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While you were sleeping: Visa, MasterCard rally

Wall Street rose after a report showing the US economy grew at a better-than-expected clip in the third quarter, while shares of Visa and MasterCard rallied after their latest earnings topped expectations.

In afternoon trading in New York, the Dow Jones Industrial Average climbed 1.30 percent, the Standard & Poor’s 500 Index rose 0.53 percent, while the Nasdaq Composite Index gained 0.34 percent.

A rally in shares of Visa and those of Merck, last up 9.7 percent and 1.8 percent respectively, propelled the Dow higher. Shares of Intel dropped, sliding 3.3 percent for the largest percentage loss in the Dow.

Shares of Visa gained on better-than-expected earnings as well as the announcement of a US$5 billion share-buyback program.

“The underlying metrics which will drive our revenue growth over the longer term are strong and getting stronger,” Charlie Scharf, chief executive officer of Visa, said in a statement. “Our partnerships are growing, our capabilities are improving, and the opportunity for Visa to disintermediate cash across the globe is bigger than ever.”

Analysts agreed.

“The quarter looked good. The most important thing is that we saw an improvement in cross-border transactions and the share buyback shows confidence,” Gil Luria, analyst with Wedbush Securities, told Reuters.

Shares of rival MasterCard jumped 8.6 percent, also on earnings that surpassed expectations.

So far this reporting season, 75.5 percent of S&P 500 companies haveexceeded profit expectations, according to Thomson Reuters data, above the long-term average of 63 percent.

The US economy also delivered. A Commerce Department report showed gross domestic product expanded at a 3.5 percent annualised pace in the three months ended September, following a rate 4.6 percent growth in the second quarter. The rate of growth bettered economists’ expectations. It also fuelled bolstered expectations the Federal Reserve might raise interest rates sooner than previously thought.

The Fed on Wednesday said it ended its monthly bond-buying program and said it continued “to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.”

“A strong [GDP] report, on the heels of a more hawkish tone from the Fed yesterday, has some investors thinking we could see a rate hike faster than might otherwise have been hoped,” Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, told Reuters. “That’s dampening the spirits of investors who were hoping for easier monetary conditions for an extended period.”

To be sure, some analysts pointed out weaknesses in the GDP data too.

“The report was broadly constructive, but with weakness emerging in housing and consumption spending, we expect the pace of growth to slip further in the fourth quarter,” Millan Mulraine, deputy chief economist at TD Securities in New York, told Reuters.

In Europe, the Stoxx 600 finished the session with a 0.6 percent gain from the previous close. The UK’s FTSE 100 Index rose 0.2 percent, Germany’s DAX increased 0.4 percent, while France’s CAC 40 climbed 0.7 percent.

MARKET CLOSE: NZX 50, Freightways rise to records; Mainfreight paces gains

New Zealand shares rose to a record led by Freightways after a profit upgrade. Mainfreight and Restaurant Brands paced gains as investors hunted for yield investments after the Reserve Bank kept interest rates on hold.

The NZX 50 Index rose 14.305 points, or 0.3 percent, to 5370.18, marking the sixth record close in a row. Within the index, 23 stocks rose, 14 fell and 13 were unchanged. Turnover was $94.3 million.

Freightways climbed 6.8 percent to a record $5.50 after the listed courier and data management company affirmed it is on track to lift 2015 earnings. It recorded the strongest first-quarter performance in a decade, widening its profit margin on a 17 percent increase in sales, while profit rose 37 percent to $13.4 million in the three months ended Sept. 30.

“Another positive day on the local market, fuelled a little bit by a profit upgrade from Freightways,” Grant Williamson, director at Hamilton Hindin Greene said. “A courier business can normally be a pretty good barometer for the general economy, so there is a little bit of confidence in that upgrade from Freightways.”

Central bank governor Graeme Wheeler kept the official cash rate on hold at 3.5 percent this morning and flagged rates may stay lower for longer as he pauses to asses the impact of his 100 basis point hike between March and September. Investors bought stocks on the anticipation they will provide a better return than other yeilding assets.

