Insights

If I asked you to tell me two listed companies that are alike, I highly doubt that A2 Milk and Sky TV (SKT) would even be in your top five picks. Curiously though, there is a striking similarity in these two businesses that sits at the core of both of their operations, though you wouldn’t guess it from their 12 month forward P/E multiples.

A2 Milk is currently sitting at 24x forward P/E versus Sky’s 7x. Sky’s multiple reflects the risk of renewal (or not) from the five year NZ rugby rights contract which creates a continual cycle of earnings uncertainty. While A2 does not have to worry about how much they might pay up for the All Blacks, they do have their very own five year rights renewal risk with their Chinese State Administration for Market Regulation (SAMR) licence and highly co-dependent relationship with producer Synlait. One could argue that A2’s earning are far more exposed to this five-year renewal risk than Sky as Sky is more advanced in building out a product portfolio that diversifies the company away from paying whatever sum NZ Rugby and its new (heavily commercially incentivised) partner demands.

Right now, A2 has nowhere else to put their China label infant formula production, something the company is keenly aware of as it looks to shore up its supply chain capabilities. Two structurally declining markets, two rights renewal cycles and two very different multiples applied by the market; at least gives you pause for thought.

Value is in the eye of the NBIO holder (Non-binding indicative offer)

The New Zealand market has seen its fair share of corporate action in the last few months with bids being lobbed at the likes of Rakon, Sky TV, Arvida and now Comvita. Having downgraded earnings guidance and outlook on the first of the month, Comvita’s market cap fell to ~$125m ahead of the NBIO, supported by its $145m inventory value, without any consideration given to the value of its Manuka forests or extraction plants. This makes it an undoubtedly attractive target to both industry players and private equity. Comvita is no stranger to a bid, in fact Comvita has been subject to bids, some more credible than others, in 2011, 2018, a rumoured approach in 2022 and again in February 2024. For those with a shorter memory the 2011 bid by Cerebos Pacific is particularly notable. After offering $2.50 for the company Cerebos walked away, refusing to increase its offer on the back of an independent valuation range of $3.40 to $4.00. Six months later Comvita printed a full year profit of $8.2m on $95.9m of sales. While there is no news confirming a bid price for the company in the current version, it is said by Comvita to be at a significant premium to the pre-bid share price of around $1.79. For reference, thirteen years after the Cerebos approach, Comvita’s most recent full year result saw the company print a $13.1m profit on $234m of sales.

Friends aren't forever, but the ComCom is

Air New Zealand and Auckland Airport; you really can’t have one without the other but that doesn’t mean that it’s all love and roses when it comes to this symbiotic relationship.

Earlier in the month Air NZ lodged an official request with the Commerce Minister seeking an urgent inquiry into the regulation that is failing to constrain “overspending” by Auckland Airport, who is proposing a $7 billion to $8 billion development pipeline over the next decade. The airline has said that the redevelopment costs will make flying unaffordable for some Kiwis. The average Kiwi might say that’s a bit rich coming from Air New Zealand, whose 86% share of the domestic travel market has seen them aggressively hike prices post-pandemic. Despite its sometimes unpalatable airfares, Air NZ’s full year guidance outlined at its result implies earnings before tax in the second half to be -$5m to $35m which puts Air NZ on a 12 month forward PE of 20x versus the long-term average of the sector of 9-10x. Earnings in the airline sector are cyclical, but both companies valuations depend on an affordable experience for customers.   

With a handful of companies still yet to report at time of writing I have called it slightly early, but the Margin Call deadline waits for no company, and with over fifty percent of the NZ50 by index weight having reported, I have think we have seen more than enough to keep us busy for the meantime.

Paige Hennessy is an Equity Analyst at Octagon Asset Management.