by Jenny Ruth
Thursday 18th December 2008
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NZX, which runs New Zealandís stock exchange, a number of index-linked managed funds and a number of information services, reported a 23% rise in third-quarter net profit, taking profit for the nine months ended September to $7.8 million, up 20% on the same period a year earlier. Costs fell 18% in the quarter. The company plans to accept a 125 Rand per share offer from the Johannesburg Stock Exchange for its 22% stake in the Bond Exchange of South Africa (BESA) for which it paid 73.17 Rand per share in October after underwriting a rights issue.
Sharechat: What is your view of the political response to your suggestions on how to deal with the credit crisis?
NZX director and chief executive Mark Weldon: With regard to the New Zealand Superannuation Fund policies, with regard to some of the things theyíre looking at on the tax side, with regard to the early response on proposals on streamlining the rules around capital raising, the National government clearly get that this is important and urgent. This is the number one priority in their political calendar. As to what the full package of responses will look like, whether it includes relief on the provisional tax regime which charges you penal rates if you underpay Ö it means the private sector effectively lends the government money through the year. Thatís just not the way it should be happening. Iím very encouraged. We will find out by the end of February what will be in their final package.
SC: Are you expecting the global credit crisis to worsen and how badly do you expect New Zealand to be affected?
MW: There are three different scenarios. One is itís gong to stay flat and turgid but not go into a depression and it will stay like that for a while and different countries will come out of it at different times. Thatís probably the most likely scenario, but itís not by much. The second scenario is if the US government bailing out Detroit leads to a round of subsidies and protectionism that pushes a recession into a depression. At that point in time you get a deflationary environment combined with real stress in the global financial system. Thatís the worst-case scenario. And then thereís the middle story which sees some countries emerge at different rates to others. For New Zealand, it will depend on where the exchange rate is and which of our trading partners are affected negatively, ie Australia because theyíre our biggest trading partner. The only wrinkle to that is the most exposed sector in New Zealand is small to medium enterprises which are going to be cut off most quickly from credit. When you think about credit, you donít think about it as a supply factor like energy, but itís a critical factor for a firmís health. Those small to medium businesses arenít very profitable for the banks. The other sector which is heavily leveraged is the farming sector.
SC: When do you now expect AXE will get its Australian market licence?
MW: The Australian government has just announced the appointment of a fellow by the name of John Stuckey to conduct a review of capital markets. Heís ex-McKinsey. Itís good theyíre making proactive moves to take this out of the political arena. In terms of timing for AXE, I think probably within 12 months or so.
SC: The offer for BESA is at as significant premium to what NZX paid for its stake but doesnít your own example of what happened to NZX after it refused the ASX offer suggest NZX could get better value by keeping its BESA stake?
MW: I agree with the premise of your question and, if NZX owned 100%, that would probably be our strategy. With 22%, with a large number of other shareholders having signed up at lower prices, being left as a minority shareholder is a situation in which we wouldnít be comfortable about returns. It was always a probable outcome that, by threatening to upgrade and compete with the Johannesburg Stock Exchange (JSE), JSE would look to take it over. It happened a bit quicker than we expected.
SC: How have you been able to cut costs so much?
MW: We focus on it every single day. Every individual staff member has part of their end-of-year bonus tied to their contribution to cost control as a major component. Not every staff member can drive revenue, but everybody can drive costs. With marketing, we keep our brand extremely simple, which means our printing costs are low. Itís just a whole series of very, very small things, right down to cleaning products, printing double sided paper and all the time going to the lowest cost provider, not allowing people to travel unless they book the lowest cost fare, a whole series of things which, over time, build a culture. We always have a lot of our staff working on capital markets and other developments which arenít bringing in current revenue but we canít be running ourselves like a gold-plated organisation. Weíre very disciplined and frugal. We donít build in a lot of hierarchy. We donít have a lot of people managing the people who are managing the business. We donít have a lot of middle managers. Although costs have gone up, theyíve gone up a lot slower than revenues.
SC: How are your negotiations with Plus Markets going?
MW: Thatís proceeding in an orderly way. The guy who runs that, Simon Brickles, is the fellow who set up AIM (the London Stock Exchangeís Alternative Investment Market). He believes he can improve on the model. Youíre not going to see much coming out in the near term because globally thereís not a lot of listings going on. But long-term, thatís a good relationship for us.
SC: How did your three-month trial aimed at encouraging trading on the NZX in ASB overseas and dual listed stocks go?
MW: It didnítí make a whole lot of difference. That could be because trading isnít price sensitive. It could be because we didnít sell it aggressively enough. We will need to work out why it didnít seem like the trading fees were a big driver. Weíre doing some work on analysing that right now and weíre going to have a paper for the board on that in February.
SC: Is NZX trying to attract more overseas listings and, if so, how?
MW: The most recent accreditation to the NZX is a Chinese organisation (KVB Kunlun) with links into very reputable parts of the mainland China business community. Thatís the main organisation that weíre working with and the area weíre focusing on. We would be hopeful over the next 12 months that we will see one or two listings managed by that organisation.
SC: Why are New Zealand companies so reluctant to list on NZX?