Courier and air services company Mainfreight rose 3.5 percent to $15.90. Restaurant Brands New Zealand, the fast food chain operator and franchiser, climbed 1.9 percent to $3.70.

“Investors are probably now realising that interest rates are going to remain lower for longer and they certainly want better than they can get in the interest rate market,” Williamson said. “Today’s Reserve Bank announcement reinforces that outlook.”

A2 Milk advanced 5.2 percent to 61 cents. The milk marketer has fallen some 37 percent from its February high of 97 cents. Kathmandu Holdings, the outdoor goods retailer which has fallen 13 percent in the past six months, rose 1.3 percent to $3.13. Summerset Group Holdings, the retirement village operator which has fallen 21 percent over the past six months, gained 1.1 percent to $2.75.

“Investors are hunting through the market looking for some oversold opportunities,” Williamson said.

Vector, the Auckland lines company, gained 1.9 percent to $2.70. The Commerce Commission reduced the rate of return regulated power and gas network monopolies, like Vector, can make.

Fletcher Building, New Zealand’s largest listed company, gained 0.4 percent to $8.48. Spark New Zealand, formerly Telecom Corp, was unchanged at $3.115.

On the New Zealand Alternative Index, Chatham Rock Phosphate, which is seeking to mine phosphate nodules from the seabed on the Chatham Rise, tumbled 13 percent to 13.5 cents after it said it will push out the date to exercise its listed options until 12 months after it receives marine consent to allow it share price to stabilise.

NZ dollar holds gains ahead of central bank meetings

The New Zealand dollar held gains in local trading ahead of statements from the Federal Reserve and Reserve Bank tomorrow.

The kiwi traded at 79.20 US cents at 5pm in Wellington from 79.25 cents at 8am and 78.98 cents yesterday. The trade-weighted index advanced to 76.83 from 76.71 yesterday.

Traders are awaiting the outcome of the Federal Open Market Committee meeting on Wednesday in Washington for a steer on whether the world’s biggest central bank will continue moving away from its extraordinary stimulus measures it’s had in place to combat the global financial crisis in 2008. Weaker than expected US data in recent days and comments from Fed official James Bullard earlier this month that the Fed should hold off ending its bond-buying programme have put the meeting under greater scrutiny.

“You’ve seen such a big move to the downside (in the kiwi), but certainly any mention of QE (quantitative easing) is only going to see things go one way, and that’s a massive risk-on environment,” said Alex Hill, head of corporate FX at NZForex in Auckland. “You saw the low (in the kiwi) and it looked like a bounce was imminent before we got the next sell-off and it takes a piece of fundamental news to back that up.”

The Fed meeting comes just ahead of New Zealand’s Reserve Bank policy review on Thursday, which is expected to keep the key rate unchanged at 3.5 percent. Investors will be looking to see whether governor Graeme Wheeler takes a softer tone on future hikes, given the tepid pace of inflation, which is at the bottom end of the bank’s tolerance range.

Helping support the kiwi was upbeat business confidence in the latest ANZ Business Outlook survey, snapping seven months of declines after the general election gave the incumbent National-led government its third term.

The kiwi was little changed at 62.18 euro cents from 62.14 cents yesterday, and edged up to 49.07 British pence from 48.96 pence. It rose to 85.65 yen from 85.13 yesterday, and fell to 89.35 Australian cents from89.50 cents.

Vital Healthcare flags A$15.5M of Australian developments, sells NZ property

Vital Healthcare Property Trust, the country’s biggest listed medical and healthcare property investor, has signalled development plans totalling A$15.5 million in Australia, and has sold a New Zealand property as it looks to exit low-growth assets.

The property investor has a A$9.5 million redevelopment plan to expand its Belmont Private Hospital in Brisbane and A$6 million upgrade of its Hurstville Private Hospital in Sydney, Vital Healthcare Management, the trust’s manager, said in a statement. Vital has also agreed to an unconditional sale of Hisbiscus Coast Community Health Centre in Whangaparoa for $4.2 million.

