Nikko looks to be slightly defensive

Nikko Asset Management has a “slightly more defensive tilt” to its share portfolio at present, focusing on companies with a high degree of revenue certainty as well as ones that can achieve earnings growth in the current environment, according to Michael Sherrock, co-head of equities.

Tuesday, September 12th 2023, 6:05AM

by Jenny Ruth

That's against a backdrop in which the official cash rate may remain higher for longer, if the Reserve Bank's predictions prove accurate and inflation remains sticky.

That has meant Nikko is favouring stocks such as Spark, Infratil, Summerset, Ryman and Fisher & Paykel Healthcare, as well as Argentina-based lithium producer Allkem and Australia-based holiday and lifestyle property company Ingenia Communities, Sherrock told an investment forum in Wellington hosted by Nikko on Tuesday.

Stocks such as Spark, Infratil, which owns phone company One NZ, formerly Vodafone, and Contact Energy offer stable earnings and attractive yields, while Infratil and Contact also give Nikko exposure to the decarbonisation theme.

Infratil owns US-based renerwable energy developer Longroad Energy and has founded similar companies in Europe and Asia while Contact is in the process of phasing out its thermal power stations and replacing them with geothermal plants.

Sherrock said Infratil is Nikko's largest overweight position at the moment because it also has exposure to the AI technology disruption and innovation theme through its ownership of Canberra Data Centres.

The boom in AI means “a massive data requirement,” which CDC is meeting, he said.

Spark is a “very defensive” stock and it is also investing in data storage.

“The retirement space is an area we've liked for a number of years,” and sentiment towards residential property is starting to improve.

With Contact, Nikko is expecting earnings growth in the order of 40% or 45% over the next four or five years and so is likely to have some valuation upside.

Nikko is ecxpecting Contact's operating earnings to rise from $573 million in the year ended June to $671 million in the current year and $767 million in the 2025 financial year while dividends could rise from 35 cents per share to as much as 52 cents by the year ending June 2028, Sherrock said.

Contact's generation portfolio is likely to rise from 87% renewables in a mean year to 97% by the yea ending June 2027 as it develops a number of new geothermal plants, as well as solar and wind projects and closes its Wairakei and Taranaki thermal plants.

Tags: Nikko AM