Interest rates bite at Oceania

25 May 2023

Stock in Focus: Oceania

Oceania shares were a touch higher after reporting a mixed result, with operating earnings holding up due to sales margins, while sales volume is starting to slow. Oceania cut its full-year dividend to 3.2 cents per share, as the next couple years will appear challenging for the business given rising interest rates.

We still view Oceania as a value retirement village play, trading at an attractive valuation to its peers, with Net Tangible Asset per share slip down to $1.33 – with room to fall further over the near-term, but Oceania trading -40% below that negativity is priced in.


New Zealand

The New Zealand market (NZX50, +0.2%) closed higher reversing losses after the RBNZ surprised the market with its 25-point hike to 5.50% OCR, and stated that it would be enough to tame inflation. This came as a surprise, with economists were expected a 5.75%-6.00% peak, additionally, the RBNZ said they would keep rates at this current level until the third quarter of 2024. We feel this may hold true but is conditional on how inflation data for the second quarter of this year, unfortunately, NZ does not report inflation monthly like most of the world) and how wages and employment hold’s up. We view this as much dovish as the market had anticipated we believe this comes with a ‘wait-and-see’ approach and this decision is not concrete.


Australia

The Australian (ASX200, -0.7%) slipped for a third session in a row.

Materials was the worse performing, iron ore and copper prices slipped, dragging down some of the ASX’s larges companies BHP (-2.2%), Rio Tinto (-2.1%) and Fortescue Metals (-4.1%) all trading at 6-months lows, wiping away China reopening sentiment – not bad for profit takers earlier in the year.


UK Inflation

Inflation in the UK rose by +8.7% vs. projections of 8.3% – little good to see here and it’s a good cautionary tale of what happens when your central bank acts too slow on inflation. Here’s some charts. The first shows the core inflation remains elevated and actually is creeping up on an anualised basis.

CPI is still being driven by services, which have surged on a YoY basis. It’s what we’re seeing in credit card data, too: consumer spend has shifted from goods to services.

The whole thing isn’t helped by structurally “sticky” employment. Unemployment remains pretty low at ~4%. The equation remains the same — high employment drives wage growth which drives inflation. The Bank of England needs to continue to hike.

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