Stock takes: Fact and fiction

Rumours and market chatter around Allan Hubbard's South Canterbury Finance which surfaced late last week have yet to fully die down.

Some have proved laughably wide of the mark but there are intriguing strands.

Without getting into the more fantastical version, the central tale, told to a Stock Takes colleague, was that SCF had some issues around its lending to the dairy sector.

SCF chief executive Lachie McLeod was last week dismissive of both the substance and source of the rumours, telling Stock Takes that lending to the dairy sector was but a part of SCF's diversified book.

McLeod rightly pointed out the source of that particular rumour was himself in a fairly desperate situation.

We'll buy that, but eyebrows have also been raised by the rising yield on SCF's NZDX-listed December 2012 bonds which was yesterday more than two percentage points over their 10.43 per cent coupon.

A source close to SCF last week suggested the reason for the rising yield, or falling market price of the bonds, was that one particular holder of a substantial chunk, who was exposed to Queenstown's troubled Kawarau Falls development, was trying to offload them all at once in a bid for some badly needed cash.

That rings true as another, separate source told us he was offered what sounded like the same securities earlier the same day.

A fixed-interest specialist Stock Takes spoke to last week was not overly alarmed by the pricing of the bonds but had some admittedly fairly minor concerns about the company around its investment in PGG Wrightson.

Its $25 million loan, or more specifically the option to convert it into PGW equity, was hardly the most conservative type of investment, he said.

That had caught the eye of those in the market who give some credence to the previously reported speculation around a potential tie-up between SCF and Marac, which is working towards becoming a registered bank.

BOND ON THE RUN

One or two commentators have made the point that the standard of disclosure and its oversight on the NZDX listed debt market appears to be somewhat less rigorous than that on the NZSX equity market.

While big swings in share price on the NZSX usually trigger a "please explain" request, sizeable swings in pricing on NZDX-listed securities generally don't.

Two interesting bond price movements which spring to mind are on the instruments issued by Blue Star Print Group and AR Whitcoulls, which is now known as REDgroup.

Blue Star's 2012 bonds last changed hands at a yield of 49 per cent while the Whitcoulls bond last went at 28 per cent.

The pricing for both suggests that investors in these securities see a fair chance the companies will have problems making the repayment on maturity.

To be fair, the increase in the Blue Star yield is not surprising given the company has warned it may face difficulties making interest payments, although it has paid up so far.

There's been nothing along similar lines from REDgroup, though.

It is interesting to note that both businesses are owned by private-equity outfits, with Blue Star 84 per cent held by Sydney-based outfit Champ and REDgroup owned by Pacific Equity Partners.

Stock Takes can't help wondering whether this blow in yield on debt associated with private-equity deals is a taste of things to come.

NO COMMENT

The new board at NZX takeover target NSX is wasting no time in shaking up the second-tier equities market operator.

In just over a week since dumping the previous NZ-friendly board, it has rid itself of chief executive Robert Bladier and new director and significant shareholder Steven Pritchard told Stock Takes: "We're well on the way to exceeding our original target of A$2 million [$2.54 million] for recurring costs being taken out of the business which won't affect any of the operations."

Pritchard said that under previous management NSX had been bleeding cash, spending hundreds of thousands on superfluous consultants' fees, something like A$500,000 to A$600,000 on dealing with NZX's offer alone and a further A$100,000 on a legal bid to block Pritchard and other shareholders from getting on to the board.

NZX's A$11.78 million offer will go to a shareholder vote on June 19 and between them the board or shareholders it represents have more than enough votes to effectively block it as at least 75 per cent support is needed to remove a 15 per cent shareholder cap in the NSX constitution.

Pritchard and his board colleagues have between them enough votes to decide this easily. How does he see NZX's chances?

"The agreement that the previous board entered into with NZX means that if the current board adversely comments on the NZX transaction, we have to pay NZX a break fee."

SIR RON TO HANG ON

Reports had it that Guinness Peat Group chairman and New Zealand business legend Sir Ron Brierley has postponed plans to step down from his company next year.

Sir Ron was reported as telling GPG's annual meeting in London that the global economic situation had put those plans on hold.

Having spoken to a GPG insider, Stock Takes understands Sir Ron's retirement has been scheduled to coincide with the "return of value" to shareholders the company has planned for some time.

The credit crunch and more particularly its impact on GPG's chances of divesting key investment Coats Group mean this is going to take longer than expected.

Stock Takes understands that, as suspected, the GPG-hosted analysts' tour of Coats' South China operations last year was indeed intended to help build interest in the company from potential buyers.

Stock Takes hopes the market improves soon enough that Sir Ron will be able to free himself from his GPG commitments to enjoy some quality time in retirement on the huge new pleasure craft he is having constructed.

RATING ANGST

Given all the pre-Budget angst around the prospect that our Standard & Poor's AA+ foreign-currency credit rating might be cut just as the Government needs to go to the market to borrow tens of billions to fund fiscal deficits, Stock Takes was surprised to hear currency strategist Derek Rankin this week refer to the appeal of New Zealand's AAA-rated Government stock.

A quick call to Treasury's Debt Management Office, which will be raising $8.5 billion over the coming year, rising to $15 billion in the 2011/2012 and 2012/2013 fiscal years, confirmed that the vast majority of the stock it issues is denominated in New Zealand dollars rather than foreign currency, and the relevant rating is the local currency one at AAA which nobody appeared to be bothered about. So S&P, Treasury, the Government, the media and the public got worked up all over nothing?

No, says DMO treasurer Philip Combes. While most of the new debt will denominated in kiwi dollars and technically rated AAA, the vast majority of it will be bought by overseas investors who regard the Government's foreign currency rating as the truer indication of their chances of getting their money back.

FULL SPEED AHEAD

Wheeled boat maker Sealegs trumpeted record operating revenue of $11.5 million when it released its full-year result last week, an increase of 20 per cent on the previous year. When a company highlights its operating revenue, earnings or "underlying profit", it often appears to be an attempt to distract focus from a woeful bottom line.

So how was Sealegs' net profit? Actually it was a loss of $5.76 million against a loss of $1.7 million last year. Last year's deficit was itself a deterioration from the previous period's loss of $1.1 million.

Last year the company blamed the widening loss on the adoption of international financial reporting standards requiring staff share options to be valued and expensed.

This year it was "mainly attributable to the International Financial Reporting Standards treatment of a one-off cost of cancelling the Employee Share Option Plan".

Still, the result hasn't done any lasting damage to the company's shares. They fell 2.5c to 10c in the days after the result but have recovered all that and more, closing at 12.9c yesterday.

TROUBLED WATERS AT TOP OF FLETCHER BUILDING

One of Stock Takes' colleagues hears a degree of disquiet emerged in fund management circles this week about Ralph Waters' appointment as chairman of Fletcher Building.

"It's all a bit parish pump, too parochial," commented one senior investment specialist, questioning how it was that the ex-chief executive was about to become head of the board. Although no one was questioning the job Waters did as CEO in the boom times earlier this decade, they were asking if the net could not have been cast a little wider.

Other market watchers reckoned Waters' stint at Fletcher and his previous roles demonstrated he was an outstanding businessman. One suggested any disquiet at his appointment as Fletcher's chairman might be fuelled by the previously reported view that Fisher & Paykel Appliances' board, on which Waters also serves, failed to detect and avoid in a timely fashion the pitfalls that have forced the company into the arms of Chinese rival Haier.

Another, who personally has no issues with Waters' appointment, says having the former chief executive become chairman is generally frowned upon as it's hard for the new boss to play their own game properly with their predecessor constantly looking over their shoulder.