Mark Lister
On Investing

Mark Lister: Asset sales will be a market transformer

The part-sale of energy companies will increase the weighting of the sector in the market. Photo / Simon Baker
The part-sale of energy companies will increase the weighting of the sector in the market. Photo / Simon Baker

The National Party's widely publicised mixed-ownership model (MOM) for certain state-owned assets now appears very likely to be implemented following National's strong showing in the general election and the pending formation of government.

The scale of this change relative to the size of the existing sharemarket would be significant. The next few years, as the MOM programme rolls out, have the potential to transform the New Zealand market - and local investors' share portfolios.

The Government intends to extend the MOM (under which Air New Zealand is listed on the sharemarket, the Government majority owner with a 74 per cent stake) to four state-owned energy companies, namely Mighty River Power, Meridian Energy, Genesis Energy and Solid Energy.

The Government will also reduce its existing shareholding in Air New Zealand to 51 per cent.

It has set a number of key conditions for the programme. The first is that it will maintain majority control and ownership in each company by continuing to hold 51 per cent of each. It's also signalled New Zealand investors will be at the front of the queue.

The programme is anticipated to take several years to complete; the model to be extended to the first company sometime during 2012.

The Government has outlined that proceeds from the MOM programme will be reinvested in ongoing funding of new public assets including broadband, schools and hospitals, reducing the requirement to borrow from international bond markets.

Initial Government estimates suggest the MOM programme will generate between $5 billion and $7 billion for the Crown. If this is so, the results will utterly change our sharemarket.

The local sharemarket has a value of around $40 billion. Adding the total value of the MOM assets (including that still held by the Crown), this value would rise by around $13 billion to $53 billion, an increase of about 30 per cent.

On a sector basis, weighting to the electricity sector would increase significantly from about 9 per cent of the index to about 28 per cent, and weighting to other sectors would decrease.

This would probably lead to many investors, and KiwiSaver funds, reviewing and tweaking their portfolios, if only to ensure the exposure to one sector (in this case electricity) wasn't too dominant.

Even a very stable industry that provides key infrastructure such as energy is not without risk. The transmission grid can fail, the weather plays a major role, and regulations may change the landscape.

Much like Australia, which has become a market dominated by mining and banking stocks, New Zealand would be dominated by electricity companies. However, I don't think too many issues would arise from this scenario. Most investors and KiwiSaver funds have the ability to invest in New Zealand, Australian or global shares and would consider their portfolio as a whole.

They might use New Zealand to gain their electricity sector exposure, Australia for mining shares and the United States for technology companies, for example.

It's very early days and details on structuring, pricing and other considerations are limited at this point, but the investment opportunities across the companies in question appear attractive. The three electricity companies have strong existing market positions due to the incumbent nature of generation assets; they are profitable businesses and they have the potential to grow earnings at least in line with economic growth.

Solid Energy also has a strong portfolio of energy assets and a track record of growth.

Air New Zealand, the smallest of the deals given that it is already listed, is less suitable for conservative, smaller investors due to the nature of the airline industry. However, it remains a good, well-run business and interest from larger institutions and existing investors will be solid.

The Government has indicated it sees 85-90 per cent of the shares sold as part of the process going to New Zealand investors.

This would obviously include KiwiSaver funds and other large wholesale investors, although I suspect the Government will have no trouble generating significant interest from retail investors.

The last big initial public offering (or IPO, which simply means a company has moved to being listed on the sharemarket) we had in New Zealand was Contact Energy in 1999. The Crown sold 60 per cent of Contact to the public for a total of $1.1 billion.

The offer was very successful with smaller retail investors, a lot of them staying invested for a long time.

Over 270,000 investors pre-registered for the public offer in Contact and many of these were first-time sharemarket investors. The IPO generated domestic retail demand of more than $1 billion and it's estimated approximately 88 per cent of the pre-registration demand was for share parcels worth less than $3000.

This turned into a total of 229,000 actual retail applications for shares in Contact, with an average of just over $4000 per application.

In November 1999, six months after the IPO, 170,000 investors still held 1000 shares or fewer. Today, Contact still has a relatively large number of small shareholders, probably in the vicinity of 80,000, many of whom have retained their shares since the IPO.

According to Reserve Bank data, at the end of 2010 New Zealanders had a whopping $98 billion on deposit with registered banks. Five years before this, the corresponding number was $55 billion.

One explanation for this 61 per cent increase in bank deposits is undoubtedly investor concern over the economic environment, but I would suggest it's also due to lack of investment options in New Zealand.

The finance company sector has gone, property looks uninspiring and our sharemarket is tiny with a limited number of good-quality, high dividend-paying companies.

Given returns on bank deposits, some of that $98 billion will probably gravitate toward the $5 billion to $7 billion of energy company shares there are to go round.

This time we have KiwiSaver, the impact of which shouldn't be underestimated. At September's end, there was $10.5 billion in our national KiwiSaver accounts, 45 per cent more than the $7.2 billion a year before.

KiwiSaver contributions and balances will continue to grow and providers will welcome more local options for the investment of those funds on behalf of the 1.8 million Kiwis who have KiwiSaver accounts.

During similar sale processes in Australia, we've seen retail incentives put in place such as loyalty rights where investors receive a top-up of additional shares for remaining on the register for a period of time.

This would enhance the potential investment return for local retail investors and may be an approach the Government considers using.

From a broader perspective, the MOM programme provides an important boost to our local market and the companies that are proposed to be a part of it look like good-quality holdings for retail investors.

Looking at their defensive, cash-generating attributes, they have the potential to deliver sustainable, tax-efficient dividends.

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on Craigs Investment Partners was Crown adviser for preparatory work before the election. This column is general in nature and should not be regarded as personalised investment advice.

- NZ Herald

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