Gaynor: Heading down the road to nowhere

By BRIAN GAYNOR

The release of the New Zealand Stock Exchange's Fact Book, which is a comprehensive review of the sharemarket last year, highlights the two big problems facing the market.

These are the decline in the number of listed companies and the inability of the remaining firms to grow.

At the end of the year, there were only 132 New Zealand companies listed on the NZSE compared with 274 at the end of 1986.

In the same 15-year period, the number of listed Australian firms increased from 1147 to 1334.

The NZSE has gone nowhere in recent years.

Since the end of 1994, the number of listings has fallen from 137 to 132 and the market's total value has risen only marginally, from $42.4 billion to $42.8 billion.

Over the same period, ASX listings rose by 190, and the market's total capitalisation went from $A282 billion to $A733 billion ($344 billion to $894.32 billion).

Taking a 15-year view, the value of the New Zealand market has risen only $400 million to $42.8 billion whereas the Australian market has increased from $A137 billion to $A733 billion.

The average market capitalisation figures indicate that our companies find it difficult to grow and create wealth.

The average market capitalisation of our listed companies has risen from $310 million to just $320 million over the past seven years. The average value of ASX listed companies has increased from $A250 million to $A550 million.

The ASX is worried that it is dropping behind the world's major markets but it is doing far better than the NZSE.

A great deal of huff and puff has been made over the relatively strong performance of the New Zealand sharemarket last year. But on a longer-term basis, its performance has been abysmal.

Since the end of 1986, the NZSE40 Capital Index has declined 46 per cent, whereas the Australian All Ordinaries Index increased by 128 per cent.

Over the past seven years, the New Zealand market edged up just 7 per cent whereas Australia's rose 76 per cent.

The performance of our benchmark index has been extremely poor, even though several of our leading companies have been taken over by foreign interests. These include Fletcher Energy, Fletcher Paper, Frucor, Macraes Mining, Montana, Nobilo Wines, PDL, Progressive Enterprises, St Lukes, Sovereign, Trust Bank and Wilson & Horton.

A good way to judge a sharemarket is to compare its total market capitalisation to gross domestic product. In a strong free-enterprise economy, the value of the sharemarket should be equal to at least 75 per cent of GDP and this ratio should be growing.

In 1987 the total value of the NZSE was equal to 93 per cent of GDP but at the end of last year it was a mere 39 per cent.

The total value of the ASX rose from 55 per cent to 109 per cent of GDP over the same period.

The poor performance of the NZSE reflects the inability of our listed companies to grow and create wealth.

The Government's new business initiatives, announced yesterday, are far too timid.

They will not have any meaningful impact on the performance of our corporate sector.

Force Corporation

Force Corporation chairman Evan Davies pulled off one of the deals of the year when he renegotiated the terms of the group's exposure to its Argentine joint venture.

Under the previous arrangement, Force had to contribute $US4.25 million ($10.13 million) to the refinancing of the joint venture's banking facility, and had further guarantees up to a maximum of $US15 million.

Mr Davies persuaded his joint venture partners and the banks to reduce Force's exposure to the $US4.25 million contribution and further guarantees of only $US4 million instead of the original $US15 million.

The new agreement has taken enormous pressure off Force and most shareholders should now subscribe to the mandatory convertible note issue.

The closing date has been extended for a third time to 5 pm Friday.

Force's share price has risen from 4c to 6.1c since the announcement, as the renegotiated finance deal should be the first step in the group's recovery.

But investors may be overreacting as the $1 convertible notes, which convert on a 50 ordinary shares for every note basis, will represent 95.5 per cent of the group's fully diluted capital.

The notes should determine the ordinary share price rather than the other way around.

On the basis of yesterday's closing price, the $1 convertible notes have a theoretical market value of $3.05. Although the cinema operator's long-term prospects have improved this is an unrealistic value for the new convertible notes.

Contact Energy

One of the next big highlights on the corporate calendar is the Contact Energy annual meeting, which will be held in Auckland on March 11.

The notice of the meeting has yet to be mailed out but there is a strong possibility that it will contain at least one shareholder's resolution, probably on directors' fees and their retirement allowances.

The other big issue is the final dividend.

The company paid an interim dividend of 5.5c and an additional interim payment of 11c as part of the takeover offer but has yet to declare a final dividend.

The meeting will give directors an opportunity to explain why they recommended that shareholders accept Edison Mission's $4.14 a share offer and to update the market on current trading conditions.

This information should also indicate whether the bullish forecasts of several analysts, particularly James Miller of ABN Amro, are achievable.

During the early stages of the takeover battle, Mr Miller forecast a net profit of $138 million for the year to this September compared with $131 million last year.

This will be difficult to achieve in light of the sharp decline in wholesale electricity prices.

* bgaynor@xtra.co.nz