Investment columnist for the NZ Herald

Brian Gaynor: Why some flourish and others flounder

Photo / Sarah Ivey
Photo / Sarah Ivey

Why do some companies continue to perform year after year while others fade after promising sharemarket starts?

Why have Mainfreight and Ryman Healthcare been huge sharemarket successes while Pumpkin Patch and Rakon have been major disappointments in recent years?

These are not easy questions to answer but there are a few important characteristics that separate the winners from the losers. These include business models, corporate governance, shareholding structures and the ability of companies to respond to changing economic conditions.

Mainfreight, Pumpkin Patch, Rakon and Ryman Healthcare are compared in this column because they are all relatively new, were established by one or two individuals and have created a huge amount of investor interest since listing.

However, the similarities stop there as there have been enormous variations in their sharemarket performance as demonstrated by the following figures:

* Mainfreight's sharemarket value has surged 1622 per cent, excluding dividends, from its IPO value of $57 million to $980 million.

* Ryman Healthcare's market value has increased by 796 per cent, from $135 million at its IPO to $1.21 billion million.

* Rakon's sharemarket capitalisation is only $131 million - 22.8 per cent below its IPO value of $170 million five years ago.

* Pumpkin Patch has been the most disappointing as its share price has plunged from a high of $4.95 in early 2007. The company now has a sharemarket value of $134 million, 35.5 per cent less than its IPO value of $208 million.

Mainfreight was established by Bruce Plested in 1978 with paid-up capital of just $7200. He was joined a year later by Neil Graham as joint managing director.

The logistics company listed on the NZX in June 1996 following the sale of 60 per cent by Plested and Graham, which realised them $34.2 million. No new money was raised by the company.

Business success is primarily about individuals and Mainfreight is a perfect example of this.

The company's success is primarily due to Plested, the chairman, but managing director Don Braid and his executive team are playing a more and more important role. The Mainfreight board, which still has five directors remaining from the IPO, is also extremely strong.

Mainfreight doesn't have a unique business model and it operates in a competitive industry, but Braid's philosophy is that "Mainfreight doesn't do recessions". The company has substantial offshore activities yet the strong New Zealand dollar hasn't restricted its profit growth.

Mainfreight has a strong shareholding culture encouraged by Plested. He gave his fellow directors options to buy shares from him, equal to nearly 3.5 per cent of the company, at the time of the IPO. He also sold 500,000 shares to Braid in 2007 and the managing director now has 2.76 million shares.

The combination of strong corporate governance, huge ambition and widespread shareholdings has been the backbone of Mainfreight's success.

Ryman Healthcare was established by John Ryder and Kevin Hickman in 1982. It listed on the NZX in June 1999 following the sale of 20 million new shares and 10 million existing shares by Ryder, Hickman and two other shareholders.

The issue price was $1.35, well below the indicative range of $1.50 to $1.80, mainly because investors didn't believe that Ryman's business model would be successful.

They were totally wrong, as the Ryman model, which involves the development, construction and operation of facilities for the long stay care of the elderly, has proved to be enormously successful.

Ryder is gone but Hickman remains on the board and David Kerr has been chairman since the IPO.

Ryman's success is quite simple; it has a strong business model in a growing sector and the board has given managing director Simon Challies and his executive team full support to achieve the company's ambitious growth plans.

Rakon was established by Warren Robinson in 1967 and listed on the NZX in May 2006 following the issue of 6.25 million new shares and the sale of 35 million shares by the Robinson family, all at $1.60 each.

The company raised an additional $66.1 million from investors in its March 2010 year through the issue of new shares at $1.15 each. Rakon quickly became a market darling after listing and surged to an all-time high of $5.46 in late 2007.

However, the atmosphere at last week's annual meeting, which was held at 2pm on Friday as the rest of Auckland was preparing for the RWC 2011 opening, was totally different.

Shareholders, led by John Hawkins of the Shareholders' Association, criticised the company for its poor performance.

Rakon, like many other New Zealand companies, blames the NZ dollar and difficult economic conditions for its depressed earnings. Hawkins would not accept that excuse and argued that the company should be subject to a blow torch because it didn't have enough independent and non-executive directors.

Rakon operates in a difficult industry, where it is more of a price taker than a price maker, but it frustrates investors because chief executive Brent Robinson makes forecasts that the company does not achieve.

The overall impression is that Rakon is a family company that is listed rather than a listed company with a family background. Three of the six directors are Robinsons with two of them being executive directors.

Hawkins is correct, the company badly needs a blow torch turned on it before investor confidence is restored.

Chairman Bryan Mogridge told the annual meeting that he would review the board before Christmas but this was going to be after he talked to his fellow directors. There was no mention of him consulting non-Robinson family shareholders.

Pumpkin Patch was founded by Sally Synnott in 1990, who held an executive role until 1993 but has remained on the board as a non-executive director. Maurice Prendergast, the managing director, was appointed to the position in 1993.

The company listed on the NZX in June 2004 after issuing 81 million new shares at $1.25 each. This raised $101.3 million but as $61.3 million of these funds were used to buy back shares from existing shareholders, only a net $40 million was injected into the company.

Pumpkin Patch has embraced an aggressive growth strategy since listing and now has 244 stores worldwide compared with 122 seven years ago. A company associated with Prendergast has received $27.4 million over the past six years for shop fixtures and fittings connected with this store growth strategy.

The group's problem is that it operates in a very competitive environment and has limited opportunities to respond to difficult economic conditions because it is locked into property leases.

Another issue with Pumpkin Patch is that the major founding shareholders continue to sell shares even though they realised $61.3 million through the IPO. Prendergast's holding has declined from 13.4 million to 10.62 million shares since the IPO, although he recently bought 250,000 shares at $1.04.

Synnott has also reduced her holding as have most of the other post-IPO major shareholders.

There is nothing wrong with executives and directors selling shares but it gives a negative message to investors.

It will be interesting to see if Hawkins and the Shareholders Association will be calling for a blow torch at the next Pumpkin Patch annual because the company needs one.

The best hope for shareholders is that Hawkins is supported by Rod Duke and Jane Cameron, who hold 9.4 per cent and 9.6 per cent respectively.

Mainfreight and Ryman Healthcare are performing very well, and don't require major changes, whereas Pumpkin Patch and Rakon are not performing and need to review their governance, business models and the message that any insider shareholding changes give to investors.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management, which holds shares in Mainfreight, Rakon and Ryman Healthcare on behalf of clients.

- NZ Herald

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Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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