Tamsyn Parker 's Opinion

Money Editor for NZ Herald

Stock Takes: Tech wreck?

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Technology stocks in New Zealand are giving investors a roller-coaster ride this year.
Technology stocks in New Zealand are giving investors a roller-coaster ride this year.

Technology stocks have been through a roller-coaster of a ride this week leaving investors wondering if it's the start of a crash or just a temporary blip.

Bernard Doyle, JBWere's head of investment strategy, believes it's a shake-up rather than a burst bubble and says it's important to keep it all in perspective.

While the falling tech stocks have had a big profile in New Zealand, those that have fallen in the United States make up only around 15 per cent of the technology sector which as a whole is around 15 per cent of the public market.

Doyle says it's the internet stocks and software-as-a-service type businesses which have fallen the most as those stocks were also valued at more than double the rest of the market. The US technology sector as a whole still has a lower valuation than the rest of the equity market.

Doyle says it doesn't have the hallmarks of a meltdown that spills over to the wider sector and causes investors to run for the hills in droves.

The problem in New Zealand is that most of our technology stocks are those software-as-a-service types.

BIG AND SMALL FALL

Xero is a prime example of this type of stock. Its shares closed at $31.50 on Wednesday - the lowest the company has traded at since December last year and down from a March 10 peak of $44.98.

That's a nearly 30 per cent decline although it has since recovered some ground, closing up $1 at $33.10 yesterday.

SLI Systems has fallen off a similar amount, dropping from its $2.85 peak in January to close at $1.95 on Tuesday - a drop of 31.6 per cent - before recovering some ground to close at $2.05 yesterday.

Wynyard Group has suffered less of a decline, falling 23 per cent from its recent peak of $3.20 to $2.45 on Tuesday. It closed at $2.50 yesterday.

But the stock to feel the most impact has been tech minnow GeoOP. Since its recent peak of $3.15 in January it plummeted 59 per cent to $1.39 on Tuesday, before recovering to close at $1.50 yesterday.

The company listed late last year and is headed by Leanne Graham - a former Xero staffer.

TIMELY REMINDER

Doyle believes the tech sector decline is a good wake-up call.

"Once people have had a scare like that they are far less likely to make blue-sky bids."

Doyle reckons some of the more aggressive bids are likely to disappear now meaning the stocks probably won't bounce back up as quickly.

One factor about the tech sector globally is that companies tend to rise and fall very quickly, he says.

"Time is a very important factor in technology. If you haven't made an impact in a certain amount of time you can guarantee someone else is coming up with a bigger and better product."

But he is still positive on the tech sector as a whole with expectations it will benefit from capital expenditure in the US and other markets and higher dividend growth than other sectors.

"If we exclude the bubble years and aftermath [1998-2003], the tech sector has historically traded at a 10 per cent premium to the US equity market.

"A rerating to that premium over the next two years, for example, would imply [about] 20 per cent per annum total returns," Doyle noted in an investment snapshot this week.

TECH FLOATS

What the scare might put paid to is more technology floats on the NZX for the time being. With Genesis Energy soon to be out of the way (its public offer closes today and the company is expected to list on April 17) other companies will be lining up their listing timetables.

There has been much talk about a number of small tech firms following on from last year's raft of tech listings.

Serko, CricHQ and Pure Seo have all talked about plans to list but so far no formal confirmations have emerged.

IN THE PIPELINE

The NZX told stakeholders this week that it has at least six companies preparing for an initial public offer and has received documents from four.

One of those will be Genesis which is pretty much a done deal. Another contender is likely to be Hirepool.

The equipment hire company is said to be planning visits to fund managers in New Zealand and Australia next week as part of a pre-initial public offer roadshow for the $300 million float.

A broker source noted that the presentations were expected to be light on financial details but that management were "expected to point out that Hirepool is New Zealand's largest equipment rental business, at a promising time in the country's construction cycle".

Hirepool is ultimately owned by Australian private equity firm Next Capital.

AIMING HIGH

The NZX's new head of markets, Aaron Jenkins, believes New Zealand's sharemarket should aim to catch up to other economies of similar size.

He doesn't believe it is relevant to compare New Zealand's market to Australia where the largest listed company, BHP, is worth two and a half times the New Zealand market.

Instead he believes New Zealand should compare itself to countries such as Israel, Denmark, Belgium and Finland.

In 2011, New Zealand's market capitalisation as a percentage of GDP was around 29 per cent while Israel's was around 60 per cent. Finland and Denmark sat around 55 per cent and Belgium 45 per cent.

New Zealand closed some of that gap last year with 10 new IPOs increasing our ratio of market capitalisation to 40 per cent compared to a 65 per cent average for those four other countries.

But catching up would mean raising an additional $54 billion - roughly equivalent to five Fonterras or 540 Snakk Medias.

TOWER'S FALL EXPLAINED

An investor has requested an explanation on the recent share price decline for insurer Tower. The company's stock price has fallen from over $2 to around $1.53 since July last year.

Forsyth Barr analyst John Cairns notes Tower has undertaken a share buy-back and a dividend pay-out over the time the share price has fallen and these need to be factored into the company's market capitalisation. They amount to $52.6 million and $12.4 million respectively.

Adding those amounts to the market cap post buy-back (178.14 million shares at $1.53 = $272.55 million) still leaves a difference of more than $76 million in Tower's value.

Cairns said that difference was attributable to market concerns over the viability of the remaining small sub-scale general insurance operation and an increase in the amount of regulatory capital required to be held by the company.

Tower's shares closed at $1.565 yesterday.

- NZ Herald

Tamsyn Parker

Money Editor for NZ Herald

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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