Continuous Disclosure is a market news column, including analysis and opinion. Edited by Duncan Bridgeman, Tamsyn Parker and Jamie Gray.
In today's edition:
• What do insider share sales really tell investors?
• Air NZ still on track for capital return
• Local sharebroker quits NZX
Share sales by insiders have been increasing in Australia, giving investors a tip as to what may lie ahead, but the picture in New Zealand is less clear, according to analysis from FNZC.
The share trading activities of "insiders" - those intimately involved in listed companies - are closely watched by the investment community as they can become harbingers of things to come.
FCNZ, in a research note, said past experience suggested that insider share sales in Australia do lead to sub-par future performances.
"The implication is that investors should take into account significant insider share sales for Australian equities," it said.
"The financial state and size of the companies may be relevant context alongside the insider sales."
A spate of Australian insider sales noted in a recent Australian Financial Review article highlighted the growing number of CEOs and directors of listed Australian companies selling down stakes in the companies they work for.
Recent examples included Xero founder and non-executive director Rod Drury selling two million of his shares in the company, and significant share sales by directors of Bubs Australia, Treasury Wine Estates, and dual listed a2 Milk, among others.
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Insider share sales often raise interest because of the view that insiders have better information about the prospects for the companies that employ them than outside investors do.
Sales, therefore, may be interpreted as the insider seeing worse prospects ahead and seeking to reduce their holdings before that's reflected in the equity price.
FCNZ noted that there were many reasons why a company director or executive may sell their shares – meeting relationship breakup obligations, large personal purchases, retirement, prudent rebalancing of their personal investment portfolio, among others.
"But, even in these cases, the timing of share sales may be determined by when the insider thinks the price is likely to be most advantageous to them."
Studies suggest that insiders often profit from their sales, suggesting they use deeper understanding of the company that employs them to their advantage.
"However, evidence that outside investors can profit from acting on the signal of insider share sales is mixed, with most studies concluding there is generally little benefit in selling on the news after accounting for transaction costs."
FCNZ used information on insider transactions since 2008 to test subsequent returns over one month, three months and 12 months after insider sales.
The brokerage examined excess returns over the broader New Zealand and Australian equity markets to remove the effect of returns solely attributable to broad market movements.
Early on, its analysis suggested that there was greater information value from larger transaction sizes.
For Australia, FCNZ only considered transactions above A$10 million, while for New Zealand it focused on transactions above NZ$2m.
For all three post-insider sale periods, 58 per cent of the time the company's equity prices underperformed.
"Given the relatively large number of observations for Australia and the quantum of underperformance, we conclude that there is likely to be some information in significant insider share sales for the Australian equity market."
However, the picture was different for the New Zealand market.
"Given the relatively small number of observations for New Zealand and the relatively small differences from market returns, we conclude there is no compelling evidence that significant insider sales have information about future equity price underperformance here," FCNZ said.
"It is possible that the threshold for New Zealand insider equity sales should be much higher than the NZ$2m that we used before it imparts significant information about future equity price prospects.
"In the very small number of instances of insider sales exceeding $10m, subsequent one-month, three-month,and twelve month returns underperformed the market by at least as much as that observed in Australia," it said.
It appears that for the Australian equity market, significant insider share sales can indicate future underperformance of the shares to which they relate.
"While not all insider sales lead to future sub-par equity price performance, we found that it was a good indicator nearly 60 per cent of the time."
Air NZ's special surprise
Amid all the attention on Air New Zealand's aircraft capex programme (and earnings downgrade) some investors may have missed the focus on future dividends.
Air NZ spent some time at its recent investor day talking about a path to potentially returning capital to shareholders - the New Zealand Government, of course, being the largest.
"We are committed to disciplined capital deployment, with a focus on strong shareholder returns," the company said while noting that excess cash could be returned to shareholders via a share buyback or special dividend.
The timing is interesting given the airline revealed its second earnings downgrade for the year, saying its June 30 earnings could be up to $60m lower than forecast in March, due largely to higher fuel prices.
Air New Zealand said it was now targeting 2019 earnings before tax of at least $340m, having previously guided in the range of $340m to $400m.
That March figure was down on its 2019 earnings guidance of $425m to $525m, made in August 2018.
The company also announced it would spend up to $4.1 billion on eight new Boeing 787 jets, allowing it to open up longer non-stop routes, such as Auckland to New York.
Forsyth Barr analyst Chelsea Leadbetter, a Senior Equity Analyst at Forsyth Barr in Wellington, said in a research note the softening demand backdrop and higher fuel costs meant a step-down in profitability in the 2019 financial year, but a stable dividend offered share price support.
With balance sheet gearing at the top end of management's 45 per cent to 55 per cent target band that is likely to fall ahead of the new aircraft capex from the 2023 financial year, she noted.
However a relative capex "holiday" in 2021 and 2022 provides scope for special dividends, she said.
RIP Woodward Partners
Wellington-based boutique broker Woodward Partners has decided to pull out as an NZX participant, citing rising costs and competition from passive investment funds.
Managing director Neville Todd says the firm will still exist with a reduced team – senior equity analysts John Kidd and Simon Wilson have recently moved on.
But Woodward will no longer act as a sharebroker trading on the NZX.
Woodward was an advising participant only, and settled trades through Craigs Investment Partners.
Todd says the decision to revoke membership of the NZX was due to several factors but basically it was difficult for a small player to compete as sell-side margins continued to decline.
"The importance of global passive funds in a low interest rate environment has meant that the dynamics of the market has changed."
"It's not cheap. And compliance is not cheap so you have to weigh all those things up and look at the economics of what you are doing … do we continue down this path or are we better off focusing on working with companies, doing research on companies and the like?"
Woodwoard's recent investment banking work includes arranging a block trade in TIL Logistics and a $7m placement of new shares in Pacific Edge.