SELL NZD/USD – TRADE UPDATE
Top Trade Ideas to Ride a Lower NZD
We initially saw an opportunity to short NZD/USD (Sell NZD and Buy USD) ahead of the US Federal Reserve Meeting in October last year, when the NZD was trading above 68 cents versus the USD. Since our last update the NZD has remained stubbornly high, although the last few weeks have seen the US dollar strengthen considerably.
Given we forecast the NZD is set to retrace over the remainder of 2016, we believe it is an opportune time
to highlight some of our top stocks ideas which benefit from a falling NZ dollar. Across our portfolios we
hold a number of stocks exposed to currency weakness, and we discuss the following top stock ideas to
benefit from a falling NZD:
Air New Zealand (AIR), Fisher & Paykel Healthcare (FPH), NZ Refining (NZR), SkyCity Entertainment (SKC).
- Over the medium term we believe the US Fed will be the primary driver of the NZD/USD exchange rate
- We see fair value of the NZD/USD exchange rate at closer $0.60
- Given we forecast the NZD is set to retrace over the remainder of 2106, we believe it is an opportune time to highlight some of our top stocks ideas which benefit from a falling NZ dollar
Top Trade Ideas to Ride a Lower NZD
Following years of strength since 2010, the NZ dollar has finally retraced against the US dollar and we believe the weakness is set to continue.
NZD/USD Reversing a Multi-Year Trend
The key driver of our bearish view on the NZ dollar is relative interest rates in NZ
compared to the US. Interest rates of a currency essentially illustrate how much return
an investor would receive by holding a currency, and the interest rate differential
between the two currencies is a driver of currency strength (a higher interest rate will
attract currency investors). As a result, over the last few years the NZ dollar has
benefitted from having relatively high interest rates, while the US Federal Reserve has
kept interest rates at zero in the US. It is only in recent times with the US Fed ending
its easing program and starting its paths of gradual rate increases that the US dollar
has experienced a powerful reversal.
Air New Zealand (AIR.NZ) BUY
believe that the medium term outlook remains robust for AIR given the strong tourism thematic to be experienced by the company driven by a lower NZD.
Air New Zealand recently hosted an investor day. While no specific guidance was provided, AIR indicated it expects 2017 earnings to be down on 2016 due to increased competition and operational headwinds (benefit of FX hedges in 2016 not expected in 2017 circa NZ$120m). There are some challenges ahead for AIR as the market adjusts to the capacity growth with additional yield pressure signalled by the company.
always believed the fall in oil prices and a pick-up in tourism numbers would see an increase in competition in the region. The recent share price decline also appears to coincide with poor Qantas result rather than company specific news.
Despite the negative news, AIR continues to be operationally efficient and focused on profitable growth. AIR’s business is in the best shape in terms of network profitability and customer experience. We believe the current share price devaluation is overdone, and see value in AIR at current levels. Overall we see AIR as a higher risk play on NZ dollar weakness, given the inherent volatility in its key business drivers – oil prices and currency moves.
Fisher & Paykel Healthcare (FPH.NZ / FPH.AX) BUY
In contrast to AIR, FPH shares have been experiencing a dream run, with FPH’s share price up 60% over the past 12 months alone. FPH has been one of the main beneficiaries of a lower New Zealand dollar, as almost all of its revenues are generated outside of New Zealand, which has been reflected in FPH’s share price performance.
Currency moves aside, FPH has experienced strong operational improvements from new products which have been years in the making. At its recent investor day FPH highlighted the elevated long term growth potential for the business going forward,
and we forecast double digit earnings growth for FPH over the next few years. There is set to be a lagged impact on FPH’s earnings from a lower NZ dollar given the currency hedges FPH has in place. FPH recently updated its market on its currency hedges, and as shown below the company has extended its hedging profile out further given recurring revenues FPH forecasts it will generate.
Source: FPH 2016 Companies Day Conference Presentation
Given the growth potential we forecast over the next few years we remain buy rated on FPH despite the impressive share price run. Looking forward, we remain positive on the longer term outlook for FPH’s and await the company’s full year result announcement due on the 27th of May. Given the proximity of the result (to be Commented [HS1]:
released in 2 days) we would encourage potential buyers of FPH to wait for the
outcome of the result before buying FPH.
Z Refining (NZR) BUY
In a similar manner to AIR, NZR shares come under pressure in recent times. Given the
extraordinary run for NZR in 2015, there was always likely to be some consolidation in
the share price as the tailwinds for NZR – refining margins and a falling NZ dollar,
reduced to more “sustainable” levels.
Give the recent share price moves, we believe the market has overreacted, and has
provided a buying opportunity for investors with a higher risk appetite. While the
drivers of NZR’s business are inherently volatile (currency and commodity prices), at
current levels and NZR offers a very attractive dividend yield of 9%, and is trading on a
very undemanding price to earnings multiple of 8.0x.
NZR’s profitability is highly leveraged to the NZD/USD exchange rate as shown below.
Assuming gross refining margins (GRM) of US$8, a 5 cent move in the NZD/USD
exchange rate has a NZ$20 million, or $4 million per cent currency move impact on
profit for 2016.
SkyCity Entertainment (SKC) BUY
SKC owns and operates casinos in Auckland, Hamilton and Queenstown in New
Zealand; and in Adelaide, South Australia, and Darwin in the Northern Territory in
Australia. A lower NZD is boosting Tourism and assisting SKC’s gaming growth. With
the NZD set to remain low over the long term and increasing Chinese tourism to NZ,
we continue to see value in SKC.
In terms of direct currency translation benefits, given SKC’s Australian operations, its
profit in NZD terms will benefit as the NZD depreciated versus the AUD. We believe
there is downside to come for the NZD versus the AUD from current levels:
While the AUD remains in free-fall of late the NZD has not fallen as far and has risen to
a two-month high against the Australian dollar (NZDAUD at 93 cents). This is primarily