Opinion: Stock market flooded with floats

By Simon Louisson of NZPA

Friday 21st May 2004

Two sizeable new public offerings were revealed this week bringing the total amount promoters have, or will try to raise from the public this year, to nearly $1 billion.

Both new offerings will attract plenty of interest. CanWest announced plans to raise up to $143 million from its New Zealand media assets including TV3, and Pumpkin Patch, run by former Warehouse Chief Executive Greg Muir, plans to raise around $113 million.

And last week, Pacific Retail, transforming itself into an investment company, disclosed plans to raise around $150 million by selling its main retail brands including Noel Leeming and Bond & Bond.

Other sizeable initial public offers (IPOs) around include Feltex Carpets ($271 million) and funds Colville Equities ($75 million) and Salvus Strategic ($50 million). Smaller issues announced include Store-Fund $30 million and Just Water (8.25 million). Others such as Turners & Growers have been flagged.

Floats, like takeover activity, tend to be a function of a buoyant market. The benchmark top 50 gross index is up 28% on a year ago and on a capital basis (excluding dividend payments) is up 19%.

The IPO market is now as buoyant as at any time since the mid-1980s, when you could have floated a brick. Several were, including one infamous effort called Kiwi Bear, which aimed to rebrand possum meat and sell it to a supposedly hungry Asian market.

Apart from a rash of privatisation-related listings in the early 1990s, including Telecom, Air New Zealand and Bank of New Zealand, New Zealand has suffered a dearth of new listings since the 1987 share crash.

Investors suffered a giant hangover in the 1990s, burnt by their losses and, possibly, the Wild West regulatory environment that prevailed.

The current Government and new NZX management have been at pains to address the latter issue by recognising the importance of re-winning investor trust. An important part of that is ensuring companies that are floated on the exchange are reasonable propositions.

Macquarie Equities investment director Arthur Lim does not rate the tighter regulatory regime as significant in the return of the float.

More important, is the realisation the New Zealand market has been "a superstar performer" against other markets over the last four years.

New companies such as Contact Energy, Sky City and Auckland International Airport have delivered super returns in dividends and capital gain and there is a big appetite for more.

"The biggest factor has been the realisation the New Zealand sharemarket is a good place to put your money," said Lim.

Secondly, there have been a raft of capital repayments from companies such Independent Newspapers, Port of Tauranga, Tenon and Carter Holt creating cash looking for a home of about $1.5 billion.

"Literally, billions of dollars has been returned to shareholders by way of takeover activity, capital repayment and special dividends and it has to find a new home," said Lim.

Thirdly, some of the bigger property investors have assessed the property market to have peaked and have sold some of their houses. They are looking for alternative investments.

"I think it is the smart money. They are people who bought into the property market four or five years ago and have taken their money out.

"They are certainly looking for alternatives and the sharemarket looks like a good place for them to put their money."

Investors like floats because of the opportunity to "stag" their investment - sell the stock as soon as it lists for a quick gain.

Lim said the pricing of a new issue is critical, and critical to that is the "book build" process, whereby institutions tender for shares rather than the vendor setting the price.

"Part of the problem is people don't want some floats, and then those do well, such as Promina last year, and attract a lot of interest in the next lot. Then the premium gets priced out of the floats."

This happened with the Just Group and Pacific Brands IPOs, two big Australian IPOs that were heavily promoted on this side of the Tasman.

"They haven't done so well and that has dampened enthusiasm."

As well, some heat has been taken out of the sharemarket by the prospect of rising interest rates, geopolitical concerns and worries that China's economy, the global economy's Viagra, is over-sexed.

"The market's been volatile and subdued which gives better scope for the pricing to be set at a level that has already taken out most of the froth," said Lim. If IPOs are too fully priced then investors get little upside, making the investment risk not worthwhile.

Some floats are spectacularly successful and investors who make big money are usually those who buy and hold.

Shares in this year's market star, Mooring Systems were issued at 50 cents in December 2000 against today's $3.80. On the other hand, TV3 has been listed once before - in 1989 - and it lasted just over a year before falling into receivership doing all the investors' dough.

Vertex shares were issued two years ago at $2.05 and today languish at $1.55. Lim said investors in Vertex case were not given the safeguard of a book build process.

"That gives them a level of protection. Institutions should price to provide upside for investors who take part in float."

Critics complain that pricing to provide upside gives a few privileged investors the ability to get in on the ground floor to make quick or super profits. Public access to many new listings is often limited or nonexistent. However, the favoured investors tend to be the ones who put their hands up for all IPOs, taking the rough with the smooth. And the alternative to not providing upside is ugly, as the disgruntled investors in Vertex can testify.

Demand for issues with high profile consumer brands such as Pumpkin Patch, Feltex, Noel Leeming or TV3 is likely to be high.

However, BT New Zealand's head of equities Paul Richardson warned investors should be wary of how they are priced.

"We would say that a lot of them tend to be in the consumer sector, which has perhaps seen its best years," he told Reuters.

Feltex may be cashing in on the building boom that has prevailed in Australia and New Zealand over the last few years and which most commentators believe has peaked. It is luring investing with an attractive 8.6%-9.6% yield. Similarly for Pumpkin Patch, retail sales in New Zealand may have seen their best times for a while. But the company is selling a growth story, particularly in the UK and elsewhere overseas. Noel Leeming and Bond & Bond may be affected by a downturn in both the housing market and retail sales.

Infometrics economists and commentator Gareth Morgan says that when a flood of floats hit the market, alarm bells should ring.

"There's a plethora of floats out there at the moment and it just tells you that there is a bull market. I don't think we have seen this many floats since 1987 and the quality is going down."

Lim agreed that generally in the very late phase of a bull market, lower quality floats tend to come out, but he doesn't believe New Zealand has arrived at that point yet.

If the bull roars louder in coming months, then watch for the bricks.

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