Richard Inder: Pessimism carries market price

Lighten up was the simple message from two of New Zealand's most important companies this week - and with good reason.

Fletcher Building chief executive Ralph Waters delivered the first salvo.

The country was in danger of talking itself into a recession, when in reality the picture was a lot better. Underlying demand remained strong, Waters said at his Wednesday half-year earnings presentation. The slowdown was necessary because the economy did not have the capacity to continue at the break-neck pace of the past few years.

"This country has just enjoyed the biggest boom it's ever seen," he said. "We are not staying awake at night."

Waters' views were yesterday echoed by NZX chief executive Mark Weldon. New Zealanders were too quick to get pessimistic.

"The risk premium New Zealanders place on New Zealand listed companies is quite different from the way offshore investors are willing to pay higher prices."

Interest charges, up after the Reserve Bank's increases to the official cash rate, would hurt. But the listed market was underpinned by demand from sectors such as dairying and the expansion in Government spending.

"The government sector charges on impervious to interest rates or exchange rates, and it is a big driver of business for the listed sector. The rural sector still has commodity prices quite high and exchange rates have come back 3 per cent or a little bit further."

It would be easy to dismiss the two executives' views as naked self-interest - talk to lift the shares of Fletcher Building and NZX. However, New Zealand companies are going cheap.

The sharemarket reaction to the Fletcher result illustrates the point.

The downturn in the Australasian residential market and the troubled international steel market knocked by a fifth underlying earnings at Fletcher's core building products division.

Yet the company still delivered a 4 per cent increase in earnings per share. And it upgraded its forecast full-year operating earnings, continuing a record of delivering returns on equity and funds employed that are in the top decile of the industry.

The reaction? Its shares fell 20c and, even before this fall, Fletcher's shares were trading at a sharp discount to its international peers.

Fletcher's earnings have grown strongly during the past few years, so investors may be cautious about what it can deliver sustainably. And New Zealand is at the bottom of the world, off the radar of the really big investors in London, New York and Tokyo.

But it still seems like pessimism upon pessimism.

Many New Zealand companies are in the same boat.

Meanwhile, despite the talk of the downturn, the appetite for takeovers remains strong. Billionaire Graeme Hart is in the last stages of taking control of Carter Holt Harvey, ING Property Trust is bidding for Calan Healthcare Properties, AMP is still bidding for Capital Properties and, if sentiment among corporate layers and investment bankers is any guide, more deals are in the wind.

New Zealand has an interest in a fairly priced market.

A failure to price Fletcher at least in line with its international peers hobbles its ability to compete, limiting its ability to use its shares for acquisitions.

It makes it vulnerable to a takeover or may prompt its emigration to a market such as Australia where its value could be recognised. Waters could easily justify such a move on defensive grounds as well as lifting shareholder returns. Takeovers are not to be welcome if the companies are going for a song, especially in a small market like New Zealand.

Each takeover (and departure) deprives the capital markets of fees that underwrite the necessary infrastructure for capital raising, investment banks, lawyers, accountants, advisers. And yes even financial journalists.

This is Weldon's concern and he is right to ask for a reality check.