Scales to expand lineup of agricultural stocks
PUT your thinking cap on and explain this. The New Zealand sharemarket is riding high, mirroring an economy that is going through a purple patch thanks mainly to buoyant agricultural exports that are running at the highest levels in decades.
This is forecast to continue in spite of an ongoing blip in dairy prices due to the high New Zealand dollar and higher milk production at home and abroad. Long term agricultural prospects seem excellent due to growing wealth and appetites for western foods in Asia that is boosting prices for food of all types.
People like me, who have been round the block a few times, might assume this would be an ideal backdrop for a surge in investment interest in the agricultural sector and a host of new listings in farm-related stocks on the NZX. But no: overseas investors have gained control of most major remaining farm companies, and there is only one, apple exporter Scales, on the horizon for NZX listing.
Instead, the focus has been on mainly smallish IT stocks whose founders and backers hope that with an injection of extra cash they’ll be able to mimic the remarkable success of Xero, and to a lesser extent Wynyard, on the NZX.
Timing is the key to a successful listing. The lacklustre debut of IT tourism company Serko, which listed below issue price last week, suggests it should have gone to the market back in March when a soaring Nasdaq index in New York carried Xero to a record $45 and SIL and Wynyard also hit peaks. All have since lost steam. At this time of the cycle, investors seem to be switching to companies that are making money, rather than ventures that promise to do so. They also want a sniff of dividends.
Forecasting dividends must have helped the long established Gentrack Group make a stronger start on the NZX last Wednesday. It supplies software to 150 international and local airports and energy companies including Genesis and Vector. Gentrack raised a comparatively modest $36m: existing shareholders and management are retaining a 43.2 per cent stake.
Dividends apparently weren’t mentioned from former high flyer Diligent whose shares slipped after its annual meeting in Auckland. Investors seem to be continuing to punish the company for problems including the protracted saga of amending its accounts to fit US requirements, though these are resolved. Diligent has an unusual problem for a tech company: net cash of US$60.6m in March.
A Deutsche Bank, Sydney research report last week said Diligent is continuing to generate ‘‘healthy’’ cash surpluses with pretax operating cashflows 37 per cent higher than this time last year. Deutsche Bank said Diligent is the global leader in its segment, electronic board portal, and should deliver strong earnings per share growth over the next three years. The brokers (represented by Craigs here) say it is a buy with a 12 month target of $5.80.
In this more challenging climate, it will be intriguing to see how the other IT stocks fare that are due to be listed on the NZX over the coming weeks.
Meantime investors are not spoilt for choice for agricultural stocks. Historically farm companies comprised the biggest sector on the regional stock exchanges that made up the old New Zealand Stock Exchange. Every major town had its own listed stock and station agent (if I recall Dunedin once had about six), and there were many frozen meat, fertiliser and related companies.
Now, if you stretch a point, there are seven if you count bee keeper Comvita and specialist dairy company A2 Milk. The others are PGGWrightson, Seeka Kiwifruit, Synlait Milk and Turners and Growers, and the freely tradeable shares in Fonterra.
Of these, investors are restricted to The Fonterra units – shares in the parent company can only be held by farmer members of their controlling co-op. Of the others, the three biggest are overseas controlled. PGGWrightson is controlled by China’s Agria Corporation whose founder Alan Lai was appointed chairman last October; Turners and Growers by German company BaWa, and Synlait by China’s Bright Dairy.
Scales Corporation describes itself as the country’s biggest integrated apple grower and marketer. It is Scales’ second go on the NZX: in the 1890s it was created to try to break the monopoly of British shipping companies to the UK, though its shares were restricted to sheep farmers. It was a cherished part of Alan Hubbard’s empire, but was sold to private equity company Direct Capital when South Canterbury Finance failed. Direct Capital are reducing their stake to between 20 and 30 per cent with new equity of $30m being raised.
The surprise cancellation of the Hirepool float may add interest in Scales, considered an industrial stock. The price, between $1.60 and $1.85, is to be set next Wednesday.
Apart from being the country’s biggest apple grower, Scales handles perishable food and operates coolstores. Its profits have risen strongly over the past two years. According to Scales, Europe no longer dictates the price of apples because of rising demand from Asia, while once tough competitor Chile focuses on Latin American markets.