Continuous Disclosure: Tepid response to first IPO, Steel & Tube's shocker

Cannasouth founders Mark Lucas and Nic Foreman have been trialling and growing industrial hemp since 2002. Photo / Jason Oxenham

Continuous Disclosure is a market news column, including analysis and opinion. Edited by Duncan Bridgeman, Tamsyn Parker and Jamie Gray.

In today's edition:

• Investors lukewarm over Cannasouth
• Steel & Tube's shocker
• Tower rebuild starting to bear fruit
• Sale loss for NZX

The market might be crying out for initial public offers but the response to the first company to IPO in two years appears to be lukewarm.

Medical cannabis research firm Cannasouth registered its product disclosure statement with the Companies Office on Friday revealing plans to raise up to $10 million.

It wants to use the money to advance its research and products, investigate a site for a new commercial processing facility, hire more staff and increase its working capital, as well as paying for the float.

The company has no revenue or forecast financials but is touting its ability to secure licences and strong relationships with regulators as selling points.

A number of institutional investors spoken to by Stock Takes said they had yet to see the offer which opens on Monday.

Shane Solly, a fund manager at Harbour Asset Management, said there had been a number of businesses in the cannabis sector which had listed globally and gone really well due to the scarcity of the investment opportunity and consolidation in the market.

He said those with a focus on the recreational side had tended to perform more strongly than the medical-focused businesses.

Solly said the New Zealand sharemarket had been pretty firm of late with growth businesses taking the opportunity to raise equity while some investors had taken advantage of strong share price growth to take money off the table.

"It makes sense for a business to be coming to market now," he said.

Medicinal cannabis is a speculative investment and carries a higher degree of risk.

But Castlepoint fund manager Stephen Bennie believed it was too early in its business development phase for Cannasouth to list.

"They should be dealing more with venture capital groups that understand the market."
He said it could be three to five years away before the company even had a product to sell.

Bennie pointed to Pacific Edge, which listed in 2011 before it had a product in the market, as being an example of how tough it can be. After seven years it pulled in revenue of $3.4 million in 2018 but still made a loss of $19.6m and investors have had to keep tipping money into it.

But there is interest in the Cannasouth offer. Fat Prophets head of research Greg Smith said he had invested in the company in his personal capacity and intended to participate in the offer.

He acknowledges it's a speculative investment and carries a higher degree of risk. But he says he has been impressed by the track record of the founders Mark Lucas and Nic Foreman who have been trialling and growing industrial hemp since 2002, and the suite of licences Cannasouth has already secured.

"It's the credibility — they've been around for a long time. It's not a fly-by-night operation," he said.

Tim Preston, principal of CM Partners, which is handling the Cannasouth IPO, said so far there had been significant interest in the offer.

Highs and lows

It's been a mixed bag of results over the last week with some companies reporting rises in profits and others big falls.

ASX-listed Xero's share price hit a record high of A$61.30 on Friday after it revealed it had reached its first profit in the second half of its financial year to March 31.

But Steel & Tube had the reverse problem with its share price dropping off the back of a profit warning.

Castlepoint fund manager Stephen Bennie said Steel & Tube's turnaround was proving to be a tough ask. "This week's profit warning had heaps of bad news about current trading conditions and culminated in a downgrade to 2019 earnings guidance of well over 30 per cent.

"Perhaps the worst aspect of it was the lack of clarity in the business — even to the point that 2018 earnings have had to be restated because they had incorrectly calculated their cost of goods sold."

Bennie said it was an example of a corporate forcing shareholders to shout en mass: "You got to be kidding me!".

The saving grace for the company was that it raised capital last year so at least the balance sheet was in reasonable order.

Bennie said the re-statement of the accounts was "embarrassing" for the management team which should know the business inside out.

Steel & Tube had a shake-up in its board and management 18 months ago bringing in new chief executive Mark Malpass.

But Bennie said more change may be needed. The company's share price has halved over that time.

Glass half full?

One company which Bennie said did seem to have turned around its performance was insurer Tower.

"While it was a result that could be viewed as glass half full or glass half empty, the last few years have been solid glass empty affair, so definitely a chink of light for shareholders."

Tower independent chairman Michael Stiassny.

Bennie said the core business had started to perform better after numerous false starts, albeit helped by it being a very quiet period in regard to claim events.

"On the less rosy side, Canterbury claim provisions ticked up yet again and, just as predictably, their IT systems upgrade is still an ongoing, expensive and interminable project. But overall this result was a step in the right direction."

Tower's share price hit 80c a share, the highest since September last year.

Sale loss for NZX

Stock market operator, the NZX, looks likely to have made a loss on the sale of research firm FundSource but exactly how much of a loss investors will never know.

The NZX acquired FundSource, which sells investment fund research and data to financial advisers and fund managers, in September 2006.

At the time it provided qualitative and quantitative research on over 600 investment funds including unit trusts, personal superannuation schemes and insurance bonds.
It also provided research on finance companies and credit cards.

Stock Takes understands NZX paid around $1m for the business. This week the NZX said it had sold FundSource for an undisclosed, but not material, figure to Australian firm Zenith Investment Partners.

NZX was understood to have paid around $1m for FundSource.

With the company's auditor KPMG setting materiality at $900,000 in the 2018 annual report based on NZX's pre-tax profit of $19.7m, it would indicate a loss on the deal.
The NZX committed to selling FundSource in 2017, valuing its assets at the end of that year at $435,000.

In 2018, it wrote down the value of goodwill and other intangible assets by $352,000, and held it as a $20,000 liability as at December 31.

The FundSource business had changed under ownership of the NZX with it outsourcing its quantitative and qualitative research making it more of a data co-ordinator.

One market source said that change would likely have lost it clients.

But he said the quality of the FundSource data and the fact it went back quite a long way meant the business still had some value.

The deal is expected to settle this month.