The Belmont extension will add 30 beds, extra consulting suites and car parking, and is expected to be completed in September next year, while the Hurstville expansion will add two new angiography suites, a six-bend coronary care unit and a six-bed intensive care unit, with an completion date set for May 2015.

“The developments and asset sale continue to support Vital’s overall strategy of creating capacity to meet rising demand for healthcare services,” Vital Healthcare Management chief executive David Carr said. “Vital is a committed investor in healthcare real estate and we are pleased to partner again with Healthe Care to undertake the brownfield developments which remains a successful strategy to enhance the long-term quality and value of Vital’s portfolio.”

Vital Healthcare is investing in private hospital facilities in New Zealand and Australia as it expects demand to increase from an ageing population, a rise in chronic disease and higher patient expectations. About 47 percent of Australians have private health care cover for hospitals, compared to about 30 percent of New Zealanders.

Units in the property trust fell 1.3 percent to $1.47, and have gained 16 percent this year.

LGNZ values water infrastructure at $35 billion, 20% up for renewal

A quarter of New Zealand’s $35.7 billion of water, wastewater and stormwater infrastructure is more than 50 years old and up to 20 percent needs renewal or is unserviceable, according to the 3 Waters project by Local Government New Zealand, the first national picture ever published of New Zealand’s water assets.

Overall, New Zealand’s water infrastructure was sound and performing as needed, but investment to replace and renew existing assets would be needed to keep up with rising standards and ensure ratepayers have the right incentives to use the assets efficiently, the report, written by Castalia Strategic Advisors on behalf of the councils’ lobbyist, found. Water assets were split across three areas, with the wastewater network carrying the highest replacement value at $15.8 billion, while drinking water assets are valued at $11.3 billion and stormwater is worth $8.6 billion.

“One of the points from the report is the state of the infrastructure is actually in pretty good shape,” Malcolm Alexander, LGNZ chief exeuctive said at a quarterly media briefing. “We know that this renewal curve is coming, so how are we going to manage it and how are we going to finance it, but we’re not falling off the cliff. This is not a crisis issue.”

Local authorities own and are responsible for the water infrastructure, and will foot the bill for upgrades to the assets. LGNZ expects to make recommendations on the next step, including around expected costs and how to finance upgrades, early next year.

The report comes after the central government’s 2011 National Infrastructure Plan noted a lack of information around the country’s water infrastructure. A recent report by the Office of the Auditor General found funding for roads and water assets was deteriorating, and if the trend continued by 2022 there would be a funding gap in the local government sector of between $6 billion to $7 billion.

LGNZ is also reviewing the sectors’ funding approach, flagging a possible shift away from rate-based funding. It is looking how to tackle imposed costs from central government and  sustaining shrinking, less economically viable towns. The final review is due in December.

“At the end of the day I think we’re constrained with land-based taxation,” said president Lawrence Yule. “Everybody is into this mould that you can’t increase the rates by more than the rate of inflation and politicians have gotten gun-shy around that stuff.

“But the risk is that we under-invest. That we build up a bow wave of stuff ahead of us that actually compromises the future of the country,” Yule said.

An insurance review and a think piece on how councils manage natural hazards are also underway.

In February 2012, local authorities established the Local Government Funding Agency, creating a borrowing entity with sufficient size to bring down the credit costs of individual councils. In the three months ended Sept. 30 the agency had issued $555 million in new debt, with total debt on issue now $4.25 billion, making it the third largest issuer in New Zealand, after the central government and the World Bank. Of its bonds, it said 19 percent was held by offshore investors.

Smelter’s future back in focus for Meridian

Meridian Energy will watch first for closure by fossil fuel-fired power stations before making any decision on how it responds if the Rio Tinto, majority owner of the Tiwai Point aluminium smelter, exercises its option to terminate its contract on July 1 next year, Meridian’s chief executive, Mark Binns, told shareholders at the company’s first annual meeting since listing on the NZX exactly a year ago at $1 a share, with 50 cents still be paid next May.

