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Exchange turns stuffy watchdog

By Peter V O'Brien

Friday 22nd August 2003

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It is hard to keep up with the whizzes of the sharemarket and their reactions to the continuous disclosure regime they imposed on listed companies.

Retail jeweller Michael Hill International reported last week for the year ended June 30. The company announced net profit of $11.57 million, including an after-tax $1.33 million unusual item arising from the sale of its Australian head office.

Operating profit of $10.24 million was 16.7% below the previous year's $12.3 million, struck before an unusual gain of $358,000.

Market whizzes promptly knocked 16c off the share price on August 15, on turnover of 35,700 shares, less than 1% of issued capital.

They added 6c on Monday with equal promptness on turnover of 10,780 shares.

The 16c fall, a decline of 3.55% on the previous day's close, was attributed to "market reaction" to the lower profit.

Some of the whizzes should be cleaning their faces if that was the reason.

Michael Hill said on April 10 its forecast group operating profit for the year ended June 30 was likely to be in the $9.5-10.5 million range, to which would be added the Australian building profit.

The whizzes immediately cut 33c (7.45%) off the then share price of $4.43 on turnover of 40,180 shares.

They either had memory failure or were nuts when they dropped the price on Friday.

Continuous disclosure was supposed to keep the market informed (read, "justify analysts' number-crunching") so that investors could put appropriate prices on stocks.

Assuming that was the case after the April 10 announcement, we were left with the August price cut.

Perhaps it was not so irrational. Brokers regularly deny they may deal for non-existent "clients." The practice has gone on for as long as stock exchanges and one would need to be naive to think the industry suddenly found commendable virtue.

Continuous disclosure imposed virtue on companies. Similar standards seem appropriate for the exchange's virtue police.

They did something sensible last week when dropping the draft corporate governance requirement for director certification.

That was said to be one of the results of "extensive consultation with industry participants" (doubtless excluding ordinary, private shareholders, who were outside the shareholders' associating ambit).

The Stock Exchange seems to have taken to itself, subject to the commerce minister's approval, the mantle of corporate watchdog.

How else to explain the statement attributed to its general counsel Elaine Campbell: "Corporate government practices are not designed to prevent corporate failures but rather to assist in prudential and risk management and give company boards a framework with which to make decisions.

"The mixture of listing rules and best practice code is designed to encourage both active participation and dissent at board level, which, we believe, provides good risk management and growth for our capital markets."

That was a bit rich, coming from an organisation that has few members who are directors of listed companies (apart from NZX) and whose non-financial technical qualifications for specific companies could be doubtful.

Any non-listed company and its directors that lacks an urgent desire for publicly subscribed capital should be careful about the Stock Exchange's blandishments.

Meanwhile, companies got on with doing their jobs, without much of Ms Campbell's "dissent at board level" and reported reasonable profit gains ­ or reduced losses ­ in the June 30 year reporting round.

Turners Auctions, another company with a Guinness Peat Group (GPG) association, was well ahead of its prospectus forecast, to the extent of 25%. It was surprising the continuous disclosure vigilantes failed to rap the company for such an excessive premium on prospectus forecast.

The interim report in February noted half-year profit was 35% ahead of the corresponding period of the previous year but made no forecast for the year ended June 30, apart from being "confident that the group will continue to build on its good results during the remaining six months of the year."

Monday's share price of $3.82 was an historic price/earnings multiple of 16.5, reasonable pricing for a stock which depends on variable auction markets for its revenues.

The market seems to have faith in the group.

Investors in companies like Turners and similar "get on with job" groups have no need for the Stock Exchange's righteous suffocation, which will do nothing to counter actual or potential corporate excess.

As mentioned on other occasions, law has no effect against lawbreakers until the latter are caught and punished. It is then too late for the victims, as the Stock Exchange may learn.

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