Stock Takes: The hidden risks in Rocket Lab’s SPAC listing

Thousands of Kiwis have already invested in the special-purpose acquisition company (SPAC) that is likely to be merged into Rocket Lab despite it not being a done deal yet.

Leighton Roberts, co-founder and co-CEO of Sharesies said 3000 of its users had already invested in the Nasdaq-listed Cayman Islands-incorporated Vector Acquisition and it is in the top 100 most popular investments on its platform out of a possible 5000 options.

“Rocket Lab is an exciting company by any account. It is very easy to feel like you want to be a part of that in some way.”

But he said they were also being careful to ensure investors knew that buying the SPAC did not mean they were getting Rocket lab shares already.

“It is not a done deal yet there is a still a chance for it not to eventuate. When we have done commentary on it we have tended to let people know that as well. If you search on our platform for VACQ you don’t come up with Rocket Lab – there is an element of people have to do their research first.”

SPACs have been popular investment vehicles for listing in the US especially among tech investors because they help ease red tape, lower the cost of listing and disclosure thresholds.

Matt Leibowitz, chief executive of Stake says SPACs (Special Purpose Acquisition Vehicles) have been increasingly popular over the past few years.

“They serve as a fast track to get a company to market without all the normal headaches, like a shell company listing on ASX or NZX. Normally companies go out looking for funding, SPACs are the reverse – they have the funding, but need to find a company.”

Leibowitz said Kiwi investors had already sunk close to US$1m in the Rocket Lab SPAC with the investment ranking 47th in popularity on its platform.

He said the SPAC gave retail investors access to a company they might not be able to through a traditional IPO.

“Atraditional IPO often sees early access to the stock granted only to the big and influential funds around the world, which means that everyday retail investors miss out. But, when a company is listed via a SPAC, everyone has access and they can buy the stock before the IPO date as it’s already a listed company.”

But it doesn’t come without risks.

“The deal could fall through in the lead-up to the IPO date, however, the biggest downside is normally that the market decides the company the SPAC is acquiring isn’t worth $10 and the share price drops.

“The other watch out is that SPACs pay a management fee, called a warrant, to the issuer that sells the shares, which eats into the money the retail investor is investing in the company.”

The merger is due to take place before the end of June.

Inflation rears head

The big jump in US inflation revealed overnight Wednesday is bound to make investors nervous.

US inflation rose 4.2 per cent in April over its level a year ago – the biggest rise since 2008.

It caused US equity markets and bond values to dive – a double whammy for those who try to spread their risk by investing in both asset classes in the hopes of them not being correlated.

Rising inflation means it is more likely central banks will lift the cash rate sooner driving up the cost of borrowing for businesses and in particular growth businesses, which need capital to expand.

It also means businesses have to find a way to lift prices to cover rising costs to keep their margin strong without losing customers – a difficult balance.

One market player said the sell-off in bonds and equities at the same time would be un-nerving for people.

Will A2 rise again?

The major slump in A2 Milk’s share price has fund managers wondering if it will ever rise back to its heights again.

Trading at $21.50 in August last year the shares hit $6.19 on Tuesday after the company announced its fourth consecutive earnings downgrade.

Sam Trethewey, portfolio manager at Milford Asset management said it would take time for A2 to turnaround its share price.

“It’s not a 12-month turnaround story.”

He said management had made a big call in the past year putting more product into the market allowing older stock to pile up as the daigou channel – the informal sales channel into China – remained closed because of Covid.

A2 Milk’s new chief executive David Bortolussi this week told the Herald the company needed to rebalance its inventory position.

The lack of daigou has shrunk the company’s distribution chain. Trethewey said the company seemed to be still grappling with how to deal with that.

Recalling old stock and replacing it with new won’t be easy while global supply chains remain disrupted.

Jarden analysts said in a note that a positive feature of the downgrade was that the company had accepted the inventory issues and was not taking more aggressive corrective actions to protect its future brand health.

“We find the negative features to be the magnitude is worse than our expectation and still
low confidence on the business reset into FY22.”