Trading at a high of $1.68 today, Meridian’s tradable instalment receipts have effectively more than paid the additional instalment, with the company raising further the prospect of capital returns at the half year dividend next year, now that the National Party win had seen off the proposed single buyer policy of the Labour and Green parties at the Sept. 20 general election.

“The election result was one of the potential events that could have negatively affected our views” on the approach to capital returns, “given Labour’s and the Greens’ New Zealand Power proposal,” chairman Chris Moller told shareholders in Wellington.  ”However this has now been resolved, at least for the term of the current Government.”

Binns dwelt on two threats to the company from Australia; the potential closure of the Tiwai Point smelter and the review of the Australian federal government’s Renewable Energy Targets scheme, which underpins revenue generated by Meridian’s substantial stable of Australian windfarms.

In the event of a negative decision, the company may need to reassess the carrying value of those assets on the Meridian balance sheet, which have reduced since Meridian sold its half-share of the giant Macarthur wind farm to its partner in the project, AGL.

Binns told the meeting that if Meridian received notice of termination from New Zealand Aluminium Smelters after July 1 next year, the company “will monitor the supply response from its thermal competitors very closely” as the consumer of around one-seventh of all electricity generated in New Zealand wound down production.

“There will potentially be significant over supply in 2017 and thermal generation, at high marginal costs, will theoretically be required less and the economics of operation will become questionable.”

Prime candidates for closure would be the remaining units at the 1,000 Megawatt Huntly coal and gas-fired plant and combined-cycle gas turbine units owned by Contact Energy at Otahuhu and Stratford, which are ageing and are now commonly used as peaking rather than baseload power stations, especially since the addition of substantial addition geothermal generation to the national fleet.

However, Binns expressed optimism about the smelter’s future, saying a lower New Zealand dollar and improving aluminium prices suggested ”the trading position of Tiwai Point appears to have improved and although forecasts are just that – forecasts – the metal forecasters we follow are predicting further increases in aluminium prices in 2015 based on supply

and demand dynamics.”

Since the electricity contracts were varied in August last year, the price of aluminium on the London Metal Exchange had appreciated by 10.3 percent and regional delivery premiums have increased considerably.

“The NZD/USD cross rate has stopped appreciating over this period and has actually declined by 1.1 percent with commentators picking further strengthening of the US dollar against most currencies over the next year or two.”

He raised also the prospect of the smelter seeking supply from another New Zealand electricity supplier.

“We do not know what that decision may be, but we do understand the matter is getting careful consideration,” said Binns.

“We would like to see the operation continue but our drawn-out negotiations last year saw us provide pricing and contract conditions which represented the best offer that Meridian could table. Sixteen months on, our view remains unaltered,” Binns said.

Moller reminded shareholders they will need to stump up the remaining 50 cents per share, which will be due for payment no later than May 4, 2015, with a record date for shareholders’ eligibility to pay set at May 4.

He confirmed Meridian will not give forward profit projections from now on, despite having done so in the prospectus for last year’s partial privatisation, because the company’s fortunes could be seriously affected by rainfall levels in its catchments.

With proviso, Miller said the board was “currently comfortable” with a consensus analyst view that the current financial year will produce earnings before interest, tax, depreciation, amortisation and the changes in the fair value of financial instruments of $607 million, some $17 million ahead of the prospectus forecast of “slightly over $590 million.”

Binns warned also that Meridian is about to get more commercially hard-nosed about its solar power generation offering, saying the company has 70 percent of the New Zealand residential solar market.

“As we move forward we have to balance our commitment to support solar customers in a way that is also commercially sustainable for Meridian. We will be reviewing our tariffs in this segment over the coming year to reflect this aim.”

Solar was not economically viable in New Zealand, being three to four times more expensive than electricity generated at a windfarm, and only ever capable of producing a small proportion of total electricity demand, even if we had “one million kiwi homes” generating their own electricity.

“Using the International Energy Agency numbers and assuming equipment and installation costs fall year-on-year by 5 percent annually, it will be no earlier than 2035 and probably 2045 before solar at utility scale becomes competitive with other renewable options in New Zealand – at current prices!” said Binns.

