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MARKET CLOSE: NZ shares rise; A2 gains, Fletcher, Mercury fall on MSCI rumours

Monday 14th May 2018

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New Zealand shares rose ahead of the MSCI rebalancing tomorrow, with possible addition A2 Milk leading gains while Fletcher Building and Mercury New Zealand, rumoured to be leaving, dropped.

The S&P/NZX 50 Index gained 36.54 points, or 0.4 percent, to 8,713.23. Within the index, 19 stocks rose, 17 fell and 11 were unchanged. Turnover was $93 million.

The semi-annual MSCI index review announcement is due tomorrow morning New Zealand time. James Lindsay, senior portfolio manager at Nikko Asset Management, said the rebalancing would impact a number of stocks but the announcement would have a clear impact on A2 Milk Co, which has been the top pick to enter the index, and the two stocks it might replace, Fletcher Building or Mercury New Zealand. 

"It looks reasonably likely that A2 will enter, and it's a wee bit of a lottery with regards of which of the two are at risk - there is a possibility that neither come out," Lindsay said. "The amount of money that follows indices like this is fairly material, and for all of those three names, quite significant flows are likely to happen. That's for the end of this month for implementation, a couple of weeks out. End of month will be fascinating, seeing what the flows will be like."

A2 Milk led the index higher, up 2.6 percent to $13.30. The stock has gained 62 percent so far this year but has dropped back from the record $14.10 it reached on March 22. The stock has been gaining for a couple of weeks as MSCI rumours have swirled, Lindsay says.

"If you look at the track in A2 over the last fortnight or so, you could possibly come to the conclusion that some of that has already been done in advance, going to probably other holders like the hedge funds hoping in a couple of weeks' time to sell it out, because of the likelihood it would be implemented," Lindsay said. 

Gentrack Group rose 2 percent to $7.50, Mainfreight gained 1.7 percent to $25.85, and Synlait Milk advanced 1.4 percent to $10.19.

Australia and New Zealand Banking Corp was the worst performer, dropping 2.4 percent to $29.80. Sky Network Television fell 1.8 percent to $2.17 and Pushpay Holdings declined 1 percent to $4.12.

Mercury fell 0.8 percent to $3.155. It has agreed to buy 19.99 percent of Tilt Renewables from the Tauranga Electricity Consumer Trust for $144 million, or $2.30 a share, a 24 percent premium to its last trading price.

"It came as a bit of a surprise, it puts their gearing towards where they were," Lindsay said. "Board and management have obviously decided to use this as an opportunity, but it does look like they have paid a fairly hefty price for it. It basically takes away all of the options Mercury had around excess capital."

Fletcher Building dropped 0.3 percent to $6.37. Along with possibly exiting the MSCI index, the retail component of the company's $750 million capital raise closed on Friday and will be followed by a bookbuild for any entitlements not taken up. In April, the company generated gross proceeds of $515 million from the institutional component.

"Obviously we're not really sure about the quantum of that yet, but it's probably around $100 million of the shortfall that needs to be placed. If that comes at the same time that Fletcher Building has exited, it may be quite a weak session for Building. Then again, the stock certainly has not been particularly strong," Lindsay said.


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