KEY POINTS:
The dramatic market reaction to the Pumpkin Patch half-year result this week is symptomatic of a trend which brokers were apprehensively tipping a few weeks ago. The children's clothing retailer shed 5.4 per cent on Tuesday despite posting a 6 per cent rise in net profit.The bull run on the NZX has been so strong there was always a risk that results would fail to live up to their lofty share prices.Pumpkin Patch was one of a group of stocks - including Telecom, Fletcher Building, Contact Energy, Nuplex and Mainfreight - that hit peaks in January and early this month as the 2006 bull market ran on. All are now looking worse for wear, including Contact which reports today.But optimists can cling to a few points.One is that there is nothing wrong with a minor correction - a safety valve - to stop the market getting carried away on hype.And the takeover prospects propping up many stocks are still real. It is hard to see Contact, Fletcher or either of the F&Ps falling too far in the current M&A environment.Also, companies like Pumpkin Patch, Auckland Airport, Nuplex and even Telecom are continuing to invest in the long-term future of their businesses. The usual suspects - a high dollar, flat economy - were always going to take the edge off this round of results.Given those conditions, New Zealand companies have had a historic tendency to keep shareholders happy by pumping up the bottom line to the detriment of long-term growth.Shareholders who take a three- to five-year view of the market will take some comfort in seeing a company like Pumpkin Patch sticking to its plans.And if this is indeed a sign of local companies displaying a mature attitude towards growth, then the next few weeks may present canny investors with good buying opportunities.Pumpkin Patch shares closed up 8c at $4.39 yesterday.
NO SALE
Market talk about a Government plan to sell down part of its stake in Air New Zealand appears to be just that - so far at least.Demand for the airline's shares (they have soared from a low of $1.13 last July to yesterday's close of $2.12) is understood to have driven at least two investment banks to approach the Government about selling down part of its stake.The Government holds a 76.75 per cent stake in the national carrier. That has been diluted from 80.75 per cent by the issue of new shares to Qantas last week.There is a firmly held market view that 50.1 per cent is enough for the Government to ensure control and all that other national-interest stuff.The Government invested in 2001 only to bail the airline out when it was on the brink of bankruptcy. And with airline stocks running hot the market is itching for more liquidity in the stock.Neither Air New Zealand nor the Government is prepared to comment on the topic. And neither party will confirm or deny well-placed speculation that high-level discussions have been held.Air New Zealand maintains it is entirely a matter for Government and the buzz around the Beehive is that nothing is formally being considered and it is just not a priority for the Government right now.The bottom line is the Government doesn't need the cash and the only obvious upside would be the goodwill such a move would buy it in the investment community. For the time being punters will have to make do with the likely off-load by Qantas of its 4 per cent stake.
DORCHESTER BUY
Those watching the scrap that's brewing for control of finance company Dorchester Pacific were intrigued by some big buying action late last week. Dorchester shares dived about 10 per cent last Thursday after a profit warning but were stopped in their tracks by a mystery buyer who was prepared to take anything on offer. Over Thursday, Friday and Monday 920,000 shares - or 2.9 per cent - were turned over.It is no secret that former director Brent King is buying his way back into the company - if he was the buyer he would have had to declare it to the market.The same goes for the other large shareholders, Hugh Green and Bridgecorp.There are those who predict a showdown is coming between Hugh Green and King's Viking Capital for control of the company. The outcome may yet hinge on the 18 per cent stake held by Rod Petricovic's Bridgecorp.The market is anticipating that a cash-hungry Bridgecorp will sell out sometime this year. It looks like at least one punter has been prepared to bet that the showdown will be a lucrative one for shareholders. Dorchester shares closed up 1c at $2.13 yesterday.
DISCONNECTED
The market is overvaluing Telecom because investors are overly optimistic about the prospects for a capital return after the sale of the Yellow Pages, writes Goldman Sachs JBWere analyst Andrew White. He is sticking to his guns on a $3.95 valuation and sell recommendation on the stock despite the stock closing at $4.82 (down 9c) last night, having traded as high as $5.14 this year.There is now a "disconnect" in the valuation, White says.White argues that a Yellow Pages sale within the consensus range ($1.6 billion to $2.3 billion) implies an enterprise multiple (enterprise value/ebitda) of 5.8 to 6.3 times for the remainder of Telecom's business. That would put it in line with incumbent peers around the world - a place where, in White's view, it does not deserve to be.Telecom still faces acute challenges from the new regulatory environment. There is also risk associated with the company's new acquisitive stance in Australia, the hunt for a new chief executive and new competitors in New Zealand.Underpinning the value has been a market belief that Telecom will return a big chunk of Yellow Pages dosh to shareholders.But that is misplaced - both in terms of timing and the likely size of the capital return, White argues. Telecom will struggle to be in a position to make a major capital return any time soon from Yellow Pages because the Government is still developing fundamental details for Telecom's separation and because of the search for a chief executive, who would presumably want some say in such a decision.On the size of the return, the market is likely to be disappointed because Telecom may look to build its balance sheet capacity to cover further acquisitions and expenditure in Australia.It may also look to make further investment in its fixed-line network in New Zealand to address performance issues and counter competitor investment.The upshot of all this is that White predicts a downward price correction.
FREE MONEY
Rakon has certainly pushed the boundaries of corporate generosity in offering small shareholders a $5000 parcel of shares at the now heavily discounted price of $4.05. The shares closed yesterday at $4.40. So that's a free $432 worth of value. Anyone with a single share prior to February 28 is allowed to partake in the offer which if fully subscribed (and why wouldn't it be) could raise another $15 million for the company.The money hasn't been set aside for any specific expansion plans yet, although Rakon is growing fast so it shouldn't be hard to find something to do with it.Based on the 275 per cent return to date on the shares which were issued at just $1.60 last May, you might even argue Rakon and lead brokers UBS have been generous to a fault. Even Fisher Funds chief investment officer Warren Couillault couldn't resist a cheeky "thanks UBS" in his speech at the fund's company-of-the-year awards on Wednesday.In the end Mainfreight beat Rakon to the inaugural Fisher Funds prize, for its "impressive track record of international expansion".
AUSSIES ON TOP - AS FAR AS COMPANY RESULTS GO
The Aussies may be struggling on the cricket pitch (let's just pause to picture that McCullum six one more time) but the big Aussie stocks are giving their NZX counterparts a bit of a thumping in this latest reporting season.
Much the same as it has here, high PE (price/earnings) growth through 2006 raised expectations across the Tasman. So far most company results have either lived up to or exceeded expectations.
Positive share price reactions to results have been running at 3 to 1 over negative reactions, writes David Cassidy at UBS in Australia. That is unusually high, Cassidy notes.
"With ample liquidity flows and a benign local and global macro-economic backdrop, the market looks set to go higher."