“We believe solar remains an important part of the renewable energy solution for New Zealand, but is not a likely game changer for generators and retailers but it will raise some interesting questions around how lines companies recover their costs.”

Chorus plan to add director to boost capability in changing landscape

Chorus, the regulated telecommunications network operator, wants to add another independent director to its board to enhance its capability in what’s become a vastly different landscape in just three years.

Shareholders today voted on whether to approve a lift in the pool for directors’ fee to $1.1 million from $980,000, which was set in 2012 when Chorus was carved out of the then-dominant telecommunications company, Telecom Corp, which has since rebranded as Spark New Zealand. Chair Sue Sheldon told shareholders the increase won’t spill over into higher fees for the current directors, rather, it would allow the company to add another director with “additional skills and perspectives” in a new environment for the company.

The board faced an increased workload in the 2014 financial year, with 33 meetings compared to 14 the year before, and a normal schedule of eight.

In response to a question from a shareholder, Sheldon said the increase was based on the average fee for an ordinary director plus a committee role.

Speaking to BusinessDesk after the meeting, Sheldon said when the board was established it was thought Chorus would operate as a typical regulated utility, though that has changed with bedding in of the new regulatory landscape.

“That obviously looks different from what the position looked like in 2011, and we’re working through that process,” Sheldon said. “It’s not just one particular thing we’re looking for.”

Chorus has been locked in a battle with the Commerce Commission over the past 18 months after the regulator imposed steeper cuts to the regulated price of services over the network operator’s copper lines. The company has been fighting initial determination based on international benchmarks in the courts, while at the same time lobbying the regulator to take a softer approach in its more fulsome review.

Chief executive Mark Ratcliffe told shareholders the regulatory framework Chorus operates in needs updating to provide the sector with more stability and improve the fibre uptake. That includes bringing forward a review of the telecommunications framework from its scheduled 2016 start date, and earlier certainty for the post-2020 pricing regime to ensure investors can base their decisions on.

“I’ve had some indications from officials for the minister that they’re contemplating starting some preliminary work on that in the current term,” Ratcliffe said in response to a question from Scott Hudson of the New Zealand Shareholders’ Association.

Ratcliffe also said clarity is needed on the Telecommunications Service Obligation review started last year, as would a streamlined consent process for fibre deployment.

Shares of Chorus rose 0.7 percent to $2.085, and have gained 44 percent this year.

Dorchester gets past 90% ownership for Turners, triggering mop op

Dorchester Pacific, the finance company, has reached the 90 percent threshold in its takeover of Turners Group, allowing it to mop up remaining shares in the car auction firm.

Dorchester offered Turners’ shareholders either $3 a share in cash, two-year notes that pay interest of 9 percent and convert to Dorchester shares, ordinary shares of Dorchester, or any combination of the three.

The finance company wants the car auction house to complement its loan book, of which 70 percent is made of car loans, while the focus of its insurance business is also car related. Dorchester already held 19.85 percent of Turners when it entered into a lock up agreement with the target company’s chairman, Michael Dossor, who owns 20.8 percent through Bartel Holdings, for a combined 40.65 percent stake.

In September, Dorchester said that a full takeover of Turners would be funded by $18 million of bank debt, $18 million of bonds, and $30 million from the issue of new shares.

The Turners board endorsed the $82 million bid by Dorchester, saying the $3 a share offer was within the valuation range of between $2.97 and $3.27 put forward by Grant Samuel in its report. The report said the 9.1 percent premium to Turners’ pre-offer trading price was lower than the average incentive offered in successful takeovers of Australian and New Zealand listed firms. But it said no other offer had been made, the finance company already held about 41 percent of the firm’s shares, and if the offer isn’t successful, the Turners shares will likely trade below the $3 price.

The independent adviser’s report said Turners investors who opted for Dorchester shares at 25 cents apiece could receive more or less than the $3 per share offer, while those taking the bonds would receive an attractive interest rate for two years, after which time the notes could be converted to Dorchester shares or redeemed for cash.

In August, Turners lifted first-half profit 5.9 percent to $2.27 million on a 19 percent increase in revenue to $49.6 million.

