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2005 Review: NZX lucks out in year of the takeover

By Rachel Pannett of NZPA

Wednesday 4th January 2006

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It is hard to put a positive spin on the NZX's performance in 2005.

It was a year when main board de-listings outnumbered initial public offerings (IPOs) by 11 to three.

Apart from the pre-Christmas float of Australasian food giant Goodman Fielder, with a market capitalisation of $A2.65 billion ($NZ2.88 billion), the only other main board listings were the $600m privatisation of a quarter of Vector, and the Allied Workforce IPO, which raised just $14 million.

Those figures are ugly, and more so when compared with Australia, where 171 companies listed in the year to November, raising $A14.3 billion.

On the NZX's alternative market, travel media firm Jason's raised $8.5m, and New Zealand Windfarms raised $3 million for its launch this month.

The market chased up two years of double digit rises, with a mere 8% gain.

It's not all doom and gloom. In the run up to Christmas, the market added 4% to its value - although brokers admitted even that brief rally lacked its usual seasonal lustre.

NZX chief executive Mark Weldon was unperturbed.

Just over two years on from the top 50 index's inception, he defended its performance.

And so he should - he owned 5.2% of the NZX, which demutualised and listed on its own bourse in 2003, and has a vested interest in its future through an incentive-based pay scheme.

Weldon said the exchange's performance this year was best measured by the success of its small cap stocks - most of which fly well below the media radar.

He pointed to electric motor manufacturer Wellington Drive Technologies, which last month raised $1.4m through a share placement and announced a 1:4 rights issue to raise an additional $3.9m.

Juice company Charlie's also raised capital to buy rival Phoenix, and Just Water issued stock for the cash to buy a water company across the Tasman.

"That's three companies on the AX (alternative) market, small companies with small market cap that are using the market very efficiently to grow," Weldon said.

In all, $3.5 billion in capital was raised in the year to November.

"The issuance of capital never gets in the headlines, but is actually really important for the long term interests of the market, and the interests of New Zealand as a place where people can own growing businesses where there are great jobs," he said.

Weldon also had a story to crow about in Pumpkin Patch.

The children's clothing manufacturer added 25% to its share price in the year to mid December, and its offshore expansion was going swimmingly.

He said the Pumpkin Patch model - where the intellectual property and ownership is in New Zealand, with manufacturing in Asia and the majority of sales offshore - was one more local companies should try and emulate.

"In five years' time you'll say: `has the market been successful?' and you will evaluate it on how many New Zealand-owned companies have generated wealth for the country," Weldon said.

While big cap listings like Goodman Fielder and Vector were "tremendous", small stocks with big potential were just as important.

"Where we see the economy being driven in the long run is companies like Pumpkin Patch, Ryman Healthcare, the ones that have a chance of going from a $200m company to a $2b company," he said.

While it is nice to see the NZX head so chipper, even when the cards haven't gone his way this year, it is hard to ignore the underlying problem the exchange faces: New Zealanders are simply not interested in investing in the sharemarket.

Our collective obsession is property, and with latest figures showing the median house price rose 15% in the year to November, it is a hard habit to break.

Weldon said it was not a case of black and white - either shares or property.

"In the long run, you need your stock market and your property markets reinforcing each other.

"You actually want both of them to steadily increase, you don't want either of them to bubble and collapse."

That is very pragmatic, but the balanced portfolio message doesn't seem to be getting through - certainly among younger generations.

Doing the rounds at company AGMs , one would be forgiven for thinking they had stumbled on a Grey Power event.

Bright young 20-30-or even 40-50-somethings are nowhere to be seen.

At $60.22b, the NZX's total value accounted for about 40% of gross domestic product (GDP) - down from 80% in the 1980s. Compare that with Australia, where at over $1 trillion, the sharemarket made up 116% of GDP.

Much of the wealth created on the local bourse goes into offshore pockets, with 48% of the market overseas-owned - the highest in the world.

The main attraction of our market is its high dividends. NZSX-50 stocks pay an average yield of 7%, compared with the average MSCI World Index yield - tracking the performance of about 1800 global stocks - of 2.1%.

Top stock Telecom, for example, paid 50c in ordinary and special dividends this year.

For older people, looking for a steady year-on-year income, that is appealing. For younger generations, sex still sells - and none of the companies lining up to list this year were ever likely to be nominated for "rear-of-the-year".

The glaring lack of market interest has seen several companies get cold feet - including a planned $200m float of Timaru businessman Allan Hubbard's 80-year-old finance firm, South Canterbury Finance.

Weldon said the market had been dominated by mergers and acquisitions - consuming the time of New Zealand's limited pool of merchant bankers.

Williams and Kettle, Vertex Group, Independent Newspapers Ltd, Owens Group, Urbus Properties, Ports of Auckland, NGC and Wrightson all departed the exchange via mergers or takeovers.

Forest products giant Carter Holt Harvey (CHH) could be next on the list if Graeme Hart, New Zealand's richest man, succeeds in his takeover.

Of Hart, who has been one of the busiest deal makers this year, Weldon said: "It's tremendous to see one of New Zealand's best investors become engaged in our local capital market."

He said the flurry of takeover activity was an indication of the quality of company balance sheets.

"We'd hope to see that move back to a more balanced level next year."

Many solid companies remain - Fisher & Paykel Appliances, F&P Healthcare, and Waste Management, to name a few - all of which have performed well against a difficult backdrop of high exchange rates, rising interest rates and inflation.

"When I came back to New Zealand three years ago, there were a lot of questions around what is the quality of management in New Zealand, and is it any good?" Weldon said.

"I think that is one story that hasn't been written this year, you have got a lot of companies that are being very, very well managed."

Unfortunately, we also have some terrible cases of mis-management, like the sharemarket's underperformer of the year, Feltex, which saw its share price dwindle 70% to 47c following a series of profit downgrades.

Next year, with an economic slowdown looming, Weldon is taking a punt each way as to how the market will perform.

"I think it's up for grabs," he said.

"I'm reasonably optimistic that it's flattening, rather than crashing. I tend to think that New Zealanders love to start thinking about the train crash, well before the rest of the world tends to.

"People love to jump on the negativity bandwagon. The risk is the more that it happens, it changes business confidence and creates a self-fulfilling prophecy."

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