NZX 50 Index - Forthcoming potential Changes.

[Basil]

Disclaimer - I am not holding myself out to be any sort of expert on how S&P make their decisions on constituent changes to this index nor suggesting there are certain gains to be made when changes do occur through index tracking funds being compelled to buy or sell large volumes of shares.
This post contains speculative thinking on possible future index inclusions which may or may not happen and if they do, this may or may not have a material impact on the share price of the companies mentioned.

That out of the way some index research kindly shared with me by one of the brokers dated late February leads me to the following initial conclusions:-

Apart from the regular quarterly index review, my understanding is that changes to the composition of the index occur when there's "reasonable assurance a takeover will proceed", or words very close to that effect.  With the revised PPH scheme implementation agreement at $1.42 garnering widespread support, and looking pretty much assured, it's probable from an index perspective that very shortly after the date of the new vote for the revised scheme, which I understand has an indicative timeline of late May, S&P will announce PPH is leaving the NZX50.  So which company will replace it?

Based on the six month average market capitalization as at 21 February (free float, so excludes strategic holdings like for example Tim Glasson's 20% stake in HLG), NPH (average price for last 6 months $2.88), and HLG ($5.37 average 6 month price). were neck and neck at $258m and $256m respectively, although if you used the current spot prices, the order would be reversed.

I've had a look at pricing of the two stocks since then and the results are inconclusive.  This is too close to call and from what I can see it depends largely on the relative share price of these two between now and late May. 

NPH recently removed profit guidance because of recent extreme weather events and their effect on Port volume. This may or may not affect their share price materially going forward and no doubt a lot of this has been factored into the share price already since that announcement.

So if it's a 50/50 call on HLG / NPH inclusion in the NZX50 with the imminent prospect of PPH being removed when might the one that misses out with PPH exit otherwise get included?

As part of the regular quarterly review changes. It is hard to say when this might happen as the research note I viewed was coy on the free float market cap of SKO position 50, SAN position 49, SML position 48 and WHS position 47, and my understanding is the regular quarterly index adjustment process has a system to stop changes happening too much and barring another takeover of a NZX50 company an incumbent member must drop to position 56 before it is booted out, in other words the share prices must "tank" quite a lot and stay down for a period of quite some months.

I do note however that the 6 month average price of SKO of $2.85 (position 50) is at a considerable difference to the current spot price of $2.40, SML position 48 appears to be in the process of a major downward move from its 6 month price average of $3.37, current price $2.40, (down 29%) and WHS position 47 at $2.99 average 6 month price, most recent price $2.01, (down 33%) so the chances of one or two of these getting booted out of the index in the next couple of quarterly index reviews, June and September, look pretty good to me.
WHS and SML look the most at risk of exiting the NZX50 in due course due to the massive reduction in their share prices. 

Conclusion from my perspective based on my holdings.
HLG - In my view there is a good chance, (not certain), that HLG will get included in the NZX50 in the near term either as a result of the PPH scheme of arrangement being implemented or as a result at some stage over the next 6-9 months with quarterly index reviews.  Apart from that I think the HLG investment case to hold is very sound indeed.

TRA. In the medium term I note TRA is coming into consideration, currently position 53 but will improve to 52 when PPH exits the NZX50.  I think Todd Hunter and his team are executing very well notwithstanding the recession and have a clear pathway for growth ahead. 

Disc I have added a few more TRA and HLG in the last week.

[Basil]

Just giving this topic a bump due to a material change in the expected timeline. Previously PPH had indicated a second vote would occur indicatively in late May. Yesterday PPH announced the vote on the new scheme will happen at a meeting on 27 April.
https://www.nzx.com/announcements/409400  I think it is likely the scheme will get the support it needs to get implemented and that at some stage fairly shortly after that S&P will announce PPH is exiting the NZX50 to be replaced by another company.
Which one remains in doubt.  Price and volume action between the above post on 27 March and now is very encouraging for HLG but its only been a week and it must be remembered that S&P use 6 month price averages and there are also liquidity requirements. 
Price weakness in SML, WHS and NPH has also been notable but again, this is only one weeks subsequent data so not too much can be read into that.

Much will depend on price and volume data for the rest of this month.

[Whome]

Just giving this topic a bump due to a material change in the expected timeline. Previously PPH had indicated a second vote would occur indicatively in late May. Yesterday PPH announced the vote on the new scheme will happen at a meeting on 27 April.
https://www.nzx.com/announcements/409400  I think it is likely the scheme will get the support it needs to get implemented and that at some stage fairly shortly after that S&P will announce PPH is exiting the NZX50 to be replaced by another company.
Which one remains in doubt.  Price and volume action between the above post on 27 March and now is very encouraging for HLG but its only been a week and it must be remembered that S&P use 6 month price averages and there are also liquidity requirements. 
Price weakness in SML, WHS and NPH has also been notable but again, this is only one weeks subsequent data so not too much can be read into that.

Much will depend on price and volume data for the rest of this month.

Both HLG and TRA are riding the very slow incoming tide for NZX50 inclusion ... with HLG ahead of TRA.
Can't see SML staying in especially in light of Fonterra reducing their payout forecast to farmers yesterday as an indication of further global milk price weakness.
Hoping TRA have turned the corner with not overly strong tailwinds, more of a breeze behind them at this stage ... noting current sp around $3.40, and MA50 for TRA closing in on the MA200 where support at sp $3.55 would take it above the MA200, something the bot traders love.