Shares of Dorchester were unchanged at 26 cents and have gained some 18 percent this year, while Turners stock was unchanged at $3.05 and has gained 30 percent since the beginning of the year.

NZ business confidence shows first gain in eight months in post-election bounce

New Zealand business confidence advanced for the first time in eight months in October, rebounding from a two-year low as certainty returned following last month’s general election. The New Zealand dollar rose after the survey was released

A net 26.5 percent of firms are optimistic business conditions will improve in the coming year, up from a net 13.4 percent last month and the first increase since confidence hit a 20-year high of 70.8 percent in February, according to ANZ Bank’s latest Business Outlook survey. Still, firms expectations for an improvement in their own activity was little changed at a net 37.8 percent from 37 percent last month.

Last month’s survey was taken before the outcome of the Sept. 20 general election, where incumbent Prime Minister John Key and his National government were returned for a third term. This month’s survey showed expectations for profitability, investment, and hiring edged lower while export and pricing intentions lifted.

“We put September’s decline in confidence down to politics, and this month we say the same,” ANZ chief economist Cameron Bagrie said. “Confidence is still well down from its February euphoria but readings are still north of average. Life on the prairie for the average business may not be stellar but it looks solid.”

The New Zealand dollar rose as high as 79.33 US cents from 79.19 cents immediately before the 1pm release of the survey. The local currency was recently trading at 79.23 cents.

The business confidence report comes ahead of the Reserve Bank’s review of interest rates tomorrow where governor Graeme Wheeler is expected to keep the benchmark rate at 3.5 percent following four hikes between March and July.

Since the start of the year, expectations for New Zealand economic growth have slowed, with the Treasury cutting its gross domestic product forecast to 3.8 percent in the year through March 2015, from a previous estimate of 4 percent.

A report last week showed New Zealand consumer prices are accelerating at an annual rate of 1 percent, lagging the Reserve Bank’s 1.3 percent forecast and at the bottom of the bank’s 1-to-3 percent target band. Lower inflation means the Reserve Bank will probably hold off raising the official cash rate until late 2015, according to economists.

Today’s survey showed a net 54 percent of firms expect interest rates to rise further, up from 50.6 percent last month. Inflation expectations were little changed at 2.48 percent from 2.46 percent with a net 24.2 percent expecting to raise prices, up from 19.2 percent last month.

A net 25 percent expected to increase exports, up from 22.1 percent last month.

Meanwhile, firms expectations for profits slipped, with a net 17.2 percent expecting higher earnings, from 19.2 percent last month. Those intending to employ more staff also slipped to a net 19.4 percent from 21.3 percent, while increased investment intentions weakened to a net 16.3 percent from 20.3 percent.

Sentiment in the residential construction sector declined but was up in the commercial sector.

Business confidence was weakest in the agricultural sector, reflecting a decline in prices for dairy farmers, and highest for the services sector.

Sanford expands executive team

Sanford, the country’s biggest listed fishing group, has expanded its management team to kick off structural changes under new chief executive Volker Kuntzsch.

The Auckland-based company’s senior managers are chief operating officer Greg Johansson, chief financial officer Clement Chia and chief people officer Claire Walker, rounded out by Kuntzsch, who took over the top job in December last year. The appointments are the first step in a company-wide structural change to become more customer focused and drive an international value-add strategy, it said.

“Supported by a strong and experienced leadership team, my goal is to drive more value for Sanford’s seafood products through leveraging New Zealand’s image and international reputation, our unique marine environment and premium seafood resource,” Kuntzsch said. “We want our seafood to move beyond a traded commodity because what we take from the oceans is a precious resource.”

Earlier this year the fishing group reported a 17 percent decline in profit to $11.7 million in the six months ended March 31, due largely to lower prices for skipjack tuna and blue mackerel.

Sanford also announced the retirement of general manager of marketing and development Vaughan Wilkinson.

The shares last traded at $5.05, and have gained 8.6 percent this year. The stock is rated an average ‘sell’ based on two analyst recommendations compiled by Reuters, with a median target price of $4.58.

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