A judge found that retailer Myer failed to meet its obligations when it didn’t correct the chief executive’s overly optimistic profit predictions. Photo / 123RF
COMMENT:
Recent developments across the Tasman illustrate two significant differences between the New Zealand and Australian sharemarkets.
These are the aggressive short-selling attack on WiseTech Global and the successful class action case against Myer Holdings.
They don't imply that the ASX is better than the NZX, or vice versa, but they do signal that we can expect similar developments in New Zealand, particularly as an expanding KiwiSaver sector attracts more active fund managers.
WiseTech Global, which was founded by Richard White in Sydney in 1994, is a cloud-based software developer for logistic service companies in Australia and across the world.
These logistic services include customs clearance, warehousing, tracking and tracing and cross-border regulatory compliance.
The company listed on the ASX in April 2016 after issuing shares to the public at A$3.35 each.
This gave the newly listed company a sharemarket value of A$974 million at the A$3.35 a share IPO price, with founder White retaining a 51.0 per cent holding. The 1278 new IPO shareholders had a combined 17.5 per cent stake with pre-IPO shareholders, excluding White, holding the remaining 31.5 per cent.
The prospectus included pro forma revenue forecasts of A$102m for the June 2016 year and A$135m for the June 2017 year, and net profit after tax forecasts of A$13.0m for the June 2016 year and A$25.0m for the following year.
WiseTech has performed extremely well from day one, when its share price closed at A$3.89, more than 16 per cent above its IPO price.
The company's share price has continued to surge higher since listing, mainly because it achieved net earnings after tax of A$31.9m for the June 2017 year, compared with the prospectus forecast of A$25.0m.
WiseTech went on to report earnings of A$40.8m for the June 2018 year, followed by A$54.4m for the June 2019 year on revenue of A$348.3m.
Founder and CEO White, who remains the largest shareholder with a 44.8 per cent stake, optimistically wrote in the June 2019 year annual report: "The opportunity available to us is vast and while our growth rates to date have been strong, our penetration of both customers and addressable markets is still in the early stages."
He added: "With the addressable market in technology for global logistics in hundreds of billions, and the spend on digital transformation itself hundreds of millions more again, we are moving fast to leverage these components and build out our technology lead."
Investors fully endorsed this optimism, with WiseTech's share price reaching an all-time market closing high of A$36.93 on August 30. This gave the company a A$11.75 billion sharemarket value and an historic p/e ratio in excess of 200, with White's stake worth a massive A$5.3b.
WiseTech's remarkable share price run was dramatically checked on October 16 when J Capital Research (J Cap), a US registered investment adviser was established in China nine years ago, published an extremely negative report on the ASX-listed company.
J Cap, which operates under the slogan "Making short work of over-valued companies", has the following statement on its website: "Be warned. We are short-sellers. We are biased. We do our best to find and present facts, based on extensive primary research and using public sources. But we will profit if these stocks decline in value. We do not offer advice. We present our views."
A short-seller is an investor who borrows shares from existing shareholders for a fee, sells these shares on the market with the objective of buying them back at a lower price and returns these shares to the original owner when they are repurchased.
WiseTech had been viciously attacked by this US short-seller, a far more common investment strategy across the Tasman than in New Zealand.
J Cap's initial 31-page report, which was posted on the US company's website, criticised WiseTech for its "overstated profit", "overstated organic growth", "suspect European revenue growth" and inadequate "audit scrutiny". It asked the question "Who's making the money?"
J Cap's reply to that was as follows: "The insiders are cashing in on the story that WiseTech is pushing out to investors. Management and directors have sold $259m in stock since listing. Public investors will not be as fortunate. That is why we are short the stock."
WiseTech immediately placed its shares in a trading halt until Monday October 21 and on Friday October 18 it released a strong rebuttal of J Cap's allegations. The ASX-listed company's response finished with the comment: "Many of these (short-selling) attacks may largely be beyond the reach of our market regulators and operate in ways that are clearly at odds with our system of laws, our market, culture and society."
A subsequent opinion piece by Australian Financial Review journalist Jonathan Shapiro took a different view under the heading "Get Shorty: The market needs short sellers more than it knows".
Shapiro wrote that short-selling goes "some way towards balancing the bullshit ledger. The overwhelming flow of conflicted, misleading or exaggerated information tends to be directed towards boosting a share price."
J Cap published a second 31-page WiseTech report on October 20 under the heading "The Closer You Look the Uglier It Gets". The new analysis criticised WiseTech for its weak response to the October 16 report and was particularly critical of the ASX company's acquisition strategy and customer claims.
J Cap wrote: "WiseTech has spent $400m acquiring 34 companies" and this "acquisition spree looks like a frantic effort to maintain the narrative that this is a fast-growing technology business".
In addition, "We found that WiseTech has misrepresented its client relationship. They claim 25 of the top 25 freight forwarding companies as 'customers', while we found only 6 use CargoWise One (WiseTech's premier single-platform software solution)".
WiseTech's share price plunged from its pre-J Cap assault level of A$33.40 to A$26.30 when it started trading again on Monday October 21. Since then the company's share price has stabilised at the latter level, but it gives a strong message to New Zealand directors that they could be subject to a similar attack.
Short-selling is a legitimate strategy but when it is accompanied by dramatic public reports that aren't subject to any regulatory scrutiny, they can have a major and immediate impact on the target company's reputation and share price.
Meanwhile, ASX-listed companies have also been attacked for their low share price, with department store owner Myer being a recent example of this.
Myer Holdings listed on the ASX in 2009 after issuing IPO shares to 59,300 investors at A$4.10 each. The share price fell 8.5 per cent on day one, never traded above that A$4.10 IPO price and had plunged to just A34.5 cents by April 2018.
Two private equity firms sold all their Myer shares to the public for a $1.5b profit and, according to Australian media reports, quickly moved these funds to tax havens in Luxembourg and the Cayman Islands to avoid attempts by the Australian Tax Office to recover A$678m of tax and penalties.
Legal action was taken against Myer because former CEO Bernie Brookes repeatedly told investors that the company's net profit for the 2014/15 year would be higher than the A$98.5m million achieved for the 2013/14 year. Brookes' comments were contrary to a board decision that the company should not issue profit guidance.
Brookes' positive prediction came badly unstuck when the company subsequently announced net earnings of A$77.5m for the 2014/15 period and its share price plunged 31 per cent, from A$1.89 to A$1.30.
About 1500 Myer shareholders took a class action against Myer, claiming that the company had misled investors by not correcting Brookes' optimistic comments regarding the 2014/15 results. Justice Beach agreed that Myer had breached its continuous disclosure obligations by not correcting the CEO's guidance, but Justice Beach also decided that these comments didn't cause shareholders to lose money.
Although last month's judgment against Myer didn't result in any recovery by shareholders, it was a landmark decision as far as continuous disclosure and company obligations are concerned. It is a clear signal to all directors, including New Zealand boards, that they could be subject to class action if they promise too much and fail to deliver.
- Brian Gaynor is a director of Milford Asset Management.
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