Tamsyn Parker 's Opinion

Tamsyn Parker is the NZ Herald's Money Editor

Stock Takes: Xero fever

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Xero's share price has been rocketing. Photo / NASA
Xero's share price has been rocketing. Photo / NASA

Rod Drury's Xero has been the talk of the markets this week as its share price has rocketed upwards.

Since the accountancy software firm undertook a $180 million capital raising last month, its shares have more than doubled in value.

The capital raising was done at $18.15 a piece and yesterday shares were trading as high as $41.50, giving the company a market capitalisation of $5.3 billion, before falling back to close the day down $3.30 at $34.

Xero briefly became the second largest firm on the NZX by market capitalisation this week, overtaking Auckland Airport, before falling back yesterday. Yet the differences between the two could not be more stark.

Auckland Airport returned a profit of $177 million on revenue of $448 million in its last financial year.

Xero has not yet made any profit and will likely generate revenue of about $70 million this year.

Fletcher Building is the biggest listed company and Xero has a way to go to catch up to its $6.57 billion market cap.

DIVIDED MARKET

Xero has divided the market between those who are true believers and investors and those who can't justify the price.

Mark Warminger, fund manager at Milford Asset Management which owns a stake in the tech company, says if Xero can take a significant chunk of customers from its competitors and get a 10 to 15 per cent global market share it could be worth as much as $70 a share.

On Wednesday brokers First NZ Capital came out with a target price of $45.70 a share and said Xero could be a $10 billion Nasdaq company within five years.

But others are less convinced. One market source said Xero could be the company that wins the Lotto ticket but its chances were less than 50-50. "Investors won't know for three to five years whether it is going to be successful."

The source said its success was not about New Zealand or Australia but its potential to capture the US market.

"In order to justify the price they have to be successful in the US. I have seen this a zillion times and every time, ultimately it has gone badly."

BAD TASTE

The stock's performance is said to be leaving a bad taste in the mouths of some local institutional investors. Xero's growth means it is now worth around 5 per cent of the NZX50 index - the performance of which many local managers try to beat.

But those who don't hold shares in Xero or have only a small amount won't capture its performance, impacting how their fund performs against the index.

Xero shares are up more than 570 per cent in the last year. Stock Takes understands questions have been raised around how much of the index Xero should make up. The NZX uses a complicated methodology to work out the index weightings which includes valuation and the amount of shares in a company able to be freely traded.

Some question how much of Xero should be considered part of its free float and whether certain investors should be considered to be company insiders or cornerstone shareholders taking their stakes out of consideration.

DRIVING FORCE

Despite the concerns held about Xero's place in the NZX50 it has been a key driver of the index over recent weeks and could help tip it over the 5000 point mark.

The NZX50 is already breaking through record highs on an almost daily basis. But the 5000 point mark would be a real psychological milestone. Yesterday the benchmark closed down 0.44 per cent at 4922.69.

BUM NOTE

Analysts are predicting Chorus could slash its dividend payments in the wake of the Commerce Commission's decision to cut wholesale broadband prices by 23 per cent.

Communications Minister Amy Adams yesterday said she was seeking independent advice on Chorus' financial position and capability to deliver on its contractual obligations to the Government after the company warned the price cuts could put its ability to build the Government's ultra-fast broadband network in jeopardy.

At the same time Adams said she had written to Chorus asking the company to come back to her by November 18 with its plans following a review of its capital structure, dividend policy and possible need for a large capital raising.

Chorus had forecast a dividend of 25c a share over the next year - a cash yield of around 11 per cent.

Phillip Anderson, an analyst at Devon Funds Management, said that was definitely under threat now and the uncertainty around the company could mean its dividend was cut completely.

"It could go to zero for a few years," he said.

Mint Asset Management's Shane Solly said it was difficult to see how Chorus could maintain its dividend given the circumstances the company faced.

A dividend announcement could come from the company on November 18 as part of its report back to the minister.

Yesterday its shares closed down 21.5c at $2.10. The share price has fallen more than 30 per cent in the past year.

- NZ Herald

Tamsyn Parker

Tamsyn Parker is the NZ Herald's Money Editor

Tamsyn Parker is the NZ Herald's Money Editor. A business journalist for ten years, she has worked in the UK and NZ for the New Zealand Herald, the National Business Review and a specialist publication on investment products for financial advisors. She is passionate about helping readers learn more about to make their money work for them.

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