Concerns of 20% fall on NZX horizon

Does failure of Pumpkin Patch and Wynyard mean bear is knocking?

he collapse this week of former market darlings Pumpkin Patch and Wynyard Group has raised concerns among market- watchers that a likely correction in the NZX50 could veer into bear territory.

The twin failures, representing a loss of $ 1 billion in market capitalisation from the companies’ respective peaks, comes as an October surprise on the tail of a steady decline in the benchmark NZX50 index in the past two months.

Since its September 7 peak the S& P/ NZX50 index i s down 8.5 per cent, on the verge of the technical 10 per cent fall required to classify the slide as a correction and raising the possibility that a bear market ( a 20 per cent fall) may be on the horizon.

Slowly building global interest rate pressures were cited as a key point of concern by three market players — Castlepoint Funds’ Stephen Bennie, Craigs Investment Partners’ Mark Lister and professional director Rob Campbell — who were all unwilling to say the floor on the local bourse had been reached.

But is a bear knocking on the door? Bennie said: “A bear market could well have begun. I’m not expecting to see us go above the early September levels again any time soon. And if anything, we have considerable risk to the downside”.

Noting the NZX was imbalanced, heavy on interest- rate- linked infrastructure firms and light on the counterweight of growth stocks, Bennie said the tide appeared to have turned in the past two months.

“There seems to have been a sentiment shift. Interest rates starting to tick up. And that would leave our share market dealing with severe turbulence,” he said.

Lister, who said he’s been advising his clients to sell shares for some months, reckoned while the worst was not over it was not far away. “We are some way from a bear. For me there could be a few more per cent of downside from here as we look to the end of the year.”

Campbell, given the calamitous week and a torrid past few months, wasn’t willing to make a call either way: “Who knows?”

While Pumpkin Patch and Wynyard had wildly different profiles — a mature bricks- and- mortar fashion retailer and a tech startup that never got into gear for growth — their near- simultaneous failure shows the availability of easy finance and capital may be drying up.

Pumpkin Patch’s story is one of retailing struggling beneath the weight of past mistakes, namely a crippling debt load incurred from illfated expansion overseas.

By late 2014 the Herald noted the company was trading at the whim of its banker ANZ to operate as a going concern.

The company then owed ANZ $ 66 million and renegotiated covenants saw a series of milestones aimed at trimming this to $ 25m by January. While early marks were hit, the company’s accounts to June 30 show progress was reversed in the past year, with poor sales burning cash and bal- looning inventories. ANZs exposure in this 12- month period actually widened, from $ 41m to $ 46m.

Wynyard, by comparison, was a technology startup relying on specialised software for law enforcement and intelligence agencies. After launching onto the NZX in mid- 2013, and topping up its war chest in early 2014, it failed to meet revenue expectations and burned through its available cash.

Lister characterised the two failures as “company- specific”, noting many NZX companies were reporting record profits, but said the end came after investors in both firms lost patience when expecting profitability.

“Sometimes they get sick of waiting,” he said.

Lister said in some ways both companies were “a victim of disruption”, with Pumpkin Patch steamrolled by online retailers and Wynyard not making the evolution from an embryo.

Bennie said ANZ had given Pumpkin Patch too much rope, but said he understood the motivation. “ANZ had effectively become the owner of that business, and taking a loss is not a pleasant experience,” he said.

Turning to Wynyard, he said its collapse had injected a dose of hard realism into growth startups. Campbell sounded a final note of caution for bargain- hunters and urged investors to be wary of high leveraging. “Do not assume anything is cheap because it used to be more expensive,” he said.