It’s been something of a rollercoaster for Nuplex over the last couple of years. At times, the board and senior management seem to have been out of touch with reality.
In May 2009 the NZSA wrote to 20 companies with an analysis showing they were carrying excessive debt based on their published 2008 annual reports. The market was outraged that we could be so “reckless” with our claims.
Provenco Cadmus (now in liquidation) came out bottom of the heap; Allied Farmers was not much better and almost all of the companies on the list subsequently went to the market to strengthen their balance sheets. So who was fooling who?
Nuplex was also on this list. Chairman Rob Aitken claimed our study was flawed. It is hard to see how he justified that position as just weeks earlier the company had been forced to ask shareholders for a bailout of biblical proportions. The reason – a huge debt to equity blowout!
Our study showed that even in June 2008 Nuplex may have been in breach of one bank covenant. Again, there was denial based on the company’s capital notes being equity rather than debt. This subtlety was probably lost on the capital note investors.
When debt covenants were officially breached due to the GFC a few months later, the company saw no reason to inform its owner shareholders, despite the situation being critical. In the latest annual report Aitken claims that “shareholder interests were preserved”. Try telling that to anyone unable to afford to take up the seven for one rights offer!
In April 2010 the Securities Commission announced action against Aitken and the company for breaching continuous disclosure rules. Aitken continues to protest that covenants are only a guide. Until the bank actually enforces its rights, he seems to hold the view that the shareholders don’t need to know, despite the fact that at that stage their investment is probably heading down the toilet.
Now the Nuplex board seems to have agreed that moving the company domicile to Australia is the next smart move. There are three reasons given.
Firstly, New Zealand dividends could be partially imputed. The company tells us that at present all corporate overheads are carried in New Zealand meaning there are no New Zealand profits to impute against. The usual situation is to recover overheads from subsidiaries and remit these, thus alleviating this burden. Quite why Nuplex cannot do this is something we are querying with them. In any event, it does not matter whether dividends are imputed or not. Either the company pays the tax and declares a lower dividend or the investor does so from a proportionately higher payout. The outcome is
the same. Only the process differs.
Secondly, Aitken claims greater liquidity in the larger Australian market. Nuplex might end up around 172 on the ASX200 if they can meet the appropriate liquidity hurdle which would not be the case at the moment. This hardly positions them in the headlights. In New Zealand, they would drop to 46 on the NZX50. So, coverage would diminish and arguably reweighting by passive funds could depress the share price. On Friday 17 September, 54,750 NPX shares traded on the ASX and 321,848 on the NZX. NPX’s argument is not supported by the facts. The reality is a lose/lose situation.
The final reason is a re-rating of NPX shares over time. In our view, this will be influenced by the company’s performance rather than where it is domiciled. Off the radar and with modest liquidity at best, the shares may indeed be re-rated, but not necessarily in the direction Aitken expects.
It has been said that capital is easier to find in Australia. This is undoubtedly true, but NPX have plenty of headroom to grow. Debt to NTA is a modest 15%. Until such time as it is demonstrated that additional equity is unavailable, this is a non-reason.
There are compelling arguments for staying put. New Zealand has a free trade agreement with China, a large and growing market for NPX. Australia does not. This is a global company. It could be based anywhere from an operational perspective. Moving to Australia is no panacea. Look at Nufarm.
So what are the reasons? Could it be related to the majority of the board and many executives being Australian based? A fear of flying? Or perhaps the New Zealand directors fancy all that international travel? All the personnel took the job knowing the present situation. It is a bit rich to now find fault with it.
Certainly, the company has become staggeringly generous towards its top people since the gradual shift to Australia gained momentum and business picked up. Retired CEO John Hirst collected $4.2 million for his last 9.5 months including $1.4 million bonus and $1.9 million termination, not forgetting the $370,000 that he escaped paying when the executive share scheme was cancelled in 2009. New CEO Emery Severin has pocketed $415,000 in his first 2.5 months. The NZSA is not averse to rewarding good performance, but this is getting out of hand.
NPX is an iconic New Zealand company. A real “garage to global” success story. 81.6% of shares are held in NZ. NPX has been incredibly well supported by NZ investors. The NZ capital markets can ill afford to lose another primary listing.
There is no advantage to the majority of shareholders in moving the domicile.
Aitken could do well to reflect that ultimately shareholders will decide whether such a move is wise, and indeed whether he retains the confidence of the NZ majority owners.
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Contributed by John Hawkins, NZSA Chairman.