MW: As a percentage of market capitalisation, where weíre most under-represented is at the top end rather than the mid-sized end. There havenít been a lot of listings on any markets anywhere in the world in the last 18 months. I think weíre in a bit of an aberrational period. Prior to that, we were in an aberrational period because private equity was using cheap debt to pay ridiculous prices.
SC: Will tougher access to credit help encourage New Zealand companies to list?
MW: I think thatís right. I think there will be three drivers. Private equity will no longer be able to sell on the greater fool theory. They will have to exit in order to get cash. Some of those companies are hurting quite badly. The second is a lot of mid-sized companies that tend to be (run) by a patriarch will see the equity market valuations are a lot more competitive with private equity than they have been over the last few years. The third one is companies that are looking to grow, in particular, will need to raise equity rather than the banks being so free with credit.
SC: Doesnít the governmentís intention to scrap the ETS severely dent TZ1ís viability?
MW: There are two parts to TZ1. It doesnít impact at all the registry business. It does clearly impact the trading business, so the strategy there will be logically to separate those out into two business units as they clearly have different prospects. Weíre still working through that.
SC: Can NZXís financial performance continue to remain so resilient, given the increasingly gloomy economic environment?
MW: Five or six years ago, I tried to design a strategy and a business model with a view that we needed to be able to manage three years of the most absolutely dismal financial conditions and that we needed to be able to manage that with strong corporate health and the ability to invest for the long term. We did some pretty good modeling of the effects of a real financial crisis, which it now turns out weíve got. So we built the business in areas such as some of the acquired data businesses that we could put on top of a fixed operating platform but which had a customer base and a revenue stream that were completely distant from anything related to the core financial markets. Thatís really been the key there. The other thing we do analytically all the time is we make sure weíre investing equally for the next 12 monthsí revenue and the next three yearsí revenue. We were working on the BESA transaction for nearly two years. As our customer base diminishes and as capital markets all around the world shrink, weíre not got to be immune but Iím very confident weíre going to be among the best performing stock exchanges around the world. Most people managing stock exchanges have assumed liquidity would grow forever. Those guys are experiencing negative operating leverage at the moment. You will see their profits fall a heck of a lot quicker than you will see ours.
SC: Can NZX survive on current low daily turnover levels?
MW: Thatís a question everybody who runs a stock exchange globally is asking themselves right now. If you believe hedge fund money will be about a third of what itís been over the last five years, there are a lot of markets which are going to have a lot less liquidity. Is liquidity being lost to another exchange, in which case itís a competitive issue, or is it being lost all around the world? Because weíve (designed) our business model to get through three years of grim times, yes, I think thatís a yes.
SC: Can NZX further diversify its income streams?
MW: Yes. Clearly, weíre working on that.
SC: How much Kiwisaver and "Cullen Fund" money is the NZX attracting and will government policy for the latter to invest 40% in New Zealand make much difference?
MW: Itís hard to tell actually. Investing 40% in New Zealand, in the long-term, I think will make a massive difference. If you look at the US, itís got around 70% or 80% of all US money invested in America but itís only 25% of the world economy. If New Zealand doesnít have a big home base, by definition there are going to be under-funded businesses and ideas in New Zealand because everybody else is keeping their money at home and weíre shipping ours overseas. Ten yearís hence, that will seem one of the best things theyíve ever done.
SC: Given the current environment, is there anything NZX can do to encourage more retail investment in listed companies?
MW: The main one here is actually tax. Thereís such a lack of clarity in our tax code around capital gains tax for individuals who hold shares that a lot of people wonít invest in New Zealand or Australia for risk of their underlying clients being subject to capital gains tax. I think the capital markets task force is going to address this issue pretty firmly. Itís not just listed companies, itís (skewing) the risk/return pay-offs between investing in companies, whether public or private, versus housing stock.
SC: But a capital gains tax on housing is never going to happen.
MW: There are ways you can do that without putting a capital gains tax on housing. If you drop the corporate tax rate to 15% and get rid of imputation credits, suddenly you donít want yield, you want growth and companies look much better compared with housing.
SC: Does NZX want to create greater retail participation and, if so, why does it persist with the 20 minutes announcement delay which clearly disadvantages retail investors?
MW: Retail investors have to enter orders through a broker because itís a regulated market. All brokers have access to all information real-time. Itís a bit academic.
SC: What do you think NZX will look like in three years time?
MW: I think we will look as different in three years as we looked three years ago and I think we will be very healthy. I think we will have a bigger presence in Australia, we will have a bigger product set, we will have upgraded infrastructure, and we will be operating in an environment which will be increasingly positive.
SC: A number of www.sharetrader.co.nz readers complained about how much youíre paid.
MW: I havenít received a cash salary change since 2004. The board actually just offered me a cost of inflation catch-up and I turned it down Ė we didnít make this public Ė simply because in this environment it just didnít seem like the right time. A lot of this stuff comes down as tall poppy and, if you stick your head above the parapet, you just understand there will be some people who take pot shots at me personally. Every year when the annual report goes out, someone will make a comment. Sometimes it gets hard to live with, particularly when I think of the number of jobs overseas Iíve been offered which pay a lot more. Globally, I donít get paid a lot of money.
Written by Jenny Ruth, 17 December 2008
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