New equities research service targets NZ small caps

Tuesday 3rd April 2012

The double whammy for small listed companies of no broker research and tough new rules on retail investment advice is behind the launch of a new research service in New Zealand by global research house Edison International Research.

Fronted by one of the country’s most highly regarded resource sector analysts, John Kidd, and fellow Kiwi, former fund manager Simon Wilson, Edison’s local operation will be targeting the wide range of companies that have NZX or NZAX listings, but struggle to get coverage as broking houses’ research functions shrink.

The vicious cycle of shrinking research coverage leading to lower investor interest in stocks with small market capitalisations was identified for the Capital Markets Development Taskforce report in 2009.

Recent changes to the rules on financial advisory services have made the problem even greater, says Kidd.

“There are 140-odd stocks on the NZX and 25 to 30 are covered,” he told BusinessDesk. “With the change in the regulatory environment, retail advisers are now much more accountable for the advice they give. It has to be sufficiently researched.”

In the absence of high quality independent research, that represented “quite a threat for a good part of the market and is creating a real headache for those companies.”

Edison’s business model sees companies pay for research which Edison is free to publish whether or not its findings are favourable, and which it distributes without charge to news media and the investment community. Its research reports do not give recommendations or target share prices, but its editorial policy allows companies only to correct errors of fact in its draft reports.

“Reputation is sacrosanct,” said Kidd, who advised the Treasury on state-owned enterprises, and penned the influential 2009 “Stepping Up” report for then Energy Minister Gerry Brownlee on New Zealand’s oil and gas potential, before leaving his role as head of research for broking house McDouall Stuart.

“If conflict isn’t managed, then no one will read it,” he said. Also offered by the Edison connection is potential to take small-cap New Zealand companies to investors in other markets, with a reach of 85,000 “points of contact” in the global financial media, fund managers, brokers, and private equity investors.

“New Zealand stocks that struggle in the local market, we want to give them a wider platform,” said Kidd, who is also helping out on Edison’s portfolio of some 25 stocks under research in Australia, where the firm expanded 18 months ago.

One New Zealand firm already using the service is enterprise network monitoring pioneer Endace, which is listed on the London Stock Exchange, where it has struggled to gain investor attention.

Kidd also expects growing investor interest in independent research on the four energy SOEs which the government proposes to partially privatise over the next five years.

BusinessDesk.co.nz

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