Friday, March 03, 2006

Stock takes: Positive vibes

By Liam Dann

The broking community has been given a rark-up by NZX boss Mark Weldon, who is more than a little peeved with what he sees as unjustified negativity about new and prospective listings on the exchange.

Weldon raised the issue at a meeting of the NZX board last month and his views appear to have divided broker opinion.

There are some who accept his point - that bagging a prospective IPO to clients and/or the media prior to the release of pricing details is unfair and counter-productive to the greater good of growing the market. But others have taken umbrage at the suggestion they should restrain their opinions if they don't like the look of a company.

It's true that Goodman Fielder has well and truly exceeded the low expectations that were set up by early criticism. Now there is concern that the Delegat's and Baycorp floats may be suffering from similar scepticism.

This is hardly the Danish cartoon controversy but it is a difficult issue. In theory, the exchange needs all the new listings it can get and it would be a shame if any were sunk by petty and unfounded criticisms. But it is also true that poor timing and execution have bought some dogs to market in the past. These public failures really turn off investors and do the market more harm than good. So it would be a shame if brokers pulled back from engaging in full and frank discussion.

Finance humming

It is tempting to view investment company Pyne Gould Corp as just a spin-off of rural services company PGG Wrightson (or more accurately its pre-merger version Pyne Gould Guinness). PGC's half-year result this week was certainly flattened by the rural blues and it reported a profit of $26 million. But take out a $14 million one-off gain and the result was slightly down on the same period last year.

However, the good news was that PGC's Marac finance business looks like it is still humming. ABN Amro Craigs analyst Mark Lister points out that Marac is well managed and is a pretty good barometer of the wider economy. Marac's net profit was up 9 per cent and the commercial division - which finances new plants and equipment for small businesses - had a 13 per cent growth in receivables.

PGC has been cautious about its longer-term outlook but remains confident about the year to June. So there is still a bit of life left in the economy - for now at least. PGC shares closed at $4.10 yesterday.

Moving on

Popular broker and sometime media commentator Brett Wilkinson has left Direct Broking to set up shop for himself.

The shell-company enthusiast and fan of the NZAX has relinquished his broker's licence to get more involved at the front end of the investment game. Wilkinson plans to focus on sharemarket placements, pre-IPO investments, private equity raising and, hopefully, bringing some new issues to market. Watch this space.

NZAX rules

A process that should finally see some changes made to the trading rules for the NZAX is about to get under way.

Brokers have been complaining for some time now that rules - like a 2c minimum price point for making trades - have hampered liquidity.

These companies often have share prices of just a few cents each and it's a lot to expect people to buy and sell on incremental jumps of 10 or 20 per cent.

Geoff Brown at the NZX agrees, saying this is one rule that is likely to be changed. The powers-that-be will meet on Monday and a time line for a review of NZAX rules will be drawn up. That process is likely to involve a round of public submissions.

Taxing problem

The Government has really failed to think through the ramifications of its capital gains tax on overseas investments, says broker Ian Waddell.

OK, so it looks like a softening of the policy with regards to Australia, but Waddell offers this real example of how a capital gains tax in the US would force an innovative local company to move overseas:

A South Island-based medical equipment company has designed and manufactured an impressive new device but can't raise the money locally to get it into mass production.

The big market for these things is in the US so the company goes to venture capitalists there who tell it that it all looks wonderful.

The US fund values the company's effort so far at $3 million. But, as a condition of handing over another $3 million to the business, they want its headquarters to be in San Diego.

The company is unlikely to make money for three years, but it technically becomes an overseas investment. So under Michael Cullen's proposal, the innovative mainlanders will face a 6 per cent tax on their unrealised gain.

"So these poor buggers, who haven't got two bob to rub together but have been given $3 million worth of shares in a company based in the States, now have a tax liability of $180,000," says Waddell.

"They can't sell the shares, so the actual consequence is that they have to move their manufacturing operation to the States."

These are exactly the kind of companies the Government wants - surely Cullen won't allow this scenario to become a reality for New Zealand start-ups?

Good to go

In case anybody was still wondering, Graeme Hart's takeover of Carter Holt Harvey is looking like a certainty. For the first time in the drawn-out offer (and second offer) process, the shares are trading below or at the offer price. They closed at $2.75 yesterday.

Looks like the hedge fund players have finally given up and are ready to let Hart get on with it.

Not so bad apples

All the bad news about the apple industry late last year seems to have overshadowed some positive growth at Turners & Growers.

Last August, the produce company was forced to downgrade its profit outlook because of the dire situation facing apple exporters. T&G owns ENZA, New Zealand's biggest apple exporter accounting for about 40 per cent of the industry's global sales.

The situation hasn't really improved for growers but there is more to T&G than just ENZA. Its share price did well in February, rising by 7.5 per cent.

And Goldman Sachs JBWere is picking that it may have more upward momentum in it yet. In a research report, analyst Rodney Deacon gives the stock a valuation of $2.60 and says it is likely to outperform the market in the short term.

It is still at a discount on net-asset backing, has a relatively low PE multiple for a company with such a good earnings track record and last week's result was a strong one. On February 22, T&G reported a half-year profit of $13.25 million, up from $10.4 million in the same period last year.

Deacon notes that there are still a few long-term issues, like the volatility of earnings, that could hamper performance... Those dang apples again.

Its shares closed at $2.17 yesterday.

Southern resistance

Investors and the good citizens of the Garden City appear to be rallying against the Christchurch City Council's takeover of Lyttelton Port. Investor opinion (unsurprisingly) reckons the offer is too low. The public opposition probably has more to do with "Johnny Foreigner" getting his hands on "our" assets - the council is planning to sell 49 per cent of the port to Hong Kong-based mega-corporation Hutchison.

One Stock Takes reader notes that the Lyttelton half-year result was later than usual and lacking in the usual dividend. Given that the offer terms dictate that any dividend declared will be deducted from the bid price of $2.10 a share, it's not surprising that the company hasn't issued anything.

"The company certainly knows how to antagonise loyal shareholders," writes our reader.

Lyttelton shares closed at $2.17 yesterday.

A shot in the dark

So liquor company 42 Below is launching a "ready-to-drink" product. What exactly is so "not ready to drink" about their other products?

It's vodka; you just unscrew the lid and pour don't you?


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