MARKET CLOSE: NZ shares drop, Tower and Air NZ fall, Kathmandu gains

Tuesday 24th May 2016

New Zealand shares fell as Tower tumbled after reporting a wider full-year loss and Air New Zealand dropped to an 18-month low while Kathmandu Holdings recovered on optimism a cold snap across the country will boost sales of winter clothing.

The S&P/NZX 50 Index dropped 35.12 points, or 0.5 percent, to 6,872.65. Within the index, 28 stocks fell, 15 gained and seven were unchanged. Turnover was $171.5 million.

Tower led the index lower, dropping 11.9 percent to a three-month low of $1.56 after the general insurer posted a wider first-half loss of $8.7 million, including an impairment charge against IT, and little changed gross written premium income, raising questions about its ability to compete with larger rivals.

"It was probably $3 million worse than we expected," said David Price, a broker at Forsyth Barr. "The general insurance market is relatively flat, there's increased competition and increasing claims."

Air New Zealand fell 2.8 percent to $2.06, the lowest since November 2014. It has dropped 20 percent since March 30 when it announced it had hired investment bankers to look at a sale of its 26 percent stake in Virgin Australia, less than a fortnight after committing to a one-year, A$131.2 million loan to the airline, and has faced increased competition as oil prices have slumped to record lows.

"At the moment, with the lower oil price, you're just getting a bonanza of cheap international travel," Forsyth Barr's Price said. "We've seen it in the updates out of Air New Zealand over the past two months, the yield pressure has been very much brought to bear, and that's not a situation that's going to disappear in a hurry."

"The Virgin issue, the numbers that are being bandied around in terms of what they need for a recapitalisation have nearly doubled from $400 million - they were talking about maybe needing a cash injection of $400 million, and now that number is $500 million to $1 billion," Price said. "The problem is you're not going to get a suitor in the Virgin stake until they get some clarity in terms of what needs to be put in. It's like buying a leaky home - you're not going to put your money into it until you know what it's going to take to fix it."

Metro Performance Glass dropped 2.7 percent to $1.83, Sky Network Television shed 2.6 percent to $4.16, and Spark New Zealand declined 2.4 percent to $3.645.

A2 Milk fell 1.9 percent to $1.56. Last week, First NZ Capital sent out a note to clients that the strength of A2's patents was set to be tested with a number of unrelated firms either launching or preparing to launch milk products with the A2 variant protein.

Price said the fall may be related to changes to tax in China, which is one of A2's biggest infant formula markets.

"A number of companies have stopped delivering product into China until there's some clarity on tax issues which have recently been implemented," Price said. "We've seen news which has unsettled people, and whether there's any basis to it has yet to be proved, but at the moment, the path of least resistance is certainly on the downside."

Kathmandu Holdings was the best performer, up 4.8 percent to $1.52, having fallen to a seven-month low of $1.43 last week.

"It's probably up for the same reason it was down - people looked out the window," Price said. "The irony for Kathmandu is their big period is June and July, and up until ten days ago their new winter stock hadn't even hit the stores. Now people are going, it's a bit more gloomy outside - that's as fickle as it has been. We've had a cold snap for three or four days, the stock has had a good re-rating in the past two days, but until the main sale gets underway in earnest it's probably a bit premature to be taking a position."

Heartland Bank gained 1.7 percent to $1.22 and Orion Health Group rose 1.3 percent to $4.62.

Outside the main index, Vista Group International rose 2.2 percent to $5.98. The cinema software and analytics firm, which was named PwC Hi-Tech company of the year at New Zealand's annual Hi-Tech Awards, has inked its first deal to provide its cinema software to theatres in Africa. The shares were sold in the 2014 initial public offering at $2.35 apiece.

BusinessDesk.co.nz

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