[BlackPeter]

Both HLG and TRA are riding the very slow incoming tide for NZX50 inclusion ... with HLG ahead of TRA.
Can't see SML staying in especially in light of Fonterra reducing their payout forecast to farmers yesterday as an indication of further global milk price weakness.
Hoping TRA have turned the corner with not overly strong tailwinds, more of a breeze behind them at this stage ... noting current sp around $3.40, and MA50 for TRA closing in on the MA200 where support at sp $3.55 would take it above the MA200, something the bot traders love.

Agree that SML's tenure in the NZX50 looks uncertain, but not quite sure about your reasoning.

Why would a lower milk price impact in any shape or form on SML's business? SML is just processing the milk and clipping the ticket. How much the milk costs if for their business absolutely irrelevant (as long as the farmers get enough money to survive).

[Basil]

Synlait have been very busy shooting themselves in the foot, some would say both feet and may struggle to run well or even walk well again any year soon.
Notable that the sixth month price average was $3.37 as recently as 21 February and now struggling to hold much above $2.  Investor day on 8 May will be interesting.  Downgrades 'never" come in 3's eh 

[Whome]

Agree that SML's tenure in the NZX50 looks uncertain, but not quite sure about your reasoning.

Why would a lower milk price impact in any shape or form on SML's business? SML is just processing the milk and clipping the ticket. How much the milk costs if for their business absolutely irrelevant (as long as the farmers get enough money to survive).

Not quite that simple. SML can hold the price they pay to their farmer suppliers and wear the additional costs when they sell the milk products, or they stay in step with Fonterra and also reduce their payout to their farmers, and risk losing some suppliers ... a delicate balance for a company that has become weaker in the last few years.

[Basil]

https://www.rnz.co.nz/news/business/487257/pushpay-s-dissenting-investment-funds-accept-new-offer

[BlackPeter]

Not quite that simple. SML can hold the price they pay to their farmer suppliers and wear the additional costs when they sell the milk products, or they stay in step with Fonterra and also reduce their payout to their farmers, and risk losing some suppliers ... a delicate balance for a company that has become weaker in the last few years.

They lost because they did set on the wrong customer and put on top of that all their eggs into this one basket. Nothing wrong with their supplier relationships I can see.

Anybody who wants back to Fonterra anyway needs first to find lots of cash to buy back into Fonterra. Remember - Fonterra is a Co-Op and serves only their paid up members.

Synlait on the other hand is no Co-Op. The change from Fonterra to Synlait did free up plenty of capital for the farmers. The way back however ... 

No worries.

[Basil]

With the PPH scheme of arrangement vote tomorrow looking highly likely to be approved and another month of price data between the apparent two front runners to replace it in the NZX50 index, (NPH and HLG), I am feeling quietly confident that HLG now has its nose in front in this race.

Based on free float market cap on the average share price over the last 6 months to 22 February 2023, (Broker analysis), there was just on 1% difference with NPH in front. Since then NPH appears to have traded at an average price in the low $2.60's, (against an average 6 month price of $2.88 as at 22 February), whereas HLG despite paying a 24 cent divvy this month appears to have traded at an average price in the low $5.40's over the last 2 months, compared to its $5.37 6 month average as at 22 February.

This remains a close race and one cannot overlook that S&P also have liquidity requirements for NZX50 inclusion, so which company replaces PPH in the NZX50 if the scheme of arrangement regarding same is approved tomorrow, remains to be seen.    If the PPH vote is approved I am hopeful we will see an index constituent change announcement by S&P shortly thereafter, probably sometime in early May.

In other potential index changes on the horizon with quarterly index reviews in June and September, gosh WHS and SML are making huge strides downwards and appear to be both vulnerable to be booted out.  That brings whichever company is not included above with the probable PPH removal into front position with TRA the likely next cab off the rank if both WHS and SML are booted out in due course.  I reckon TRA are a real chance for inclusion later this year or in early 2024.
 

[Basil]

PPH takeover approved by shareholders.  Last day of trading for PPH shares is 10 May.  https://www.nzx.com/announcements/410536

Game on as to which company replaces them in the NZX50 index.  We should know the answer well before 10 May.

[Teitei]

PPH takeover approved by shareholders.  Last day of trading for PPH shares is 10 May.  https://www.nzx.com/announcements/410536

Game on as to which company replaces them in the NZX50 index.  We should know the answer well before 10 May.

HLG to hit $8 if it is included in the NZX50.

[Basil]

Expecting S&P to issue an NZX50 index constituent change announcement later this week, Monday 8th May at the latest.

[Basil]

Very good news for HLG shareholders just announced.
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20230503-1463800/1463800_20230503-nzx-pph.pdf

[winner (n)]

Very good news for HLG shareholders just announced.
https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20230503-1463800/1463800_20230503-nzx-pph.pdf

You called it ...you a genius

[Basil]

You called it ...you a genius

Not at all mate.  Every dog has his day     I am most grateful to Shareguy for most generously sharing broker index research upon which my analysis and this thread was based.  I didn't do much, I merely extrapolated share price and volume data from that and took off 2+ months of price and volume data from the back end of the six-month price averaging process.    Any half reasonably skilled old bean counter could have done that.

I'm also most grateful for your superb work with your charts and images showing among other things the beautiful steady growth in Glassons market share in Aussie over the years and the strong correlation between the HLG share price and the PE of 12.5.   Those were very powerful images, (an image says a thousand words), and brilliant original work mate and very much appreciated.  Thank you!