Chief executives need to achieve much higher long-term growth

Ten years is a long enough period to evaluate the performance of directors, management and their companies.

How have New Zealand listed companies performed over the past decade?

Have senior management deserved the substantial increase in salaries they have received over this period?

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Telecom was the biggest with a sharemarket value of $9.30 billion or 21.7 per cent of the total value of the NZX. Carter Holt Harvey was in second place and Contact Energy in third position.

The three largest companies at present are Fletcher Building with a market value of $4.4 billion, Telecom in second place on $4.14 billion and Contact Energy third on $3.4 billion.

Fletcher Building has been the best performing large cap company by a wide margin over the past decade when it has gone from 12th position, with a sharemarket value of only $1.02 billion, to the top spot.

The building and construction company made a number of astute acquisitions under the chairmanship of Roderick Deane and chief executive Ralph Waters and it benefited from a strong uplift in the residential housing market in the early part of the survey period.

New Zealand housing consents went from 20,539 in 2001 to a peak of 31,423 in 2004 but fell back to just 13,662 last year. Over the same period the total value of all new and alteration consents went from $3.88 billion to $7.01 billion and back down to $4.92 billion.

Housing construction markets have also weakened in most of Fletcher Building's overseas markets.

The group is struggling to hold its top spot on the NZX and during the week it guided June 2012 year net earnings after tax expectations down from $360 million to the $310 million to $340 million range.

Fletcher Building's management performed extremely well for most of the past decade but they are now being severely challenged by the housing market downturn.

Auckland International Airport has been the second best performing large cap company over the past decade as it achieved a value lift from $1.52 billion to $3.23 billion. As with all the other companies this performance does not include dividends and capital returns to shareholders.

The airport operates under a relatively light regulatory regime and the number of overseas arrivals through the port has increased from 1,348,200 a decade ago to 1,847,200 last year.

The company's share of total New Zealand airport arrivals from overseas has increased from 70.6 per cent to 71.2 per cent over the past decade. This clearly makes it one of the country's most important infrastructure assets.

SkyCity has had the third largest value increase in percentage terms, from $1.29 billion to $2.20 billion.

The company has achieved good momentum in recent years under Nigel Morrison and his management team.

The outcome of its negotiations with the Government regarding the New Zealand International Convention Centre will have a big bearing on whether this momentum continues.

Contact Energy has also had a 48 per cent lift in value but its recent results have been disappointing after earnings peaked in the 2006 to 2008 period. It will be interesting to see if investors sell Contact Energy shares in order to participate in the Mighty River Power IPO.

Sky TV has also had a lift in value over the past decade but its true position is complicated because of a major restructuring in 2003.

Independent Newspapers Ltd (INL), which was controlled by Rupert Murdoch, acquired 48 per cent of Sky TV in 1997. INL increased its stake to 66.2 per cent in 2001.

In 2003 INL sold its publishing business to Fairfax for $1.19 million.

Later that year INL made a successful takeover offer for Sky TV for a combination of cash and shares. Subsequently INL changed its name to Sky TV and had a major capital repayment to shareholders.

Thus the figures in the accompanying table understate the performance of INL and Sky TV since the end of 2001.

The Warehouse has been the worst performing large cap company by a wide margin with its total market value plunging by 60 per cent, from $2.01 billion to just $800 million, since December 2001.

The discount retailer's problems began in 2001 when it purchased Clints Crazy Bargains (82 stores) and Silly Sollys (33 stores) in Australia for A$105 million.

The acquisition was a disaster and since then the company has consistently lost ground.

It is now forecasting net earnings of between $62 million and $66 million for the August 2012 year, well below the net earnings achieved in its 2002 and 2003 financial years.

The Warehouse badly needs a major shake-up and this responsibility now rests with new chief executive Mark Powell.

Ian Morrice, his predecessor, was paid exceptionally well but failed to turn the struggling company around.

Telecom and Chorus are worth a combined $5.39 billion compared with $9.3 billion at the end of 2001. The company had a dreadful run under the stewardship of chairman Deane and chief executive Theresa Gattung but this has been partly corrected in recent years.

Telecom has shown that changes must be made when a business is struggling and last year's split into two separate companies has raised the total sharemarket value of the group.

Fisher & Paykel Healthcare is the other struggling large cap company.

It is consistently rated as one of the country's best companies yet its sharemarket value has declined from $1.75 billion to $1.13 billion over the past decade.

F&P Healthcare's main problem is its poor earnings performance. Group revenue has surged from $214.6 million in the March 2002 year to $506.1 million in 2010/11 yet net profit after tax has declined from $62.3 million to $52.5 million over the same period. The company blames the strong New Zealand dollar, which rose from US44c to US76 over this same nine-year period, for its poor earnings performance.

However, investors need to start asking some serious questions about the direction of the company and the performance of Mike Daniell and his management team.

Does the company need to change its business strategy in order to achieve profitable growth?

F&P Healthcare and The Warehouse are the only two companies to drop out of the top 12 largest listed companies since 2001. This indicates that the senior executives of both companies have been overpaid relative to their company's performance.

The current 12 largest NZX companies are in order: Fletcher Building, Telecom, Contact Energy, Auckland International Airport, Vector, TrustPower, SkyCity, Sky TV, Port of Tauranga, Ryman Healthcare, Chorus and Trade Me.

The total market value of all domestic listed NZX companies has increased by 32 per cent since 2001 but this is equal to only 27.9 per cent of the country's GDP while the total value of the ASX equates to 86.3 per cent of Australia's GDP.

The NZX is incredibly small because our major companies are not achieving sustained and rapid growth and the exchange is not attracting new private sector listings.

The only recent large cap private listing is Trade Me. We sold the company to Australia and have to thank the Australians for listing it back in New Zealand.

The NZX badly needs more large cap private sector listings and it is also essential that the existing large cap companies achieve much higher long-term earnings growth.

Chief executives will only justify their huge salaries when the latter is achieved.

Winners and losers since 2001
Market value of large-cap NZX companies
Telecom $9.30b in 2001 -42% $5.39b current
Latest figure is Telecom and Chorus combined
Carter Holt Harvey $2.96b in 2001 -
Acquired by Graeme Hart for $3.60b in 2006
Contact Energy $2.29b in 2001 +48% $3.40b current
Competitive sector, capacity oversupply
Lion Nathan $2.20b in 2001-
Acquired by Kirin for A$6.14b in 2009
The Warehouse $2.01b in 2001 -60% $800m current
A very disappointing performer
F&P Healthcare $1.75b in 2001 -35% $1.13b current
Unable to generate earnings growth
INL $1.54b in 2001 -
Assets sold to Fairfax. INL then acquired Sky TV
Sky TV $1.54b in 2001 +30% $2b current
Acquired by INL, changed name back to Sky TV
Auckland Airport $1.52b in 2001 +112% $3.23b current
Has 71.2% of NZ's offshore airport arrivals
SkyCity $1.29b in 2001 +71% $2.20b current
Gaining momentum under new management
UnitedNetworks $1.24b in 2001 -
Acquired by Vector for $1.50b in 2002
Fletcher Building $1.02b in 2001 +331% $4.40b current
The best large-cap performer since 2001

Total NZX value $42.8b +32% $56.7b
Total ASX value A$732.8 +67% A$1226.9b

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
bgaynor@milfordasset.com