Stock takes: Vector shock

Another week, another regulatory kick in the teeth for the sharemarket. This one was particularly bittersweet for Vector shareholders.

In a rare reversal of the present trend, the Government shunted Vector stock out of the doldrums with a positive guidance announcement on electricity regulation. The short read-between-the-lines version was: let's not be too heavy-handed, please.

So, what's up with the Commerce Commission's timing. Is it flexing its muscles or is it just a strange coincidence?

Leaving aside the debate about whether Vector needs price control, there is still cause for concern about the way the information was released.

Is it too much to ask that the relevant regulator - whether it be a Government ministry (as in the case of Telecom) or the commission - contact the NZX first, allowing shares to be put on a trading halt while the information is distributed.

The kind of spike Vector shares have been through this week is no good for the credibility of the market, and that is not good for the country.

The regulators may not have any legal reason to care about the markets but they should - as public entities - care about New Zealand's international reputation.

Vector shares closed at $2.30 yesterday, down another 8c.


Bio buy

Brent King and his freshly listed investment company, Viking Capital, raised eyebrows with their first purchase this week: a stake in biotechnology company ICP Bio. After buying two separate stakes, Viking now has a 17.5 per cent stake for which it has paid $3 million cash and $6.5 million in Viking shares.

Biotechnology is a high-risk sort of space for King to be playing in, although ICP looks to have a good scientific pedigree.

It specialises in the manufacture of products that are used as ingredients by other biotech companies in product development.

This means ICP Bio is one step removed from the high-risk end of the sector. It uses raw ingredients such as sheep brains and cow's blood to produce vaccines and serums. It exports almost everything it makes.

It is also profitable, with forecast 2007 full-year earnings of $2.1 million. It has revenue of $22.8 million.

Like Viking, ICP is also a newby on the NZX - having listed in May - but isn't a complete minnow by local biotech standards, with a market cap of $27 million.

So it certainly doesn't look like a speculative punt on the part of King.

Viking shares closed at 28c yesterday. ICP Bio shares closed at 23c.


Global reach

Rob Mercer of Forsyth Barr is cautioning investors not to let anxiety over proposed tax changes for foreign investment blind them to the potential of international equities.

He says it is worth bearing in mind that the local market is fully valued and likely to experience further consolidation - whereas global equity markets are looking pretty sound.

International markets have the potential to deliver a return target of between 10 per cent and 20 per cent, and New Zealand investors are likely to benefit from a further weakening in the currency. It wouldn't be unreasonable for them to be even higher if the earnings story and market conditions veer to the upside.

Frankly, a lot of our stocks are overvalued in comparison with blue-chip international stocks - Glaxo Smith Kline is trading on a PE multiple of 14 while local market darling Auckland International Airport trades on a PE of 25.

It would take another five to six years of solid growth at AIA before it comes back towards that level. Both companies offer good security, although they are exposed to regulatory risk.

So are we getting good value for money?


That Feltex question

Calls for a Securities Commission inquiry into Feltex's disastrous performance keep coming. In last Saturday's Weekend Herald, Brian Gaynor suggested the commission should establish whether Feltex directors have a case to answer.

The next day the Sunday Star-Times business editor, Tim Hunter, weighed in with a similar call, reporting that the paper had written to the commission asking for a full investigation into investor losses. Hunter went on to claim that the Feltex board has "strangely" never explained its decision to increase ANZ debt funding to cover an increased dividend announced in February last year.

He asked: "Were directors so desperate to pay a dividend, as promised in the prospectus, that they risked putting the company at the mercy of the bank?"

Perhaps, before writing to the commission, Hunter could have questioned someone a bit closer to hand: namely, his boss. One of the Feltex directors at the time the earnings implosion was under way was Joan Withers, Fairfax NZ chief executive.

Withers resigned from the Feltex board in May last year.


More carpet talk

What are the implications for Cavalier if Godfrey Hirst is successful in its efforts to buy the remains of Feltex? Rodney Deacon, of Goldman Sachs JBWere, has taken a look and concludes the deal could be mildly positive for Cavalier.

The combination of Godfrey Hirst and Feltex would create a company with more than 50 per cent market share of Australasian wool carpet markets and more than 60 per cent of the Australian synthetic market. It would have estimated total sales of $750 million compared with Cavalier's $205 million.

That sounds pretty ominous. But, says Deacon, some carpet retailers will start to get nervous about relying on just one supplier, which could result in Cavalier picking up sales.

Rationalisation of Feltex's New Zealand business could lead to a loss of market share benefiting Cavalier's local wool sales.

Also the removal of competition between Godfrey Hirst and Feltex could lead to more price stability - something that would benefit the whole industry, including Cavalier. Deacon has retained an underperform/hold recommendation on Cavalier and a valuation of $3.19. The shares closed at $3.55 yesterday.


Looking into space ...

* Science fact or fiction?

The stock exchange launched SciTech index earlier this year ... which frankly sounds pretty cool in a futuristic kind of way.

It is an eclectic collection of stocks - which all have some interest in the development and commercialisation of new technology - and it is hardly the Nasdaq.

It's easy to be cynical about its size and diversity with stocks such as F&P Healthcare (market cap $2.2 billion) alongside minnows like Connexionz (market cap $6.1 million). It's also true that many on the index are not profitable, due to being in the growth phase.

But the list of 24 companies certainly does include plenty of outstanding local science.

Mark Lister, of ABN Amro Craigs, attended the NZX SciTech conference last month and has reported on the highlights.

A key theme of the conference was exposure to export markets. Most of the companies were strongly export focused and, with the domestic economy slowing and the dollar falling, this provided some cause for optimism.

He said the presentations by various companies helped reinforce positive views that ABN Amro Craigs already has on the likes of Provenco, Comvita, Rakon, F&P Healthcare and Software of Excellence. It also disclosed some interesting stories such as ICP Bio (see item at left) and Renaissance.

Renaissance is an IT company with several business components. It is the local distributor for Apple computers and several other technology brands such as Palm.

It provides IT-related education products to schools, has a business called Conduit which designs and supports websites and a PC assembly business called Insite.

Its role as Apple's distributor generates the bulk of its revenue - as well as generating the most publicity. The iPod has been a roaring success and sales remain strong. The company says it is on track to deliver net profit growth of 20 per cent for the 2006 year.

Renaissance shares closed yesterday at $1.36.


Builders force boss to check out

Talk about knocking down the family mansion. During his five years as Fletcher Building chief, Ralph Waters has always held the media full-year briefing in the Stamford Plaza on Albert St.

The dependable Aussie battler is a man of regular habits - and places. That's one of the things the sharemarket has loved about him.

However, Fletcher Construction now has its hands on the Stamford, tearing the guts out (a full refit and expansion) forcing Ralphie up the road to the Crowne Plaza on Wednesday.

The Stamford is doubling in height but we wonder if incoming chief Jonathan Ling will return there once Fletcher's workers have shifted out.