Saturday, April 08, 2006

Brian Gaynor: Stay home and build up a track record

Two visiting London Stock Exchange executives were given an enthusiastic welcome in Auckland this week. They were in New Zealand to convince up-and-coming domestic companies to list on London's AIM rather than the NZX.

AIM, the LSE's alternative investment market, is specifically tailored to growing businesses. Its light-handed regulatory regime has attracted more than 1400 listings, including 220 overseas companies. In 2005, AIM had a phenomenal 519 new listings, including 120 international companies.

In the same period, the ASX had 233 new listings while the NZX attracted only five new domestic equity issuers: Allied Work Force, Avon Investments, Jasons Travel Media, NZ Windfarms and Vector.

In 2005, the NZX lost 11 listings: Finmedia, Independent Newspapers, NGC, Nuhaka Farm Forestry, Owens, Ports of Auckland, URBUS Properties, Vertex, Westpac (NZ), Williams & Kettle and Wrightson.

Although most New Zealand companies are reluctant to list on any sharemarket, there were more than 60 at the LSE Northern Club breakfast on Wednesday. That was more than twice the number that attended a similar LSE function in Melbourne.

Many of the breakfast attendees took the view that AIM was a better listing option than the NZX.

The LSE presentation identified two New Zealand companies, Endace and Neptune Minerals, listed on AIM.

Companies Office records have no information on Neptune Minerals although it has a number of fully-owned New Zealand subsidiaries all starting with the name Neptune Resources.

According to Neptune Minerals IPO prospectus, dated October 4, 2005, the company is incorporated in England and Wales. Its head office is in London, it has no New Zealand directors but has licences to explore and mine SMS deposits in an offshore area north of the Bay of Plenty and Hawkes Bay.

SMS deposits are high-grade hydrothermal deposits rich in copper, zinc and lead with a high gold and silver content.

Neptune Minerals' shares were issued at 25p six months ago but are now trading at 15.9p. This gives the company a market capitalisation of £9.17 million ($26.2 million).

Endace, which is based in Manukau City, was listed on AIM in June 22, 2005, after the issue of shares at £1.62 each. The company, which had March 2005 year net earnings of US$0.4 million ($0.7 million) on sales of US$6.5 million, offers security systems for computer networks.

The share price reached a high of £1.97 on August 18 and again on September 23 but fell dramatically after a profit warning on February 22.

Endace shares are now at £1.02 giving the company a market capitalisation of £14.97 million.

The big question is whether Endace has made a good decision to list on AIM instead of the NZX. This can be assessed in terms of cost, share-trading volume and share-price performance.

According to its interim report for the six months to September 30, 2005, Endace raised US$14.09 million at a cost of US$2.3 million. This is a staggering cost to funds raised ratio of 16.5 per cent.

AIM's listing fees are low but all AIM companies are required to have a nominated adviser and a stockbroker. These can cost up to £500,000 with the nominated adviser charging up to £250,000 and the broker 2 to 3 per cent of the amount raised.

Capital-raising costs are much lower in New Zealand.

Delegat's Group estimates that it will cost $3.5 million, or 7.8 per cent, to raise $45 million in its IPO.

In 2004, Just Water International raised $8.25 million at a total cost of $459,900, or 5.6 per cent, and last year Allied Work Force raised $11.4 million for an estimated cost of $771,000, or 6.7 per cent (70 per cent was paid by the company and 30 per cent by the controlling shareholder Simon Hull).

There is little evidence that Endace obtained any more for its LSE listing dollars than new companies listed on the NZX (Endace might argue that it received more value for its shares on the LSE than it would have in New Zealand).

Endace and Just Water are fairly similar in size yet the NZX-listed company has experienced far more share trading than Endace on AIM.

In its first seven weeks, there were 647 Just Water trades with a total value of $4.3 million on the NZX whereas in its first seven weeks on AIM Endace experienced just 68 trades worth $1.8 million.

Just Water traded on all 34 days whereas Endace dealt on only 20 out of 34 days. Even Allied Work Force, which is relatively lightly traded, dealt on 30 of its first 34 days on the NZX.

Endace would also have been far less savagely treated on the NZX for its February 22 profit downgrade. This is a subjective judgment but AIM has more than 1400 companies and, if they fail to meet profit expectations, they can completely disappear off the radar screen, particularly if they come from the other side of the world.

If Endace were listed on the NZX, it would continue to receive media and broker attention. Its share price would also have benefited from the decline in the dollar as most of its revenue is generated overseas.

Although there don't seem to be many logical reasons for New Zealand companies to list on AIM, at least before they have a track record at home, there are some characteristics of the London market that could be adopted here.

One of the unique features of AIM is the nominated adviser, called "nomad".

The nomad's role is to determine the suitability of a company for listing, then take it through the listing process and advise it after flotation.

Every AIM company has to have a nomad and if a nomad resigns, and is not replaced by another nomad within three months, then the AIM company is automatically delisted.

One of the biggest problems with the NZX is that most of the new IPOs are extensively marketed before their capital raising but are virtually abandoned by their broker and adviser after the process is completed. Many companies flounder after listing whereas one of the key roles of the nomad in London is to ensure that companies are assisted in this post-listing phase.

In the past few years, three good companies - Allied Work Force, Gullivers Travel and Methven - have had particularly poor post listing experiences. Allied Work Force shares were issued at $1.50 and fell to a low of $1.16, Gullivers Travel listed at $1.60 and dropped to $1.16 and Methven fell from its IPO price of $1.43 to $1.19.

Allied Work Force and Methven have virtually fallen off the investment radar whereas Gullivers Travel has made a sustained effort to promote itself to the investment community and this is beginning to pay off.

New Zealand companies are looking to AIM and other overseas markets because of the negative experience of Allied Work Force, Methven and, to a lesser extent, Gullivers Travel and other newly listed NZX companies.

They would be better off to stay home and find a broker or adviser that will stick with them after the IPO fund raising has been completed.

* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.

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