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YEAR IN REVIEW: Regulatory risk rears head in boom year for stock sales

Jonathan Underhill
Fri, 27 Dec 2013

The New Zealand stock market has rounded out its busiest year in more than a decade with some $6 billion of initial public offerings, placements and selldowns, with only the threat of regulation dampening the party mood.

New Zealand's NZX 50 Index is heading for a 16% gain this year, building on 2012's stellar 24% rally and touching a record high 4983.596 on Nov. 7. The benchmark index is likely to crack 5000 for the first time in 2014, even in the face of rising interest rates and a general election, investors say.

"There's enough info coming out that next year should be an ok year," said Rickey Ward, head of equities at Tyndall Investment Management. "It could be 10% up again for the NZX 50 but I don't think we'll get to a 20% return."

Companies and their shareholders queued up in 2013 to sell stock in a rising market. The performance of those shares has been mixed, though, leaving private equity owners, brokers and the government among the biggest winners.

"There's been an element of confidence to invest in an improving economy," Mr Ward said. "They've been able to use the enthusiasm in capital markets to exit."

With about a week of trading left in 2013, Xero is the best performer by a clear margin. It has soared 323% and the gains quickened in October, when the cloud-based accounting services firm raised enough cash from high profile US technology investors to bankroll its growth strategy.

Diligent Board Member Services almost kept pace with Xero in the first half of the year, helping drive New Zealand's very own tech boom before being sunk by governance issues and the need to restate revenue, and ending the year down about 35%.

They were joined by mobile advertising company Snakk Media in March, website search operator SLI Systems in May, intelligence software firm Wynyard Group on July and GeoOp, which sells software to SMEs to manage workers, in October. As year-end looms, only Wynyard is showing gains.

MightyRiverPower has fallen 21% from its issue price, making it one of the year's biggest disappointments.

The Key government's first asset sale was spiked by the announcement by the opposition Labour Party and Greens a week before the sale closed in May that they would scrap the nation's existing wholesale electricity market and replace it with a new government agency, NZ Power, which would act as a central buyer, planner and regulator for the industry.

While dismissed as an outlandish scheme at the time by some market participants, the threat of regulation continued to resonate and even gained momentum as 2013 wore on.

Meridian Energy's instalment receipts recently traded at 99.5 cents, just below their issue price in October after a smaller-than-expected pool of investors participated in the IPO.

Chorus has dropped 49% this year as the network operator waits and hopes that the government will push back against regulated price cuts ordered to start in December. Gas and electricity lines company Vector is heading for a 4.4% annual decline.

"Anything that has potential chance of being regulated has had a big question mark over it," Tyndall's Mr Ward said.

Fletcher Building, the biggest company on the exchange, has managed only a 1.8% gain in a year when the government began an inquiry into the high cost of building products and it struggled to build earnings in Australia. Telecom is up just 2%.

Units of Fonterra Shareholders' Fund have dropped 18 percent in 2013 and plumbed their lows this month. Despite the high profile whey protein contamination scare Fonterra faced in August, the units have suffered more after the dairy giant slashed its dividend payments.

Synlait Milk provided a more straightforward play on dairy prices when it IPO'd in June at $2.20 and went on to beat its prospectus guidance for earnings. The stock is up 44% this year.

A2 Corp, once sneered at for marketing milk with a protein variant said to have health benefits, has gained 42% after overhauling its marketing drive into Australia, the UK and Asia.

The share market rally allowed Australian buyout firm Quadrant Private Equity to exit its holding in retirement village operator Summerset Group in two steps this year.

Investors who participated have come out ahead as Quadrant sold the first 40 million shares at $2.42 in March and the remaining 50 million in October at $3.10. The shares were last at $3.24 and have climbed 42% this year. It has helped that catering for the elderly is increasingly understood to be a growth market.

"The retirement village sector has been very successful," said Mark Lister, head of private wealth research at Craigs Investment Partners. "It's a great sector when you think of the demographic tailwinds behind them."

Ryman Healthcare, the biggest of the three listed retirement village operators, is one of the year's biggest gainers, rising 73%. Metlifecare, whose former owners sold out to Infratil and the NZ Superannuation Fund in October, has gained 29%.

Sky Network Television has gained about 18% and investors who participated in News Corp's sale of its 44% stake at $4.80 apiece in March are among the year's winners, with the stock recently trading at $5.74.

Lister is also upbeat about 2014 in the face of the election and rising borrowing costs, saying companies may achieve earnings growth of 10% and a dividend yield of 6% in average. He doubts there will be a repeat of the past two years' gains though.

"I'm still positive on the New Zealand market and most share markets around the world," he said. Craigs has been advising clients to put more money into international markets after a "great run" out of New Zealand shares that has left the market looking more expensive

Despite boom times for equities, New Zealanders are still somewhat wary of the stock market, keeping some $120 billion in short-term deposits paying interest of 4-5%.

"We're still underweight shares as a country, compared to Australia, the UK or the US," Mr Lister said. "Such a large amount of money is sitting on the sidelines."


Jonathan Underhill
Fri, 27 Dec 2013
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YEAR IN REVIEW: Regulatory risk rears head in boom year for stock sales