Australian firms provide good crystal balls for Kiwi investors

Friday 16th February 2001

RICHMOND: Well-run company but not from a popular industry

By Peter V O'Brien

The comments Australian Prime Minister John Howard made this week when interviewed on his country's Channel Nine Sunday programme were similar to those New Zealand ministers used to make when they were opposition politicians.

Mr Howard was reported as saying he was concerned about the economy's future in the face of an increase in Australian companies going offshore and growing foreign investment in Australian projects.

He commented that, apart from that particular issue, he was concerned to ensure that Australia did not become a "branch-office" economy."

Mr Howard said he was committed to globalisation and open markets but believed economic sovereignty, economic independence and economic dignity were important parts of political independence and dignity.

His comments were made in the context of questions about Shell's attempt to raise its stake in Woodside Petroleum from 34% to 56%, giving the European company control of the oil and gas producer and a significant position in the North West Shelf field.

Mr Howard's views were relevant, admittedly in a tortuous manner, to several other recent events on both sides of the Tasman, the Shell-Woodside exercise and the strange events leading to Lion Nathan gaining control of Montana Group.

Meat processor Richmond listed on the Stock Exchange on Tuesday and immediately went into the top-40 companies.

"The big Aussie," BHP, produced its preliminary report for the year ended December, as did another big miner, Rio Tinto.

New Zealand investors should look carefully at the various matters.

Woodside Petroleum is involved in mining (oil and gas) and mineral exploration.

Oil and gas are basic commodities, whose prices fluctuate in line with general movements in commodity markets as major economies wax and wane, although there is currently a strong element of "rigging" in international oil prices through the activities of Opec and speculators.

Montana produces wine, another commodity-based product, being based on the land and grapes from the land, but the product is highly processed and prices relate to quality, availability in a given year and competition between the output of many producers.

With the exception of variations between oil from different fields, oil is oil is oil.

Woodside and Montana have a common element in that control of local companies in each country is going overseas, in the latter case to Japanese-controlled Kirin Brewery.

It is no reflection on Richmond to say the company's well-publicised listing and place in the top 40 was an example of the lopsidedness of the New Zealand economy, while the reports from BHP and Rio Tinto showed the benefits a country gets from a resource base broader than traditional agricultural products.

Richmond is a well-run operation in the context of the meat industry and the inevitable constraints on such activity but meat companies will never attract the sharemarket interest given to major Australian groups, including those in mineral resources.

It is unfortunate the results of Australian companies are given limited publicity in New Zealand in terms of both the Stock Exchange daily memo and daily newspaper reports.

Many New Zealanders are direct or indirect (through managed funds) shareholders in major Australian groups. The New Zealand content of Australian share registers would be bigger than the total for several New Zealand registers in some cases, irrespective of the New Zealand share of the relevant market capitalisations.

Wide interests of leading Australian companies and their internationalisation make their reports useful for New Zealand-ers looking for another angle on world economic trends and the effect they could have on a individual's investments.

Rio Tinto always includes a solid "outlook" section in its reports, while BHP looks at the future in the context of its recent and continuing remarkably successful restructuring.

Rio Tinto chairman Sir Robert Wilson said economists might argue whether the US was in or was moving toward recession, but the metal-consuming sectors of the US economy were already in contraction and had been for several months.

"Automobiles, capital equipment and construction are all under pressure and, of course, the state of the US economy is the dominant influence in global metals consumption."

The good news was that metal markets appeared to have already discounted the downturn (as always happens), unless the landing was "very hard."

Stocks of metals have been unusually low relative to consumption and would normally have prompted higher prices than were seen in the second half of 2000 and into 2001.

Sir Robert said metal prices should strengthen as faster economic growth resumed, assuming the slowdown was short-lived.

Rio Tinto must have done something right, because net profit went from 1999's $A1.28 million to $A1.52 billion, an increase of 18%. Earnings per share were $A109.8c compared with 93.6Ac and the dividend was 57.5Ac (55Ac). BHP earned a record half-year profit of $A1.43 billion, benefiting from higher petroleum products and copper prices, lower Australian and US dollar exchange rates, profit from new businesses and lower debt levels. There were also efficiency gains from the reorganising.

Structural differences in the economies of each country, wider equity choice and a more "lively" investment environment suggest New Zealand investors should have a high proportion of funds in Australian equities, but beware in both countries of political dislike of "branch economies.

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