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Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Five-year listings drought set to break

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A market upturn has encouraged a large number of firms to look at floating

Moa Beers marketing manager Sunil Unka (left) and chief executive Geoff Ross (right) enjoy a toast with NZX chief executive Tim Bennett after listing.  Photo / Greg Bowker
Moa Beers marketing manager Sunil Unka (left) and chief executive Geoff Ross (right) enjoy a toast with NZX chief executive Tim Bennett after listing. Photo / Greg Bowker

Initial public offerings (IPOs) are the lifeblood of the sharemarket, and activity is expected to pick up this year after five quiet years on the NZX.

The exchange had only 11 IPOs between 2007 and last year, the quietest five-year period in the 30 years covered by this survey.

Worldwide IPO activity declined during the global financial crisis but the NZX has been particularly hard hit with IPOs plunging 85 per cent, from 73 to 11, between the 2003/07 and 2008/12 periods.

IPOs in Australia declined by 65 per cent, from 891 to 309, between the same five-year periods.

The low level of IPOs has had a negative effect on the NZX and the domestic economy because one of the major roles of a stock exchange is to raise equity for companies to grow and expand.

We moan about poor government but the private sector is the country's major job and wealth creator, and the NZX should play a major role in raising new capital for the private sector to create jobs and prosperity.

Increased IPO activity will have a positive effect on the NZX and the economy this year and beyond.

An upsurge in IPO activity usually coincides with an upturn in share values, and the 1980s were a clear example of this.

The benchmark Barclays Index - a capital index that did not include dividends - rose 116.8 per cent in 1983 and the NZX had 27 IPOs that year compared with only five in the previous year.

Cavalier Corporation is the only 1983 listing to survive on the NZX.

There were 31 and 33 IPOs in the following two years, the most notable being Equiticorp in 1984 and Rod Petricevic's Euro-National in 1985.

None of the 64 new listings in 1984 and 1985 survived the 1987 sharemarket crash.

IPO activity accelerated in 1986 as the Barclays Index rose a further 99.2 per cent. New listings included Judge Corporation and many commercial property investment vehicles.

None of the 50 IPOs in 1986 survived the October 1987 crash.

There were an unprecedented 65 new listings in 1987, excluding a number of issues that had to be abandoned because they were still open when the market crashed.

The two largest 1987 issues were Petrocorp, where the Government sold a 16.7 per cent stake to the public, and the Bank of New Zealand, a 12.9 per cent Crown sell down.

These were the first partial privatisations with Petrocorp ultimately coming under the full control of Fletcher Challenge while the Bank of New Zealand was acquired by National Australia Bank in 1992.

There was a huge variety of new listings in 1987 including a farm owner (Agland), a merchant bank (Bancorp), a goat farmer (Cashcorp), a duty-free operator (Compass), a bank (Countrywide), an interior designer (Gaze), a coin and bullion exchange (Goldcorp), an opossum farmer (Kiwi Bear), a movie producer (Mirage), a winemaker (Morton Estate), the Turoa ski field (NZ Ski Fields), a deer farmer (Producorp), a funder of Broadway and West End shows (Strada), a travel agent (Stars), a motor lodge operator (Woodcorp) and a host of property and investment companies.

Michael Hill is the only one of the 65 new 1987 listings left on the NZX.

IPO activity dropped off substantially after the 1987 debacle, as one would expect.

Four of the six new companies listed between 1988 and 1990 went bust within a few years, including TV3 and Fortex. Air New Zealand and Macraes Mining, which is now part of OceanaGold, were the only new listings during these three years that didn't go bankrupt.

IPO activity picked up in the 1991 to 1994 period, the most notable being GPG and Telecom in 1991, Port of Tauranga in 1992 and Infratil, Metlifecare, Property for Industry, TrustPower and The Warehouse in 1994.

1994 was the first year for a long time that the NZX had several IPOs for companies that survived for a reasonable period of time without going bust or being fully acquired.

The 1987 crash continued to have a negative effect on sharemarket confidence and new listings were sparse in the 1995 to 1999 period. However, there were several notable IPOs during this period including:

• Mainfreight, SkyCity and Tranz Rail in 1996.
• Restaurant Brands and Sky TV in 1997.
• Auckland International Airport in 1998.
• Contact Energy, which attracted more than 220,000 shareholders, Ryman Healthcare and Tower in 1999.

There was a big pick-up in IPO activity in 2000 but the 23 new listings included 11 New Capital Market companies, a new cashbox company market that was unsuccessful. None of the 23 IPOs in 2000 have ever threatened to be included in the benchmark NZX50 Gross Index, which includes the market's largest companies.

The figures suggest that there was a reasonable amount of activity between 2001 and 2007, but these are deceptive because there were a large number of small NZX Alternative Market (NZAX) listings which attracted limited investor attention.

Only a few of these companies have migrated to the NZX's main board.

According to NZX records there were only 11 IPOs over the past five years, the leanest period in living memory. These were:

• Celsius New Zealand Income Fund and Geneva Finance in 2008.
• Kathmandu in 2009.
• Ecoya and DNZ Property Fund in 2010.
• Broken Hill Prospecting, Energy Mad, Summerset Group and Trade Me in 2011.
• Moa Group and the Fonterra Shareholders' Fund units last year.

This is a hugely disappointing number, although the strong performance of Summerset, Trade Me and Fonterra has whetted investor appetites.

Looking at the numbers decade by decade, there were 224 NZX IPOs between 1983 and 1992, 97 between 1993 and 2002 and only 84 between 2003 and last year.

There are several reasons for the sharp decline in IPOs including that business and investor confidence hasn't fully recovered from the 1987 crash, former chief executive Mark Weldon placed a higher priority on profitability than spending money on promoting the NZX as a vehicle for new listings, private equity offers owners an alternative exit strategy and the effect of the global financial crisis.

There are clear signs that there will be a significant pick-up in IPO activity this year, although some commentators are warning that the NZX has already had a strong run and investors should be careful.

Investors should always be cautious when investing in growth assets but the NZX is a long, long way away from the euphoria of the 1980s.

The Barclays Index roared from 357 at the end of 1979 to 3969 in September 1987, a rise of 1012 per cent in just over six years. The NZX50 Gross Index, which includes dividends, is still below its recent high of 4343 in May 2007.

Meanwhile, Auckland house prices, according to the Real Estate Institute of New Zealand, have risen 11.6 per cent since May 2007.

The recent market upturn has encouraged a large number of companies to look at listing, and investors should not be overly influenced by the large number of poorly performing New Zealand IPOs, particularly in the 1980s.

Well managed companies, with a strong business model, can produce great returns for investors.

Examples of these are Port of Tauranga, which has appreciated 2843 per cent - including dividends - since listing, Infratil up 1114 per cent, TrustPower up 2481 per cent, Mainfreight up 879 per cent, Auckland International Airport up 568 per cent and Ryman Healthcare up 1826 per cent.

A few similar IPOs would quickly entice New Zealanders back to the sharemarket.


Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

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