Jarden has an underweight rating on the stock and downgraded its target price from $7.90 to $6.10 as a result of the earnings downgrade.

Harmoney's challenge

An upbeat update to the market on the growth in its loan book has helped arrest a recent slide in Harmoney’s share price.

The online lender on Thursday reported 800 per cent growth in its loan originations in April compared to the same month a year prior with its loan issuance rising from $4.2 million to $37.8m.

Harmoney chief executive David Stevens said the lender had accelerated its data-driven marketing programme after its listing in November, significantly increasing its new customer originations.

“Growth in new customers typically leads to a big increase in repeat customer originations from six months later.”

But Stock Takes can’t help wondering how fair it is to compare the two months given New Zealand and Australia were in Covid-19 induced lockdowns in April last year.

Consumer demand for loans virtually dried up overnight as job uncertainty became the focus and lenders also became much more cautious.

Stevens said the 2020 calendar year had been heavily affected by Covid-19 particularly in New Zealand, which had had a flow on impact into 2021 resulting in fewer customers being eligible for repeat loans.

“However the business is building strong momentum in Australia and has a clear and immediate plan in place for New Zealand originations.”

The company is forecasting cumulative Australian loans to be over A$300m by the end of June. Perhaps the tougher part is convincing investors to believe in its prospects.

Harmoney’s share price has trended downwards since its listing. Its shares listed at $3.57 on November 19 and hit a fresh low of $1.73 on Tuesday. They closed on $1.94 yesterday.

The business has made strong in-roads in the New Zealand market but there is some concern from local fund managers that the non-bank lending market is much more competitive in Australia and will be a much tougher market to crack.

Air NZ's fuel price hit

Just as much air travel spools up and there’s a sliver of light for airlines an old enemy returns – rising fuel prices.

Analyst Andrew Steele at Jarden says that since the start of the year, jet fuel per barrel has increased 24 per cent and is up 7 per cent since late February.

One of the only silver linings for airlines was the collapse of fuel prices a year ago – the only problem was that there were so few flights to take advantage of cut-price kerosene.

Steele says that identifies the normalisation of borders and the recapitalisation of the airline’s balance sheet as remaining the key near-term issues, he believes it is still important to emphasise that the operating cost base also remains key to the company’s earnings trajectory.

As such, higher jet fuel costs adds earnings pressure at a time of significant operational and earnings uncertainty, further reducing the investment appeal of Air New Zealand.

The analyst says that over the past three months, higher fuel costs have reduced the forecast pre-tax profit for the 2022 financial year by around $50m.

Jet fuel prices haven’t taken off at the same rate as Brent crude – the difference is known as the crack spread – but if it had, it may be 13 per cent higher than what it is now.

“We expect the normalisation of the crack spread to occur as global air travel begins to normalise, which is built into our forecasts. However, if the spread was to revert faster than expected to the three-year average, this would drive a further 27 per cent downgrade to our (estimated) financial year 2023 underlying net profit.”

Hedging by Air New Zealand reflects current planned capacity; exposure on price as long-haul opens up and Jarden expects the company will have limited long-haul fuel hedging in place, leaving the airline’s fuel costs more exposed to price swings on the routes that consume the most fuel.

Steele does identify an upside for Air NZ:less competition.

”We believe the combination of a rising fuel cost environment and Covid-19 operational uncertainty may mean that some of the significant long-haul competitor capacity that launched from late 2015-18 will not return quickly. As such, while Air (NZ)may endure higher fuel costs, this initially could be in a less competitive backdrop.”

Last week analysts at Forsyth Barr also said the airline could enhance its competitive position as it climbs out of the Covid crisis.

But they still expect the airline to generate a material loss in the second half of the current year and be loss-making through the 2022 financial year.The outlook remains highly uncertain and a required capital raise (scheduled for later in the year) still has to play out.

A report out last month by McKinsey & Co points to air travel becoming more expensive with the enormous debt airlines have taken on adding 3 per cent to ticket prices, on average, around the world.

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