Jamie Gray is a business reporter for the NZ Herald

Capital Markets: IPOs in short supply despite boost

New Zealand is an attractive place for capital, which is fuelling the market, but there are few initial public offers on the horizon, reports Jamie Gray
Honey producer Comvita has found a "sweet spot" in the market.
Honey producer Comvita has found a "sweet spot" in the market.

Equity markets here and around the world have been strong, driven in no small part by interest rates that in many countries are close to zero.

That has meant investors have been piling into sharemarkets in search of yield and New Zealand, with its high proportion of dividend-paying stocks, has been singled out by investors for special attention.

The surprising thing has been the length of time central banks have clung on to their highly accommodative monetary policies, which has meant sharemarkets have tended to carry on stronger for longer, says David Gibson, co-head of Deutsche Craig's. "We get the jitters every now and then, as we did in February over worries about China," he says.

"Since then, we have had a very strong rally and global markets have remained strong."

Gibson concedes the market, from a price earnings (p/e) perspective, looks pricey.

He says that on the face of it, the market looks expensive at an average p/e multiple of 20 times -- which is 35 per cent above the 20-year average of 14.8 times.

However, the premium to historical price earnings has recently been skewed due to the emergence of high p/e tech companies and the high concentration of the so called "gentailers" -- Meridian, Genesis and Mighty River Power.

"We are not expecting a major New Zealand-specific market correction, especially given where interest rates are," Gibson says.

"New Zealand companies' earnings performance has been solid. We are one of the strongest-performing markets and our price-earnings ratios and multiples look high. However, you need to back out of that equation the unique characteristic of the New Zealand market -- the fact that such a high proportion of our market is in the (high dividend-paying) power generator/retailers, with some technology as well," Gibson says. "If you back those out, we still look strong."

New Zealand is an attractive place for capital at the moment because of the stable political backdrop.

Companies are performing well and the official cash rate -- at 2.25 per cent -- still has room to move on the downside; many other countries do not have the same luxury.

David Gibson, co-head of Deutsche Craig's.
David Gibson, co-head of Deutsche Craig's.

Gibson says there has been strong support for New Zealand stories. Those companies involved in high-value agriculture with exposure to China -- such as Comvita and A2 Milk -- have enjoyed a sweet spot in the market.

Food remains a strong theme for investors, as evidenced by the success of the Tegel float. "Hopefully in the next five years a lot of other companies -- food stories with an Asian focus -- will emerge," Gibson says. "To our minds there is a shortage of supply emerging for these quality businesses.

"We expect IPO levels to remain relatively light -- not through a lack of demand -- but we just can't see a lot of companies lining up with a lot of scale," he says.

"I don't think that we will see many more IPOs this year, but I do think we will see a surprising number of mergers and acquisitions," Gibson says.

"We are going through a slight merger and acquisition wave at the moment, which I think will continue through into the end of this year."

Gibson says dairy prices were the potential overhang, especially given the impact they might have on the banking sector if conditions remain depressed.

I don't think that we will see many more IPOs this year, but I do think we will see a surprising number of mergers and acquisitions.

Corporate activity levels continue to rise with the recent Z Energy/Caltex deal being a case in point.

Gibson says private equity firms have been very active and are flush with cash, supported by cheap funding from the debt markets.

In the "hot" sectors -- health supplements and honey -- high multiples are being paid.

The media sector is attracting a lot of interest given the big changes taking place at NZME, Fairfax and MediaWorks.

Gibson says the collapse of electronics retailer Dick Smith -- which was brought to the market by private equity -- has made investors cautious about private equity funds seeking to exit retail businesses.

In the domestic credit markets for the year-to-date, aggregate maturities of bonds have been less than total new offers, creating the first significant positive new issuance in about four years.

Gibson says there is a "reasonable pipeline" of new debt issues ahead.

- NZ Herald

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