Brian Gaynor: NZX growth just what market needs

COMMENT

New Zealand Exchange's strong share price performance is a positive indicator for the domestic sharemarket. It shows that investors have taken an optimistic view of NZX and the market's growth prospects.

The exchange has travelled a long way over the past 15 months.

On December 31, 2002, the old stock exchange was demutualised and 10,000 new shares were issued to each broker member, a total of 3,310,000 shares. Many brokers quickly sold their shares.

On May 30 shares were split on a one-for-one basis and each original shareholder ended up with 20,000 shares, a total of 6,620,000 shares.

NZX was listed on June 4 and brokers continued to bail out at a frantic rate. On the first day 496,300 shares were traded at a price range between $4.05 and $4.50 a share and over the first 10 trading days 2.12 million shares, or 32 per cent of the company, passed through the market.

In July NZX had two capital raisings. The first was a one-for-two rights issue for existing shareholders at $1.50 a share. The second was a public offering of 2.78 million shares at $3.60 each. The public offer was oversubscribed nearly four-fold and the $3.60 issue price well-exceeded the prospectus indicative price range of between $2.50 and $3.25 a share.

NZX now has 12,685,504 shares on issue. The exchange has attracted several suitors since listing. On June 16 Computershare revealed that it held 5.6 per cent at an average price of $3.84 a share.

Since then Computershare has raised its holding to 8.4 per cent. Other shareholders with a declared interest of more than 5 per cent are Forsyth Barr (8 per cent), ING (6.2 per cent) and NZ Guardian Trust Funds Management (5.5 per cent).

NZX has continued to deliver a steady stream of good news. The company reported net operating earnings, before non-recurring items, of $468,000 for the six months to June 30 compared with a loss of $155,000 for the six months to June 2002.

The result reflected an increase in listing fees but a small decline in revenue from trading, clearing and settlement and from the sale of market information.

Chief executive Mark Weldon wrote: "We are optimistic about the prospects for the future."

The result for the 12 months to December was more impressive. NZX reported net earnings of $2.83 million, before non-recurring items of $116,000, for the December 2003 year compared with a loss of $515,000 for the full year to June 2002 (the company has changed its balance date from June to December and its last full year was the 12 months ended June 2002).

Chairman Simon Allen said the good result was due to price increases for some services and lower costs. No dividend was declared and at its current share price of $7.50 NZX has a sharemarket value of $95.1 million and a historic price-earnings ratio of 34.

This high price-earnings ratio indicates that investors have an extremely positive view of NZX's prospects. The company's ability to meet these expectations will depend on a range of factors, including the number of companies listed, share trading volume and the sale of market information.

The most important issue for a stock exchange is the number of companies listed.

Listed companies pay an initial entry fee, an annual listing fee and generate share trading fee income for the exchange.

The minimum entry fee for the NZX's main board is $10,000 and the annual fee ranges between $10,000 and $180,000, depending on market capitalisation.

The minimum entry fee for the alternative exchange (NZAX) is $7500 and the maximum annual fee is just $5000.

The main challenge for Weldon is to encourage companies to list, particularly large companies or small ones with growth potential. The NZX has only 169 listed domestic issuers compared with 361 in 1987 and 1408 on the Australian Stock Exchange at present.

In other words ASX has one listed domestic company for every 14,200 Australians whereas NZX has one listed company for every 23,700 New Zealanders.

Australian listed companies are also almost twice the size of New Zealand companies in value terms.

There are several announced and potential new listings over the next few months including A2 Corporation, ABS Canterbury, Hanover Group, King Country Energy, Kingfish, Kiwifruit International, Livestock Improvements, New Zealand Wool Services, Pacific Brands, Pumpkin Patch, Pyne Gould Corporation, Salvus Strategic Investments, Satara Co-operative and Terra Vitae Vineyards.

Many of these are small but they will generate entry fees, annual listing fees and greater on-market trading activity for the exchange.

Brokers are also working on other new listings that have yet to be made public. Market transactions are also important as far as NZX is concerned as it charges brokers for each trade. From July 1 last the fee per trade was raised from 60c to $1. The exchange also introduced a $4.50 charge for every internal share trade marriage and a value component up to a maximum of $20 a trade.

NZX had 584,745 share transactions in 2003 compared with 532,853 in the previous year. This represents a strong recovery from the depressed levels of just 117,477 trades in 1990 but is still well below the 757,922 transactions in 1987 and 725,001 in 2000.

NZX's profitability will increase dramatically if it can encourage new companies to list and raise the volume of on-market trading activity. ASX reported net earnings of A$42.5 million ($47.7 million) for the six months to December, an increase of 35 per cent over the six months to December 31, 2002, because of buoyant trading conditions and a big increase in new listings.

ASX had 8,970,000 transactions in the six months compared with 6,849,000 in the previous corresponding period. It had 96 new listings, at an average entry fee of A$64,059, compared with 53 new listings, at an average entry fee of A$70,678, in the six months to December 2002.

The NZX has the ability to double its latest earnings if Weldon and his management team can maintain momentum. The exchange reported net earnings, before non-recurring items, of $2.36 million for the second half of the year. On this basis it is reasonable to assume that NZX can achieve net earnings of $4.8 million in the December 2004 year as long as trading volumes are maintained.

Weldon and his executive team have a big challenge ahead. If they can meet this challenge then NZX shareholders, and New Zealand investors in general, will benefit.

* My column on February 18 reported on an incentive scheme for Rubicon executives that would have rewarded them for asset sales, including the Fletcher Challenge Forests forest sale.

The scheme was approved by the Rubicon board but was never implemented. At a subsequent meeting Rubicon shareholders approved a different incentive scheme.

An official of Tenon, previously known as Fletcher Challenge Forests, said: "For a limited number of senior executives, the forest sale was one of the business objectives to be achieved in order to qualify for part of the variable remuneration under the executives' contracts."

The amount of the incentive will not be known until the annual review of executive performance bonus payments is completed later this year.

* Disclosure of interests: Brian Gaynor is an NZX shareholder.

* Email Brian Gaynor