ZEL - The 2 Billion dollar asset reallocation question ?

**Beagle** · 04-04-2022, 10:10 AM

I think this question deserves its own thread as its shaping up as a major factor for the market this quarter. I started a conversation in the retail thread about this, (copy and paste of initial thoughts below), but lets centralize our thoughts in here.

Where will ZEL investors reallocate the proceeds of the Ampol takeover funds to ?
What are the index change implications ? i.e. (Who will gain entry to the NZX 50 to replace ZEL ?)
What are the implications for all the money invested in index tracking funds ?

A few initial thoughts but please, lets all chip in here and share our idea's because I am not pretending for one minute I have the answers. What do you think of my key assumption highlighted below, makes sense or is there a more plausible theory you'd like others to consider ?
Copy of earlier post follows:-

1. ZEL will exit the NZX50, probably before the end of this quarter to be replaced by the next most eligible candidate. Immediate index effect on the incoming candidate. I am not sure which company is the next most eligible candidate but WHS and HLG are in the running with that order (WHS then HLG) being the more to slightly less likely outcome. Its possible there is a more eligible candidate, I would certainly not rule that out.

2. My understanding is all the weightings in the index get adjusted at the time of ZEL exiting the index, (I recall how this worked when XRO delisted and went to the ASX), and there was a substantial uptick on a lot of stocks in the NZX50) so probably at the time of this index change index tracking funds have to re-weight their holdings. Certainly by the following quarterly index adjustment, (third Friday of the third month of each quarter, next one is 17 June.

3. I think there's also a MSCI index reweighting coming in May, don't ask me how that's going to effect things, I don't know.

As well as index changes and index tracking funds changes being one thing the other is where is that ~ $2 Billion going to be reinvested ?
WOW that's the really big question. I think most investors in ZEL were investing as an income stock as it was always well known its in a sunset industry so nobody realistically expected growth. So income investors would probably be looking to shift to other stocks which would enable them to replace that lost income...I think its reasonable to draw that conclusion so that begs the question of which stocks might they buy that have high and solid level's of income ?

Four prime candidates spring to mind
WHS - Already clearly articulated why that's the best income stock on the NZX, forecast gross yield 10.8%
HGH - Recent acquisition in Australia boost income potential going forward and has a great history of steadily rising dividends. I think they can pay ~ 14 cps in FY23 fully imputed so that's 19.44 cps gross and on $2.28 that a gross prospective yield of 8.5% which should grow steadily over the years ahead
TRA - I am expecting good things from Turners and 24 cps fully imputed in dividends next year so that's 24 / 0.72 = 33.33 cps gross and on $4.11 that's 8.1% gross paid quarterly.
GNE - Also has interests in oil and gas so some might feel affinity for it coming out of ZEL, gross yield, my forecast for FY23 ~ 8%

Disc - I have significant positions in all 4 stocks mentioned.

**Muse** · 04-04-2022, 10:19 AM

I already chucked my 2 cents in on this on another thread

but the $2bn headline blew me away. I had forgotten what a big beast Z is (once upon a time even bigger).

that is a lot of dough to flow

**winner69** · 04-04-2022, 10:21 AM

Where did your Z cash go when you cashed out early on.

Think mine went to STU

**Beagle** · 04-04-2022, 10:28 AM

Originally Posted by winner69

Where did your Z cash go when you cashed out early on.

Think mine went to STU

Sorry mate, selling at $6+ was a while ago and I have forgotten.

What about the higher yielding REIT's, will they come in for some attention ?
ARG 4.7% fully tax paid PIE yield, worth ~ 7% gross to 33% taxpayers and 7.7% gross to 39% taxpayers (Disc - modest holding)
KPG 4.8% PIE yield, gross figures slightly higher than those shown above. (Disc: No holding)

**Rawz** · 04-04-2022, 10:28 AM

Would a fair chunk of the ZEL shares now belong to those hedge funds that buy into companies that are very close to being taken over but not 100%.. Buy hundreds of millions to make a couple of cents on the dollar.. once the takeover has occurred the fund moves to the next one.. overseas?

Maybe a heap of the money doesn't end up back into the NZX.. just a thought I had

**Muse** · 04-04-2022, 10:30 AM

Originally Posted by Rawz

Would a fair chunk of the ZEL shares now belong to those hedge funds that buy into companies that are very close to being taken over but not 100%.. Buy hundreds of millions to make a couple of cents on the dollar.. once the takeover has occurred the fund moves to the next one.. overseas?

Maybe a heap of the money doesn't end up back into the NZX.. just a thought I had

excellent point