Gaynor: Junior market left to sink or swim

By BRIAN GAYNOR

The poor performance of the New Capital Market (NCM) is a major disappointment.

The NZSE initiative, which had a high-profile launch in March 2000, has failed to appeal to a wide range of companies or investors.

Only 11 companies have used it, and there has been no new listing this year. The share price of eight of the 11 companies is below the original 50c-a-share issue price, but a $1000 investment in each of the new issues would have produced a positive return of 24 per cent, after taking up all share entitlements.

This is mostly due to the strong performance of Cabletalk and Mooring Systems; the latter's performance has been boosted by a nine-for-one rights issue at 50c a share.

The main objective of the NCM is to provide an equity financing option for small to medium-sized businesses through a relatively fast and low-cost mechanism.

The NCM has three distinct stages:

* A newly formed company can raise a maximum of $1 million and list on the NCM. Shares are issued to the public at 50c each and to promoters, including directors, at 25c. Options may also be issued to promoters and the organising broker.

* The only asset of a new NCM company is cash, but it must make a major acquisition, called the key transaction, within 18 months of listing.

* NCM companies may raise further equity from the public using a simplified disclosure regime approved by the Securities Commission.

When an NCM company's share capital or market value exceeds $10 million, it automatically migrates to the main board of the New Zealand Stock Exchange.

The first two NCM companies were Mowbray Collectables and e-Opportunity, now called Selector Group.

Mowbray's key transaction was the purchase of John Mowbray's collectible businesses for $2.1 million. Subsequently, the company bought Stanley Gibbons (Australia) for $700,000, and as a result Sir Ron Brierley is Mowbray's second-largest shareholder with 14.2 per cent.

Mowbray has annual turnover in excess of $8 million and should achieve its net profit forecast, before the deduction of goodwill, of $380,000.

e-Opportunity has been the most disappointing listing by a wide margin. Its key transaction was the acquisition of Selector, a developer of computer-based psychometric tests used to assess potential employees, for $15.7 million. This valuation was endorsed by PricewaterhouseCoopers and Melbourne based Valutech, even though Selector had total revenue of only $115,000 in the 27 months before the valuations.

Selector has migrated to the exchange's main board but it is a long way from justifying its $15.7 million purchase price.

NZIJ.co.nz bought stockbroker Reuhman & Co, but earnings have fallen well below forecast. Christchurch-based RetailX has recently acquired a small retail management company with nine stores under its control.

Next to come to the market were Rocom Wireless and Submarines Australasia. Rocom's share price quickly ran up to $1.40 but it has faded since the acquisition of a wireless and mobile communications solution business this year.

Submarines is hoping to operate a deep-dive submarine tourism venture in Milford Sound, but it has been frustrated by unforeseen delays in obtaining an operating certificate from the American Bureau of Shipping.

The company's submarine can take four fee-paying customers and the target is eight dives a day at a minimum of $395 a person.

ABN Amro Craigs brought Cabletalk to the market in October. It has been the NCM's shining star and will migrate to the main board once its key transaction, the purchase of a telecommunications network provider for $15.4 million, is completed.

Cabletalk is forecasting a net profit of $2.2 million, before the deduction of goodwill, for the March 2002 year.

Compass, which is chaired by John Fernyhough, is negotiating the purchase of an independent telecommunications and internet service provider, while CACI has completed the acquisition of Micromode Medical. Micromode holds the master franchise for 17 CACI Clinics in New Zealand and owns two of the larger clinics in Auckland and Wellington.

The last two listings were Mooring Systems and Finzsoft Solutions in December. Mooring, which hopes to acquire the unique vacuum pad automated docking system used by the interisland ferry Aratere, has a market value of $5.2 million yet has raised only $1 million.

Finzsoft, which develops software packages for small to medium-sized financial organisations, is expected to report large losses for the next two years because of its aggressive overseas expansion strategy. The company has very bullish forecasts for the March 2004 year and onwards.

There are several reasons the NCM has run out of fizz and investors and potential listings have lost interest. These are:

* The market is perceived to have performed badly because only Cabletalk, Mooring Systems and Mowbray Collectables are above their original issue price. This perception is wrong because the strong performance of these three companies has outweighed the negative returns of the other eight.

* It has been a poor 17 months for similar markets around the world. The main index of the Canadian Venture Exchange, on which the NCM was modelled, has fallen from 4500 in March 2000 to 3100 - although the Calgary-based market has had 161 new listings this year and the NCM has had none.

* The Stock Exchange seems to have lost interest in the NCM after an initial burst of enthusiasm. The market receives minimal promotion and the NZSE's NCM website is very dull and lacks several important documents.

* Sponsoring brokers also appear to have lost interest and they have made little attempt to promote their companies after listing. The overzealous promotion of companies before listing and the virtual absence of a strong post-listing communications strategy is a major flaw of the New Zealand sharemarket.

* As a rule, NCM companies have not recognised the importance of communicating with the investing public. They have not used the NZSE's website to post regular information updates and the key transaction documents are often inconsistent and short on detail.

For example, CACI profit forecasts, dated February 2001, stopped at the March 2001 year whereas Finzsoft's went through to March 2006.

* Most vendors have an inflated view of the value of their business, and several NCM companies, particularly Selector and NZIJ, have paid too much for the assets they acquired through the key transaction.

* There do not seem to be many small to medium-size growth companies, with proven track records, that recognise the advantages of a stock exchange listing. Why is the Stock Exchange not aggressively promoting the NCM to this group?

* The two-stage approach, the initial public offer followed by the key transaction at a later date, is often time consuming and costly. It may be better to streamline the process by doing away with the original shell company and have the key transaction business list.

To maintain the NCM's uniqueness, the Stock Exchange will have to ensure that many of its features, including lower compliance costs, web-posted announcements, independent directors and a standard issue price with discounts for promoters are maintained.

The departure of Baycorp and Nufarm to Australia clearly illustrates that the NCM has to play a major role if the Stock Exchange is to attract small, growth-oriented companies to replace those migrating across the Tasman.

* bgaynor@xtra.co.nz