A rising tide lifts all boats

By David Bishop, Bryn Harrison , and Daniel McCarthy

Friday 20th August 2004

This year's NBR L.E.K. Shareholder Scorecard catalogues an outstanding year for the New Zealand equity market.

A high New Zealand dollar, strong domestic GDP growth and solid commodity prices laid the foundations for the market's performance. Helped by a high number of new listings, and an improved exchange profile, New Zealanders are rediscovering equity investing.

New domestic company listings on the main board of the exchange have added more than $1 billion of capitalisation to the market in the year to June 2004.

Continuing from last year's strength, the market has continued to perform favourably in comparison with international indices, while offering a relatively stable and safe investment destination.

The average shareholder return of the 121 companies included in the scorecard was an impressive 28% compared with last year's 13%. Ten medals are being awarded in the 2004 Scorecard, a result second only to 2003 in the nine-year history of the NBR L.E.K. shareholder scorecard.

No company has earned a gold medal, reflecting the steep threshold set by the market's high performance.

To put this in perspective, to achieve an "A" ranking this year (three "A" years in succession are required to achieve a gold medal), companies needed to achieve a SROR greater than 54%.

Last year's gold medal winner, Steel and Tube Holdings, returned another strong performance to earn a silver medal this year, and Hellaby Holdings won its second silver in a row. Added to them are a mixed set of other large and small players: Contact Energy, NGC Holdings and Fletcher Building, Dorchester Pacific, Scott Technology, Taylors Group and Broadway Industries.

The energy sector was a standout performer, with Contact, Trustpower and NGC leading the sector to an overall return of 49%.

Power stocks have benefited from an improvement in the value of generation assets caused by rapidly reducing gas reserves, the cancellation of Project Aqua, and the spectre of last year's energy crisis, which saw energy traded at large premiums.

Stocks in the finance industry also had an outstanding year, with Dorchester Pacific and Tower producing returns in excess of 50%. The buoyant domestic economy created a high demand for borrowed capital, underpinning finance companies' excellent results. The value of successful finance companies was further underlined away from the stock exchange, with Fisher & Paykel's involvement in the acquisition of Farmers being driven largely by the attractiveness of its consumer finance operations.

Ironically, while building stocks boomed, property companies under-performed relative to other shares, only managing a 12% sector-wide. These firms face increasing competition from international companies for the best sites and tenants, and speculative acquisition behaviour during the height of the property boom could be beginning to hurt them.

Port operators also fared poorly generally; the continued solid performance of Ports of Tauranga was overshadowed by Ports of Auckland and Southport producing negative shareholder returns this year.

Major players in the transport industry have suggested New Zealand has too many port companies, with too much local council ownership and that the ports will remain inefficient until the councils divest their stakes and allow consolidation in the sector.

With the exception of Michael Hill International, retail stocks were generally disappointing over the last year. Briscoe Group's bottom line and share price appear to have been heavily impacted by deep discounting practices, while The Warehouse's Australian operations continue to drag its returns down.

Pacific Retail's acquisition of cash-hungry UK retailer PowerHouse was greeted with concern by the market and Restaurant Brands' KFC and Starbucks chains have failed to meet expectations.

The equity market has generally been a much more active, interesting beast over the last year. Several high-profile IPOs had the stock exchange buzzing, and added significant capital to the bourse. Repco, Pumpkin Patch, Postie Plus, and Feltex, among others, focused public attention on the capital markets. The NZX itself has benefited from increased market activity, achieving a one-year SROR of 94% in the year to June 2004. Some of this result can be credited to Mark Weldon's leadership and his promotion of equity as an alternative to property.

The 2004 L.E.K. NBR Shareholder Scorecard showed corporate activity can have a positive, albeit short-term impact on shareholder returns. Wrightson and Toll New Zealand (formerly Tranz Rail) had outstanding SRORs (44% and 72% respectively) on the back of acquisitive activity.

Looking forward to the 2005 Scorecard, a number of macro and specific factors are likely to impact on the market. GDP growth forecasts are bullish, and the Kiwi dollar is expected to remain strong.

Political uncertainty and upheaval will play a role in the market, with major elections scheduled in Australia, the UK, the US, and most likely NZ over the next 12 months. The evolution of the building cycle and oil prices will also play a part in the performance of many players in the market.

At a firm specific level, the progress of those with overseas acquisitions, particularly The Warehouse and Telecom, will be important to the market's overall development.

Changes to Fonterra's capital structure are being discussed, and if enacted are likely to involve the stock exchange in some capacity.

Fisher & Paykel Appliances is a good way toward achieving a gold medal in the next scorecard, having posted outstanding results in the two years since it was split from its HealthCare sister.

David Bishop and Bryn Harrison are business analysts at L.E.K. Consulting. Daniel McCarthy is a management and strategy consultant at L.E.K. Consulting

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