Stock Takes: NZX trading remains high after Covid boost, Gull for sale?

Australia's Ampol may have to offload Gull Petroleum if its bid for Z Energy is to go ahead. Photo / NZME

Last year was an extraordinary one for the financial markets.

The dramatic slump in share prices prompted by the Covid-19 outbreak was followed by an equally sharp rebound.

Then there was the wave of capital raises that went on when suddenly-strapped companies came to the markets to shore up their ailing balance sheets.

Another extraordinary factor was the sheer volume of trading that went on in 2020, and NZX chief executive Mark Peterson says that trend has not abated so far this year.

"We had an enormous increase in trading activity through the course of last year of $52 billion, which was up 42.5 per cent over the previous year's," says Peterson.

"The interesting thing about this year is that whilst we did not have that enormous volatility that Covid provided in 2020, we are still keeping track at that overall level."

Year-to-date data up to September show the value of trades came to $40.8b, up a fraction from the same period last year.

"It's basically saying that the institutional investors - both domestic and offshore - together with the domestic retail investor base, are continuing to provide a high level of activity," said Peterson.

"It speaks to the continued lift in the interest in the market.

"Certainly we know that Sharesies, the ASB Securities and the Jarden Directs of this world are seeing enormous growth.

"We got a huge boost last year just from the uncertainty that Covid created at the end of the first quarter and into the second."

NZX chief executive Mark Peterson. Photo / NZME

Peterson said just under 62 per cent of volume was traded "on screen, as distinct from broker 'crossings'".

"That's important because of the price discovery that comes from 'on-screen' activity.

"It's important for the confidence of investors to know that they are trading at market prices," he said.

2degrees and Vocus

For the moment, Peterson is masking his disappointment that listings for telcos Vocus and 2degrees may not now proceed due to the two complementary businesses undertaking merger talks.

"We will see what happens," he said.

"They are obviously taking a look at Vocus or Orcon, and we will see what comes.

"There is water to go under the bridge yet."

"They are two good businesses and we would really like to see them access public capital," he said.

And what about the often-talked about "pipeline" of new issues?

"We still feel good about it - notwithstanding Vocus and 2 degrees - and certainly we have thought about what is ahead of us through to the end of this year and we don't count our chickens before they hatch, but we feel good about that," he said.

Higher stakes

Shares in NZX-listed companies shine through as the asset class of choice for managed funds, KiwiSaver and other superannuation schemes, with the Reserve Bank's latest QMF Survey showing a total of nearly $250 billion under management at June 30.

NZX-listed and international shares now account for more than 41 per cent of total funds under management, compared with about 35 per cent at the start of 2020 before the Covid-19 pandemic hit.

As well as investments in managed funds and superannuation schemes, Peterson says New Zealand has a comparatively large base of retail investors, and over the past year NZX has recorded the most significant re-engagement with equities as an investment class that it has seen in the past 30 years.

M&A up

Law firm Simpson Grierson's third annual report into M&A trends in New Zealand revealed buoyant market growth with record amounts of capital flowing as both offshore and domestic investment booms, against a backdrop of border closures and other Covid-19 restrictions.

Its report reveals a 20 per cent increase in New Zealand M&A deal volume and a 250 per cent increase in deal value so far this year.

The firm's review of M&A trends showed that offshore investors adapted quickly to "virtual" dealmaking and that M&A activity in New Zealand delivered or exceeded investor expectations from a year ago.

Partner James Hawes said New Zealand's M&A market this year was showing real strength.

"We're on track to see around 20 per cent more deals this year compared to 2020 and 2019, while the total value of deals so far this year eclipses the last three years, clocking a massive 250 per cent value increase on last year alone, coming in at US$10 billion ($14.4b) worth of investment so far," he said in a statement.

"Our closed borders and other Covid-19 related restrictions have not stopped offshore investors who see New Zealand as a very attractive destination with high quality businesses, particularly in key sectors like technology, medical, consumer and energy," Hawes said.

A Gull sale?

Ampol's takeover offer for Z Energy is effectively the same as the one made six weeks ago, but enables Z to pay some dividends without affecting the NZ$3.78 offer price, brokers Forsyth Barr said in a report.

Z Energy is now able to pay a 5cps first-half dividend without impacting on the price, and if the transaction completes after March 31, 2022, shareholders will be topped up at a rate of 0.055cps/day up to a maximum of 10cps.

The last date on which the deal can be completed on the agreed terms is October 11, 2022. Z Energy's board unanimously supports the deal.

A sale at the agreed price is the most likely outcome, the broker said.

"In our view the most likely (and our base case) scenario is the transaction proceeds with an effective sale price of NZ$3.83 (including the 5cps dividend).

"The main upside scenario is that another prospective buyer starts a bidding war (although Z Energy cannot solicit another bid), with another upside scenario being the independent adviser valuing Z Energy at more than NZ$3.83."

"The downside risk for investors is that the deal does not go ahead, with the most likely cause being Ampol's inability to sell Gull. Assuming Ampol can sell Gull, we expect the Commerce Commission will provide clearance for the deal."