uncertainty and volatility as Synlait faces [multiple] headwinds. This is impacting our short-term operations and will impact our full-year 2021 financial result,” said Synlait chair Graeme Milne.

First half profit was just $6.4 million, compared to $26.2 million for the same period last year, due mainly to a 16 percent fall in consumer-packaged infant formula sales.

Pre-tax interest and depreciation earnings fell 29 percent to $47.7m though total revenue lifted 19 percent to $664.2m largely due to its Dairyworks business which operates as a standalone entity.

Synlait reiterated its earlier outlook that there is ongoing uncertainty in a2 Milk’s expected demand for the remainder of FY21 and FY22 and as a result it “does not currently have sufficient confidence to forecast when this recovery will occur,” said Milne.

The company also noted the sudden drop in consumer-packaged infant formula demand, combined with rapidly rising Global Dairy Trade prices, a changing product mix, and increasing freight rates all combined to create volatility which limits returns.

Synlait shares have now fallen 55 percent since April last year.

Commerce Commission says it will look into timber shortage 

Carter Holt Harvey, which is well known for shunning the media spotlight, is now facing a potential Commerce Commission inquiry after revealing last week it would temporarily cease supplying building framing to retailers ITM, Mitre 10 and Bunnings in the wake of acute timber shortages.

The Commerce Commission says it intends to enquire into the company’s decision to halt supplying structural timber to some of its customers while maintaining supply to its own subsidiary Carters and Fletcher Building’s Placemakers.

Previously the government had announced the regulator would be undertaking a market study on building supplies but had prioritised a study into supermarket pricing instead.

Carter Holt Harvey has blamed the shortage of structural timber on processing constraints through its mills, though it appears its decision to close one of its mills in Whangarei last year may have been premature.

The decision to only supply certain customers also raises potential questions under the Commerce Act regarding abuse of market power, particularly given the company’s dominant market position.

In 2014 Carter Holt Harvey was found to have engaged in price fixing in the timber market in Auckland and was fined $1.85 million though the current situation obviously differs given the company’s claims of demand greatly exceeding supply due to the current building boom.

The timing of the timber shortage comes at a bad time for the Government as it faces intense public pressure to build more new houses.

Westpac NZ downgraded by rating agency

Fitch Ratings has put Westpac New Zealand on a ‘negative rating watch’ following its Australian parent’s plan to review the business.

Westpac said last week it was “considering the appropriate structure for its NZ business” and assessing whether a demerger would be in the best interests of shareholders.

“The assessment is still in the early stages and a decision is yet to be made by Westpac. We will resolve the rating watch negative once Westpac has decided whether to proceed with the demerger,” Fitch said.

The international ratings agency said its current rating of Westpac NZ reflects its “expectation of an extremely high likelihood of support from Westpac” for the NZ business, should that be required.

It noted Westpac NZ was one of the country’s largest banks, accounting for about 19 percent of banking assets at September 30, 2020, when it represented 11 percent of its parent’s exposure at default.

Reserve Bank supportive of Climate Change Commission’s draft advice

The Reserve Bank has welcomed the Climate Change Commission’s draft advice as a “considered and substantial contribution to shifting New Zealand towards a more climate-resilient future.”

In its submission, the bank noted the draft advice made a strong start at exploring linkages between investment and climate resilience, and the interplay between the environment, economics, finance and wellbeing.

It agreed interventions in all areas needed to be properly considered and coherent while acknowledging that addressing climate change was a shared responsibility that required a collective response.

“All New Zealanders will need to contribute. Many of the primary levers are with Government. Others are with iwi, businesses, communities and families” the RBNZ said in its submission.

However, it noted the investment in green solutions would be much more risky for private investors than they may be prepared to accept in the intermediate term, saying the “financial risk failure of investing unproven climate mitigation projects is high and yet international private funding is probably the only source large enough to tackle some of these projects.”

As the country’s central bank, the Reserve Bank noted activities in the climate space, both in its own role as kaitiaki of the financial system and in collaboration with others, can enhance transparency and reduce market failures such as information asymmetry.

Suez Canal blockage appears to be ending

Oil prices fell after the stuck Ever Given container ship was partially freed in the Suez Canal, raising hopes a crucial lane of global trade can soon reopen.

Brent crude oil futures initially fell 2 percent on the news to US$63.28 a barrel but the declines were soon erased as prices quickly recovered.

The Suez Canal Authority said the ship blocking the Egyptian canal had been mostly dislodged, and authorities planned to fully refloat it some time today. The 224,000-ton vessel had been wedged into the canal’s bank for nearly a week.

It was able to be successfully refloated after responding to the pulling manoeuvres from additional tugs that had been brought in to move the giant vessel.

Authorities would now keep the freed stern of the ship away from the bank as they worked on pulling the front out.

Once the Ever Given has been manoeuvred into position the canal authorities will face the difficult challenge of clearing an estimated backlog of 360 ships waiting at either end of the canal. Usually just 50 vessels are able to traverse the canal on a daily basis in order to maintain the required separation, meaning it could take more than a week to clear the mounting backlog.

Wall Street hedge fund in trouble after facing multiple margin calls

Details of a significant ‘fire sale’ of stocks on Wall Street last Friday are beginning to emerge, leading to questions about the financial health of a little known hedge fund.

Archegos Capital, a private investment firm, was behind an estimated US$19 billion worth of share sales that were literally dumped into the market at short notice leaving traders scrambling to execute the huge volume of sell orders.

The fund, which had large exposures to US media giant ViacomCBS and several Chinese technology stocks, was hit hard after shares of the media group fell sharply last week. It’s understood the declines prompted a margin call from one of Archegos’ prime brokers, triggering similar demands for cash from other banks. A margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses.

Traders buying the large blocks of stock were told the share sales had been prompted by a “forced deleveraging” by a fund, according to the Financial Times.

The firm’s website has since been taken down.

Archegos manages the wealth of Bill Hwang, a “Tiger cub” alumnus of Julian Robertson’s legendary hedge fund Tiger Management which operated between 1980 and 2000. New York-based Hwang previously ran the Tiger Asia hedge fund, but he returned cash to investors in 2012 when he admitted wire fraud relating to Chinese bank stocks.

Hwang paid US$44m in fines to settle illegal trading charges with the US Securities and Exchange Commission in 2012, and in 2014 he was banned from trading in Hong Kong. .

It’s estimated the unexpected stock sales on Friday knocked about US$33bn of value off the companies involved, including Chinese tech stocks and US media groups.

Meanwhile, global investment banking group Credit Suisse warned last night of a “highly significant” hit to its first-quarter results, after it began exiting positions with Archegos Capital due to it defaulting on margin calls last week.

In a trading update before the European market opening, the Zurich-based lender said a number of other banks were also affected and had begun exiting their positions.

The bank said that while it was premature to quantify the exact size of the loss resulting from the exit, it could be “highly significant and material” to its first quarter results.

Credit Suisse shares fell sharply at the start of trading and were last down 14 percent.

Japan’s largest investment bank, Nomura, also issued a trading update last night warning of a “significant loss” at one of its US subsidiaries resulting from transactions with Archegos Capital. Nomura said it was evaluating the potential extent of the loss but estimated they could be as much as at US$2 billion.

Nomura shares fell 16 percent following the announcement

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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