Stock Takes: Cool on Xero

Fonterra's first-half result was good for farmers, but not for the company, an analyst says. Photo / Christine Cornege

Goldman Sachs has started its coverage of Xero with a sell recommendation. Previously only two broking firms have offered research on the cloud accounting software provider, but its move into the NZX10 and into a range of international indices means there will be a lot more demand for information on its stock.

Goldman analyst Robbie Aitken said in a note that while his company acknowledged Xero's strong growth prospects and product quality, investors were paying for significant delivery in end markets.

"Previously Xero provided a less expensive option to play the growth in cloud accounting software, but at current levels given we believe investors are already paying over the odds."

Aitken put a valuation on the stock of $32.23 a share. Xero shares closed at $44.98 on March 10 but have fallen in the last week. Yesterday they closed down 80c at $37.20.

Genesis takes a toll

Xero is among several growth stocks that have declined in value over the past few days as investors are said to be taking profits before the close of the Genesis Energy share offer.

Pacific Edge, Diligent Board Members Services, A2 Corp and Xero were all down on Tuesday and had a mixed bag of results on Wednesday.

The NZXSciTech Index has fallen since last Monday and is down roughly 10 per cent from a peak of 3483 on January 22.

Stock Takes can't help noting that on one hand the Government is trying to encourage investment in growing New Zealand companies, but is offering Genesis a very big carrot.

Genesis is at the opposite end of the scale to Xero, with low or no growth prospects as power users become more efficient and big industry moves overseas.

But it does come with a very attractive dividend yield and bonus share offer.

The share price at $1.55 is also seen to be a good deal, as four out of five analysts valued the company higher than that.

The Government is determined to make sure its last asset sell-down is a winner.

Diligent's US interest

Diligent's share price decline after its annual report delays hasn't been enough to put off one international investor.

American fund manager Wasatch snapped up a 5.06 per cent stake in the corporate board document service provider this week paying $27.44 million.

That might seem a lot of money to the average Kiwi investor but it's only a drop in the bucket for the Wasatch International Growth Fund which had US$1.7 billion (nearly $2 billion) in net assets at the beginning of this month.

According to Wasatch's website it focuses on pursuing the smallest and hardest-to-reach companies.

Attracting investors like Wasatch could be the key to Diligent's move on to the Nasdaq although if it chooses this long-rumoured path it will have to make a decision on whether to stay listed in New Zealand where most of its investors are based.

Shares in Diligent closed at $4.22 yesterday.

Sour milk

Morningstar says Fonterra's first-half result was good for farmers, but not for the company. Analyst Nachi Moghe this week trimmed his forecasts for the Fonterra Shareholders' Fund but maintained his fair value estimate on the fund's units at $6.

Moghe said Fonterra's first-half results were disappointing, but not surprising because of the significant increase in milk powder prices, which is detrimental to returns for the fund.

"We expect the second-half results to be weaker than the first half because of high commodity prices and cost pressures for the branded goods business," he said.

Fonterra's dividend for the full year is expected to be 10c a share, down from 32c a share, because of lower operating cash flows and the need to protect its balance sheet from any further volatility in milk prices.

The lower dividend comes as farmers are due to be paid $8.75 a kilogram of milk solids up from $6.16 a kilo in the previous year.

But Stock Takes notes the latest fall in dairy auction prices could indicate a better picture for Fonterra Shareholders' Fund investors down the track.

Units in the fund closed up 14c at $6.29 yesterday.

Bode departs

Industry stalwart Rob Bode is leaving First NZ Capital at the end of next week. Bode has been head of research at Credit Suisse/First NZ Capital for 15 years and before that held a similar role at Merrill Lynch/Hendry Hay for almost 14 years after joining Hendry Hay in the mid-1980s.

Bode reckons he is the last sell-side analyst still around who was also in the market at the time of the 1987 crash. But he's not looking at retiring yet. He plans to take a gap year off before looking around for new challenges.

"I will be looking for greater flexibility to pursue activities that a full-time commitment to the broking industry hasn't allowed."

Those options could involve directorships or working with high-growth companies in preparation for listing.

Kar Yeu Yeo is taking over as head of research at First NZ.

Phipps' Forte

John Phipps has left AMP Capital to set up a new boutique fund management firm called Forte Funds Management.

Phipps, who was deputy head of equities at AMP, hopes to launch the prospectus for the company's first fund within weeks.

The fund will predominantly invest in Australian and New Zealand listed companies, and the portfolio will have around 10 to 15 stocks.

Phipps said he planned to target high net worth investors and wholesale clients with a minimum investment of $250,000.

A plethora of boutique fund managers have been set up in New Zealand in recent years, most in the hope of getting their hands on some KiwiSaver cash to manage.

But Phipps said he would not be targeting KiwiSaver money as the fund's performance would probably be too volatile for that market.

Darrell Briggs, from Harbour Asset Management, will also join the Auckland-based firm and another appointment is also on the cards.