KEY POINTS:
Mark Weldon is delivering the goods for New Zealand Exchange shareholders.
On Thursday the stock exchange's chief executive unveiled net earnings of $6.4 million for 2006. This was well ahead of analysts' forecasts and group net earnings of $4.9 million for the 2005 year.
The company's share price
rose 40c to $8 immediately after the announcement. NZX shareholders have done particularly well as the 2003 IPO issue price was $3.60 a share and since then the company has had a one for eight share cancellation, with $9.69 repaid for each cancelled share, followed by a one for one share split.
Last year was a beauty with operating earnings (ebitda) rising from $1.7 million in the first quarter to $2.2 million in the second, $2.4 million in the third and a whopping $4.7 million in the final quarter.
All divisions had a strong final quarter but the market information sector was the star performer. Revenue from this activity rose from $1 million in the first quarter to $1.3 million in the second and third quarters and $2.5 million in the last.
This was because of an upturn in sales for its market information products and improved contributions from the newly acquired Agri-Fax and FundSource.
The establishment of the ECN electronic market in Australia had minimal impact on earnings because the new enterprise is equity accounted even though it is 50 per cent owned. This accounting treatment, which is based on a shareholders' agreement that doesn't give the NZX effective control, means that ECN's start-up costs are not taken into account by its largest shareholder.
Ten years ago, when the stock exchange was controlled by stockbrokers under a mutual ownership mode, it reported net earnings of only $101,000. Total revenue at the time was $6 million, made up of 34 per cent from members' fees, 29 per cent listing fees and 15 per cent market information.
Last year the NZX's traditional operations had total revenue of $23 million - 35 per cent from listing fees, 27 per cent from market information and 20 per cent from trading, clearing and settlement.
But the biggest change in the past decade has been on the cost side. In 1996 the exchange had total costs of $5.8 million with information technology accounting for 35 per cent and salary and wages just 10 per cent.
Total NZX Markets costs were $12.4 million in the latest year with salaries and wages making up 59 per cent and information technology only 14 per cent. IT costs have fallen from $2 million to $1.8 million since 1996.
A number of parties, including some brokers, have argued that the strong profit motive of the NZX since demutualisation has had a negative impact on the development of the domestic sharemarket.
This is clearly ridiculous.
Under the stockbroker ownership model the main role of the NZX was to operate an efficient market. The exchange did almost nothing to promote the market from either a listing or investor perspective - this was the responsibility of member brokers.
The mutual model was a disaster during the 1980s. The sharemarket was almost totally unregulated and a large number of companies collapsed after the October 1987 crash including three top 10 companies, Chase, Equiticorp and Renouf Corporation.
More than 100 listed companies went bust and between December 1986 and the end of 1996 the total number of domestic listed companies plunged from 273 to 130 (see table).
No other world market experienced such a dramatic decline in listings.
If any group can be accused of sacrificing the integrity of the market for its own self-interests, it is the stockbroking sector during the 1980s and early 1990s.
By the end of 1996 the total value of all domestic listed companies had increased from $42.4 billion a decade earlier to $54.7 billion but this was totally due to the listing of Telecom.
At that stage Telecom had a market value of $13.6 billion representing 25 per cent of the value of all domestic listed companies.
At the end of 1996 two other former publicly owned companies, Power NZ (now part of Vector) and Tranz Rail (now called Toll NZ), had appeared in the top 10 list.
The subsequent poor performance of the December 1996 top 10 list cannot be attributed to the NZX. Telecom has shrunk in value by 30 per cent; Carter Holt was worth only $3.6 billion when acquired by Graeme Hart; Brierley (BIL International) has left New Zealand and is now valued at only $2.1 billion; Fletcher Paper and Fletcher Energy have been sold overseas; Fletcher Forests is now called Tenon and worth only $200 million; Lion Nathan moved to Australia; and Toll NZ had a December 2006 value of only $600 million.
Fletcher Building is the only December 1996 top 10 company to maintain a primary NZX listing and to have grown in value.
One of the main features of the current top 10 list is that four of the top five - Telecom, Contact Energy, Auckland International Airport and Vector - are formerly state or semi-state owned. Guinness Peat is registered In Britain and Air New Zealand is in 11th place.
If the former state and semi-state owned companies are excluded, then the sharemarket is smaller than it was 20 years ago, both in terms of value and the number of companies listed.
The NZX is working hard to attract new listings but there are a limited number of controlling shareholders with the ambition and drive to list, particularly with private equity offering big dollars for acquisitions. Based on recent experience, the best prospects lie with state and semi-state owned companies.
Fonterra may list a part of its operations and there is the prospect of a number of technology IPOs in the months ahead. The appointment of Fonterra chairman Henry van der Heyden to the NZX board in 2005 should encourage the dairy giant to look at a partial NZX listing more favourably.
Although comparisons with December 1996 and December 1986 are depressing, the sharemarket has made good progress in recent years. This is particularly so since the introduction of the Takeovers Code in 2001, the change in the NZX's ownership structure in 2003 and the emergence of a younger and more effective group of listed company managers. The operating performance of the top 10 companies has improved dramatically and one can confidently predict that there will be more value creation than destruction among the top 10 over the next decade.
Hopefully the younger generation will put more emphasis on long-term value creation and won't accept the first cash offer from an opportunistic bidder.
The NZX is making strong progress on a number of fronts including market information, funds management (Smartshares) and registry services (Link).
Annual market turnover has risen from just $4.8 billion in 1986 to $14.7 billion in 1996 and $36 billion last year.
This represented 56.6 per cent of total market capitalisation in 2006.
It is crystal clear that the NZX has performed substantially better under the demutualised model and Mark Weldon's stewardship.
But - more importantly - the best is probably still to come.
