New Zealand’s economy, described as a “rock star” last year, is now being called a “one-hit wonder”, as growth slows and interest rates are cut. But that has not stopped New Zealand companies raising capital in Australia and dual-listing on the ASX.
Forty-three New Zealand-based companies now trade on the ASX and more are on the way. Many have joined the ASX in the last few years through an Initial Public Offering (IPO). Volpara Health Technologies listed on the ASX last month and AFT Pharmaceuticals listed in December 2015 after raising $32 million.
The A2 Milk Company, Adherium, CBL Corporation, and Martin Aircraft Company listed on ASX in 2015 through IPOs. Evolve Education Group, Intueri Education, Orion Health Group and the fast-growing Vista Group International had IPOs in 2014.
The billion-dollar New Zealand energy privatisations, Mighty Power River and Meridian Energy, dual-listed on ASX in 2013 and Z Energy was another large NZ float that year.
More New Zealand companies are choosing to dual-list on the ASX to access capital from Australian fund managers, whose mandate requires them to invest in ASX-listed companies. Higher liquidity on the ASX compared with the NZX and funding diversification are other attractions.
I have followed several New Zealand-based IPOs over the past five years, notably Vista, CBL Corporation and Mighty River Power. The latter has occasionally featured in my reports for the Switzer Super Report on attractive income stocks.
Auckland International Airport looks fully valued after rallying this year and Kathmandu Holdings and Trade Me Group are interesting turnaround stocks. Restaurant Brands is another with good prospects.
Investors might have seen a trend in dual-listed New Zealand stocks when the country’s economy was outperforming others in the OECD last year. A better approach is treating each company on its merits rather than basing investment decision on top-down economic trends.
I expect continued growth in NZ companies raising capital in Australia and listing on the ASX. New Zealand has a vibrant start-up culture, probably stronger than Australia’s after adjusting for its size. Watch more New Zealand-based tech companies choose this market in coming years.
Here are three dual-listed New Zealand companies to watch on the ASX and one that is not dual-listed on our exchange (Restaurant Brands). I’ll cover promising specialist insurance group CBL Corporation in a later column.
1. Trade Me Group (TME)
I nominated the online auction and marketplace services company in a column in early April on technology stocks for this report. To recap, Trade Me Group was spun out of Fairfax Media over 2011 and 2012.
It tumbled from $4.70 in April 2013 to $2.70 in August 2015 amid losses in market share and market concerns that more investment was needed to lift its performance. Trade Me has since rallied to $4.37 – it jumped about 10% in April alone – and has hit a five-year high.
I like Trade Me’s prospects. It is through most of its capital-expenditure program, the core online auction business is going okay, and the online classified-advertising business has plenty of potential. The business is well run and trades on a forward Price Earnings (PE) of 19 times. That’s a lot less than many of the larger internet advertising stocks.
Trade Me is due for a pause after strong recent share-price gains, but looks in good shape and is strongly leveraged to any improvement in the New Zealand economy.
Chart 1: Trade Me Group
Source: Yahoo!7 Finance
2. Kathmandu Holdings (KMD)
The former retailing star had a horrid 2014, plunging from $3.10 in August that year to $1.10. A savage drop in earnings, management changes, and concerns about Kathmandu’s direction crunched its share price. Some of its store formats were too big, it relied too much on a handful of sales, and its product range had become tired and copied elsewhere.
Kathmandu has recovered to $1.39 after a better-than-expected half-year result for FY16 – still a long way from its previous high, but enough to restore some market sentiment. Sales rose 9.3% to NZ$196 million and underlying earnings (EBITDA) more than doubled to $21.9 million.
Kathmandu is considering selling its product in other channels, in addition to its stores. Several US leisurewear brands successfully sell their clothes in company-owned and franchised stores, department stores and other specialist retailers. Kathmandu is doing a good job of optimising its stores format, improving its pricing and promotions and relying less on big sales.
It’s early days in the recovery strategy and Kathmandu has plenty of hard work ahead to regain market confidence. But its new management is off to a good start and the company still has a great brand and product and a valuable membership base through its Summit Club. The long-term theme of more people travelling and buying leisurewear is a positive.
Chart 2: Kathmandu Holdings
Source: Yahoo!7 Finance
3. Vista Group International (VGL)
Asian demand for Western cinema and entertainment is one of the more interesting trends. Chinese consumers could not get enough of the latest James Bond movie Spectre and superhero movies are super business in Asia. As tens of millions of Asians join the global middle class this decade, demand for cinema in the region will boom.
That’s a strong trend for Vista, the New Zealand-based cinema software company that listed on the ASX through an $83 million IPO in August 2014. Vista has soared from a $2.15 issue price to $5.65, after comfortably beating prospectus forecasts.
Vista has a rapidly growing international footprint. Its software is installed in more than 4,500 cinema sites worldwide and it announced in March the sale of its Chinese subsidiary into a new venture owned by Vista and Weying Technology. Weying’s online ticketing App is integrated into WeChat, the giant Chinese App that more than 600 million people use.
About three quarters of movie tickets in China are sold online through Apps, and Weying is thought to have a 15% share of this market. That relationship should give Vista a much stronger position in the Chinese cinema market, which is on track to become the world’s biggest box office before long.
Vista looks fully valued on most broker forecasts and is due for a share-price pause after strong gains this year. Any price weakness could be an opportunity to buy one of the more promising New Zealand companies and capitalise on the sweet spot of technology, entertainment and Asia over the next five years.
Chart 3: Vista Group International
Source: ASX
4. Restaurant Brands New Zealand (NZ: RBD)
The lack of fast-food stocks on the ASX is frustrating. Domino’s Pizza Enterprises is priced for perfection, Collin’s Food has rallied and Retail Food Group has disappointed. The New Zealand-listed Restaurant Brands is an option for those prepared to invest directly through the NZX. Restaurant Brands operates the New Zealand franchises for KFC, Pizza Hut, Starbucks Coffee and burger chain Carl’s Jr. It serves about 60,000 customers each day in New Zealand.
The $556 million company has been a good performer: the one-year total shareholder return (including dividends) is 31%. The five-year average annual return is 22%. Restaurant Brands recently acquired 42 KFC stores in New South Wales. Macquarie Equities Research believes the company could own as many as 360 stores in Australia and likes its strategy to keep adding stores and create economies of scale. Restaurant Brands has plenty of balance-sheet firepower to fund acquisitions internally and has reasonably defensive qualities. At NZ$5.40, it should yield around 5%.
Macquarie values Restaurant Brands at NZ$6 a share and has an outperform recommendation. The median share-price target, based on a small consensus of broking firms, is NZ$5.53. Restaurant Brands trades on a forward PE multiple of about 18 times, consensus analyst estimates show.
I like the outlook for big fast-food brands as consumers eat out more, and Restaurant Brands can quicken its growth through continued acquisitions. It’s a simple, lower-risk model: add one store after another, build a larger network, and create valuable synergies.
Chart 4: Restaurant Brands
Source: Yahoo!7 Finance
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not make stock recommendations or offer financial advice. It does not take into account individual investor needs. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at May 18, 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
