Stock Takes
A closer look at the markets by Tamsyn Parker

Stock takes: It could be worse

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Stock Takes is back, and phew! so much has happened since we signed off last year.

The first three weeks of 2008 will not be remembered fondly by investors and the broking community alike, with the NZX-50 skidding 10.7 per cent lower, losing ground for a record 14 consecutive sessions.

With the benchmark index last year closing where it began, the New Year's tumbling prices ate into gains investors accrued in the happier times of 2006.

And they did so here in New Zealand on pretty minimal turnover. That's not a lot of trades for brokers or indeed market operator NZX to clip the ticket on.

Of course investors' paper losses only become real when they sell out, and the low turnover suggests they were sitting tight, or that there were few buyers.

Painful as the recent losses may be, and they are nowhere near as bad as those suffered in the '87 crash, it is safe to assume markets - including our own- will recover. That is unless you believe that what we've seen this year marks a fundamental shift in the workings of global capitalism, resulting in a prolonged recession for developed countries. That's what George Soros says, and he knows a thing or two about money.

The Hungarian-born American financial speculator and philanthropist famously made a fortune in 1992 by betting correctly that the Bank of England would be forced to devalue the pound.

But even Soros himself doesn't sound entirely convinced by the grim predictions he offered at the Davos forum in Switzerland this week.

"It is possible that I'm exaggerating the dangers. I've done it before."

But with the US Federal Reserve's big rate cut this week partly restoring sentiment around the world, our market has now ended in positive territory for two sessions in a row after its 14-day losing streak, with buyers returning to the market and turnover returning to respectable levels.

While brokers warn the market is not out of the woods yet, the shake-up has created some interesting opportunities.

Financial wizards of Oz

With the Australian sharemarket punished somewhat harder than our own, some of the hardest hit stocks there have been highly leveraged, intricately financially engineered and acquisitive companies like say, MFS.

MFS Group's shares are in a trading halt after slumping 69 per cent on Friday in reaction to the company's plans to raise A$550 million ($627 million) in a fire sale of assets to meet pressing debt obligations.

They are expected to fall even further when they trade again after the company this week revealed even more debt previously not disclosed.

More than a few people here in New Zealand were pleased when MFS failed in its takeover bid last year for key local tourism company Tourism Holdings.

At the time it was felt that too many cashed up Australian predators were getting too many good New Zealand businesses too cheaply and THL was too important to the export receipt earning tourism sector to allow it to fall into overseas hands.

These recent developments with MFS in Australia are surely yet another reason to celebrate MFS's inability to seal that deal. Nevertheless, MFS and associated companies still own a swag of other New Zealand businesses, including Gullivers Travel and financial advisory outfit Vestar.

You have to wonder what kind of effect MFS's troubles will have on its "commitment to ensure that Vestar's clients do not suffer any capital loss in relation to the receivership of Capital + Merchant Finance".

Vestar put millions in clients' funds into Capital + Merchant and last year's other big finance company failure Bridgecorp. MFS has yet to tell Vestar's clients exactly what its commitment amounts to.

Good value

One of the reasons cited for the local market's relative resilience, compared with, say, the ASX-200, which lost almost 15 per cent over 2008's first three weeks, is the generous dividends many of our companies pay. As stock prices fell, those dividend yields were looking even better.

Take Telecom, for example: on Wednesday's closing prices the market leader's dividend yield was 13 per cent.

Vector was offering almost 9 per cent and carpet maker Cavalier 10 per cent.

Across the top-50 a number of other stocks showed yields comfortably in excess of the official cash rate of 8.25 per cent and more than a handful offered better dividend returns than the interest rates available from banks.

"The fallback in prices has meant that the relative attractiveness income-wise of the market has certainly increased quite a bit," says Hamilton, Hindin Greene broker James Smalley.

"But you can't just look at the headline figure, you have to look behind the facade to ensure the dividend is sustainable and the underlying business is sound."

Other things to consider are whether the headline yield includes one-off special dividends, and whether the company is facing potential regulatory curveballs.

Smalley believes that is one of the reasons Telecom is trading with such a low price relative to earnings and with such a high dividend yield.

GPG going cheap

Humungous dividend yields are not the only example of pockets of value lurking on our bruised sharemarket.

Goldman Sachs JBWere analyst Rodney Deacon yesterday pointed out that Sir Ron Brierley's Guinness Peat Group is now trading at its biggest discount to net asset value in 10 years.

In a research note Deacon said GPG's net asset value had been affected lately by the New Zealand dollar's gains against the aussie and the greenback, and significantly weaker sharemarkets.

But that decline in value, 3 per cent Deacon makes it, has been outstripped by a 14 per cent fall in GPG's own share price to the $1.50 level it closed at yesterday, taking its discount to net asset value to 38 per cent.

"We believe the slide in GPG's price has been overdone. We think GPG has a good-quality portfolio which has outperformed the market and the gap between price and NAV should close. Hence we maintain our Buy rating."

Continuous disclosure

Last year, Stock Takes reported that GPG left to the newswires the job of informing the New Zealand market of the $230 million fine its big British subsidiary Coats copped from European regulators for its part in a zipper-market cartel.

NZX was not amused. Without fingering GPG, NZX moistened the bus ticket and issued a stern telling-off to unnamed companies for insufficient or poorly timed disclosure.

Given that episode, we were intrigued to see yesterday that market co-regulator the Securities Commission was to focus on "NZX's policies on the continuous disclosure rules and its administration of these, including publishing market announcements" in its annual oversight review of NZX.

Continuous disclosure rules were one of four areas of focus for the commission in its annual review.

The others broadly fell into the category of those that "were the focus of last year's review" including the operation and management of the NZAX, NZX's progress in implementing the commission's 2007 recommendations, and even some stuff it looked at the year before last. The commission expects to complete and publish its review by the end of June.

Deal of the week?

Back to the buying opportunities created by the market mayhem, particularly those that occur when an investor is forced for whatever reason to quickly offload a big parcel of stock. That appears to have been the case on Wednesday when 620,000 shares in resthome operator Metlifecare changed hands before the market opened at $4.50 a share, a 36 per cent discount to their last traded price of $7.

It seems someone was in a hurry to get out, while somebody else picked up a bargain. The size of the stake looks very similar to that held by the British-based New Zealand Investment Trust, though nobody at the trust this week was able to confirm it was the seller. By close of trade yesterday, Metlifecare shares were changing hands for $6, so the buyer is already sitting on a 37.5 per cent gain on the investment.

Pigs almost flying

Seen in Auckland on the back of a rickshaw gliding down Queen St on Thursday morning: a herd of pigs. Yes that ubiquitous porker, made famous by BNZ's high-profile branding campaign, is popping up all over.

So it came as no shock to commuters to see the pigs enjoying a ride down the main street.

Pigs were everywhere - seated close together and riding high atop the bicycle contraption for the best view. Down the street went the pigs, pedalling past the BNZ's new headquarters.

Let's hope they managed to ignore the wrecking of the historic Jean Batten building and the eyesore, noise and nightmare their bank is creating.

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