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MARKET CLOSE: NZ shares up on A2's 27% surge; Synlait, Fletcher, Spark drop

Wednesday 21st February 2018

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New Zealand shares rose as A2 Milk Co surged on its tie-up with Fonterra Cooperative Group, while Synlait Milk, Fletcher Building and Spark New Zealand dropped.

The S&P/NZX 50 Index rose 102 points, or 1.3 percent, to 8,200.27. Within the index, 22 stocks rose, 21 fell and seven were unchanged. Turnover was $272.9 million.

A2 shot up 26.5 percent to a record $11.75 today, dragging the index with it after reporting a record first-half result and a new deal with Fonterra. The company announced it had more than doubled first-half profit to $98.5 million on strong infant formula sales as sales climbed 70 percent to $434.6 million. 

The milk marketing firm used its first-half result to unveil a strategic partnership with Fonterra, which will exclusively supply a2 with A1 protein-free milk products in bulk powder and consumer packaged forms, in exchange for an exclusive license to produce, sell and market a2 branded fresh milk for the New Zealand market. The two companies will establish an A1 protein-free milk pool in New Zealand and a new A1 protein-free milk pool in Australia.

"The result was clearly a lot ahead of market expectations, winning market share in China and diversification of supply with Fonterra is also positive," said Craig Stent, head of equities at Harbour Asset Management. "The earnings growth is supporting the share price appreciation, from any multiple it's growing into it. People are a bit conservative about what they forecast, and this company seems to deliver ahead of those expectations."

Synlait, which exclusively supplies a2 with its infant formula in China, Australia and New Zealand and has seen its shares rally with a2's, dropped 5.7 percent to $6.65. In a media release this afternoon, a2 and Synlait stressed the Fonterra deal will not affect their arrangements and said the companies will have an ongoing relationship. Stent said investors were thinking Synlait might not benefit from all of the growth a2 experiences going forward.

Fonterra Shareholders Fund units gained 0.5 percent to $6.03.

Fletcher Building was the worst performer, down 7 percent to $6.39. The company's first-half results were clouded by losses at its Building + Interiors unit but also showed weak demand at its most profitable businesses over the next 12 months.

Building products, Fletcher's biggest business, lifted revenue by 13 percent to $1.25 billion although operating earnings fell 9 percent to $118 million. Distribution, which includes the Placemakers chain, lifted revenue by 7 percent to $1.6 billion and earnings before interest, tax, depreciation and amortisation rose 8 percent to $104 million.

"There's a bit more unbundling of things under the bonnet with regards to other divisions, the market hasn't gained too much confidence from the result," Stent said. "There have been no announcements on their USPP debt financing, that's still in progress."

Spark New Zealand dropped 3.9 percent to $3.32. First-half profit fell 3.4 percent to $172 million as it ramped up spending on a new transformation programme aimed at making it the nation's lowest cost operator.

"It was okay, the signalling they're bringing through cost-out to support earnings growth may have upset some investors," Stent said. "In terms of the dividend stability for the company, it's okay."

Ebos Group rose 1.2 percent to $17.35. The pharmaceutical and animal health products maker said its first-half profit lifted 12 percent to a record $76.7 million as it reaps the benefits of a diverse portfolio.

Meridian Energy gained 0.9 percent to $2.87. The renewables electricity generator and retailer posted a 7 percent fall in first-half earnings to $329 million as low inflows into its South Island hydro catchments reduced its electricity output.


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