Brian Gaynor: Sharebrokers miss Air NZ signal

Sharebrokers should have expected Air New Zealand's strong share price performance. They were privy to information that signalled the price rise, but few, if any, interpreted it correctly.

At the end of last year Air New Zealand's share price was 35c. Based on the 757 million shares on issue the national carrier had a market capitalisation of $265 million, which was 0.62 per cent of the NZSE-40 index.

On January 24, the Stock Exchange notified brokers that it would include the 2167 million ordinary shares being issued to the Crown, but not the 1250 million convertible notes, in its calculations of the NZSE-40 index.

The ordinary shares would be included on a one-third basis at the end of February, March and April.

On February 4, the exchange asked brokers for submissions on the proposal, but only one bothered to reply.

The inclusion of the Government shares increased the market value of the airline and forced passive fund managers to buy more shares because they invest their money on the basis of a company's percentage share of an index.

The inclusion of these shares had the following impact on Air New Zealand:

* Just before the first 722 million shares were included the airline represented 0.65 per cent of the NZSE-40.

* Before the second transfer it was 1.24 per cent of the index.

* On April 26 the carrier's market value was 1.97 per cent of the index.

* Finally, at yesterday's closing price of 51c, Air New Zealand represented 3.47 per cent of the index.

The inclusion of the Government shares meant that if passive funds held 25 million Air New Zealand shares at the end of December, they would now have to own approximately 95 million shares. In other words, these funds would have had to buy 70 million more shares in a two-month period yet there were no additional shares available to the public.

Air New Zealand now has a market capitalisation of $2,144 million, including the convertible notes, well above any of its previous year-end values.

Since the national carrier rarely trades on a price/earnings ratio of more than 11, it will have to achieve a net profit of $200 million to justify 51c a share.

As this is well beyond most analysts' forecasts, brokers should have been recommending clients buy Air New Zealand shares at 35 cents in February, sell at 50 cents plus in the past week and buy back at a lower price later on.

How many brokers recommended this strategy to clients?

Pacific Retail

Eric Watson is on the prowl again.

Last week he indicated that he would make another takeover offer for Pacific Retail before December 6.

The offer is a requirement under creep provisions of the Takeovers Code because Watson already owns 73.2 per cent of Pacific Retail, has bought more than 5 per cent in the past 12 months and has contracted to buy a further 3.77 per cent from Nicholas Gordon. (The deal involves Gordon and Watson swapping 3.77 per cent of Pacific Retail and 13.5 per cent of Advantage without money changing hands.)

This will be Watson's third takeover offer for the electronics retailer in the past 41 months. In December 1998, he offered $1.30 a share ($1.17 after adjusting for a subsequent one for nine bonus issue) and $1.76 last September.

The success of the bid will depend on several issues, including the result for the March 31 year due in mid-June, the independent appraisal report and the attitude of 11.1 per cent shareholder Axa.

The $2.25 a share offer is unlikely to succeed because Andersen valued the company at between $2.13 and $2.95 a share in October, after applying a 30 per cent discount for a lack of liquidity.

If that discount is excluded, as it is by all other independent appraisers, Pacific Retail is worth between $3.04 and $4.21 a share.

Watson is determined to privatise Pacific Retail, but most shareholders will not sell unless he makes a much more attractive offer.

RMG

RMG's problems were almost totally predictable.

In mid-2000 RMG, a listed shell formerly known as Frontier Petroleum, acquired 15 Australian and New Zealand debt collection agencies for A$79 million ($95 million) - A$20 million ($24 million) cash and 296 million shares at 20Ac each.

Eric Watson was one of the principal vendors and received 114 million shares or 38.4 per cent of the company as part of the deal. Watson's holding has been watered down to 17.6 per cent following the sale of shares and the issue of new shares by RMG.

RMG has tried to ride on the success of Baycorp, but has been characterised by a complete failure to meet financial forecasts and excessive hype by the company and several stockbrokers.

On February 14, the company announced a net loss of A$2.1 million ($2.5 million) for the six months to December 31 and chairman Jim Boult made bullish statements on profitability and outlook.

On May 1, RMG announced that the result for the year to June 30 would be lower than expected but, once again, Boult painted a positive picture for the future.

The Australian Stock Exchange queried this announcement and RMG produced some sobering figures in response.

Revenue for the first three months of the year was only A$9.7 million ($11.6 million), an annual rate more than A$20 million ($24 million) below pre-acquisition forecasts.

In the past 10 days, RMG's chief executive and chief financial officer have resigned and Watson has indicated he wants two board seats.

Shareholders will welcome this move but the Auckland entrepreneur should have moved far earlier.

RMG has 658 million shares on issue, net tangible assets of only A$9 million ($10.8 million) as at December 31 and a poor image. It is going to take a Herculean effort to achieve the net earnings of $10 million ($12 million) (1.5Ac a share) confidently predicted by some brokers.

Restaurant Brands

Graeme Bulling has put forward another shareholder's resolution for Restaurant Brands annual meeting, but this time he will receive little support.

After changing the policy on directors' retirement allowances last year, he is asking for a review of the group's franchise agreement with Tricon.

Bulling says this agreement, for the KFC and Pizza Hut brands, is costing the company $13.5 million a year and is one reason it has not met its original profit forecasts.

He suggests an independent inquiry look at the feasibility of replacing them with inhouse brands.

But the board says successful, large-scale, fast food franchises need to compete with the McDonald's and Burger King brands.

Investors bought into Restaurant Brands on the basis of the big-name brands, and launching new brands would be expensive.

The meeting notice has an informative three-page coverage of the issue, but there will be little shareholder support for Bulling's motion at the annual meeting in Auckland on May 16.

* Disclosure of interest: Brian Gaynor is a Pacific Retail and Restaurant Brands shareholder.

* bgaynor@xtra.co.nz