Stock takes: Breathing easy in turbulent times

Fisher & Paykel Healthcare shares have been making good gains after a record first half result.

While its former stablemate Fisher & Paykel Appliances, like PGG Wrightson, ended up having to take a wad of Chinese cash to ward off trouble this year, F&P Healthcare is doing very nicely helping Americans breathe easier.

Its shares leapt higher a couple of weeks back on a record first half result and have continued to make gains, yesterday closing 7c higher at $3.28.

Morningstar analysts said the company's Obstructive Sleep Apnea division was the star performer in the result with sales up a better than expected 20 per cent and prospects of even better things to come.

While growth in its Respiratory Humidification equipment sales was more moderate, that was offset by firmer pricing for those products.

"We think FPH is firing on all cylinders. Second half growth is set to accelerate," said Morningstar.

But with 58 per cent of its income in US dollars and another 23 per cent in euros, the company is sensitive to exchange rate movements and that's why in spite of the rosier outlook for sales, management reduced their full year earnings forecast.

Nevertheless, Morningstar reiterated its "accumulate" recommendation on the stock.

WRONG TIME

After all the talk and effort around dairy industry gorilla Fonterra coming to market and NZX's determined foray into both rural publishing and a dairy futures market, milk processor Synlait's abortive IPO is not a good look.

The word from various fund managers and brokers Stock Takes spoke to is that while there's nothing much wrong with the company itself other than the lack of a reassuringly sustained history of profitability, the timing and pricing of the offer was off.

Synlait is still a young company and although it is projecting strong growth in gross profit, it has yet to turn a net profit.

A fund manager said he and probably others wanted more time to understand the industry given there's nothing listed in that particular space and also that he saw considerable risk in the company's numbers, not least of all stemming from the unreliability of milk powder prices.

"Simplistically they got their timing horribly wrong," said a source at another institution. "They came to the market when it was busy with a whole bunch of other things," he said, referring to the likes of the DNZ and Kathmandu floats.

Both of these fund managers also mentioned the considerable amount of effort involved to analyse the proposition.

"They overestimated the willingness and appetite of people to do the work at the moment," said one.

WRONG PRICE

Under the offer, Synlait was seeking to raise $150 million and its stock was reportedly being shopped around the institutions at $1.60 a share.

Although we understand there was at least one other fund that was a lot more positive about the offer, this was a bit rich for the first fund manager we spoke to.

He indicated he was prepared to take perhaps a couple of million dollars worth, and if others had taken a similar view, then the institutional bookbuild would have likely come up well short of expectations and lead manager First NZ Capital would then have looked to the retail brokers and their clients to take up fairly chunky amounts of stock.

"That makes a lot of sense to me," said a source at one of the large retail brokers.

"We were pulled in at what appeared to me to be the last minute which suggests to me that their institutional bookbuild had performed poorly."

All in all, this is somewhat at odds with Synlait and lead manager First NZ Capital's statement that the offer received "strong support" from local institutions.

CONFUSION REIGNS

Price and timing aside, the offer also appears to have been beset by what the retail broker referred to as "confusion" over whether it was fully underwritten by First NZ.

"There's certainly a large grey area in respect of whether it was underwritten or not."

Others less kindly disposed to First NZ have described this confusion in somewhat harsher terms, and suggested Synlait itself may have, through no fault of its own, become confused on this issue.

First NZ told Stock Takes: "It was our intention that the IPO would be fully underwritten following the market testing process but there was never any indication that it was underwritten prior to that."

Stock Takes can see why the confusion arose. We were told by one of the fund managers that although they understood there was never any underwriting commitment set in stone, they'd also received "draft documents" stating "the offer is fully underwritten by First NZ Capital".

While the episode has been characterised as "embarrassing" for a number of the parties involved including NZX where, we are told, there may be some resulting fallout, the intrigue is probably a second order issue.

Synlait is likely to have another go at raising cash in the first quarter of next year. Here's hoping the ducks are lined up a little better next time.

BIGGER THAN BIG

Last week, writing about the fact that Treasury is signalling it expects to see some hefty calls on the Retail Deposit Guarantee within the next few months - ie another string of failures in the finance company sector - Stock Takes made an error in reporting the scale of likely defaults.

We wrote what is now an $863 million provision for calls on the guarantee which will "more likely than not" be made is a gross figure and actual losses to the Crown would be well short of that.

Treasury have set us straight however. The provision is a net estimate. The gross figure is likely to be quite a lot higher.

Assuming a somewhat pessimistic 50 per cent rate of recoveries from failed companies takes the gross figure to within sight of $2 billion. A more optimistic assumption about recoveries, say 70 per cent, implies a far more pessimistic view on the scale of defaults with perhaps companies with well in excess of $2 billion hitting the wall.

Under misapprehension of the scale of likely failures, Stock Takes had ruled out the possibility of defaults among anything other than the small to middling companies.

We're now forced to rule that potential back in.

It's possible Treasury expects defaults among entities other than finance companies, but it's still guarded on how it expects events will unfold.

SPEAKING FOR ITSELF

With all the focus on Hanover and United Finance and the proposed debt for equity swap with Allied Farmers, Stock Takes thought it might be worth catching up with another Hanover Group company, FAI Finance.

As it goes, Hanover Group has now sold the company which is now known as FAI Money. The buyers? A couple of chaps named Eric Watson and Mark Hotchin.

FAI and its investors escaped the ignominious fate of its sister companies, probably as it was a consumer and retail finance company, and therefore wasn't exposed to the property market meltdown.

In its latest investment statement, however, FAI says the company had decided to alter the focus of its lending activity.

"The recent decline in the availability of financing to individuals and businesses has opened up the opportunity for the company to provide lending to other sectors including commercial and property sectors."

FAI tells investors: "The company may engage in the provision of property development and property investment finance to the property development/investment sector by offering new lending or acquiring existing loan exposures."

As we know, Hotchin and Watson have considerable experience in this sector.

At least these loans, says FAI, "will predominantly be interest bearing".

We'll leave it there.