Assessing the NZX’s full year metrics
Just published — and there’s a clear division between what has done well and what needs serious work. It’s more or less “The Two Ronnies”. The bad: The markets division saw a total of zero new listings but also note the drop-off in secondary capital raisings (-43%) and the difference a few companies leaving the exchange makes…we are down to 128 now. We continue to lose small caps and the NZX does not have a clear strategy for this — many of them trade at dislocation to their true value because funds often cannot buy small caps and they are not included in many passive indexes. What is the NZX’s strategy to address the “small cap issue” and attract more high quality listings? Total trades were down ~22% as well, which is a metric we don’t love. On the other hand, derivatives is a growing area and we have had discussions with management that feel positive re adding futures products.
The good: I’ve talked your ear off about it before, but the cash cow is the FUM business. Grown rate 32.9% YoY — well done team. I also love to see those KiwiSaver numbers tick up – almost 20%. KiwiSaver is still a very young sector in NZ — we are only in the first innings — and the potential for growth simply through passive contributions, govt contributions and matched employer contributions seems obvious to us simply via population growth + time + passive piling in of funds…if you take a look at the Aussie super industry, which is orders of magnitude of larger and more mature than ours, you get an idea of the potential. Like I say — cash cow — this is where the real value lies.
Wealth tech has been a white elephant for years, and it looks as if it’s finally nearing break-even point. Analysts tend to write off the value of wealth tech, our proprietary data gathered from groups using NZX’s wealth tech suggests it is leaps and bounds ahead of competitors…maybe worth more than first thought?
We’ve been engaging with the NZX for a while and we intend to continue to do so. It is clear that the market segment needs a lot of work — to put it lightly — in what was a bull run for the US market the NZ market seemed to slug along like Winston Churchill after too many drinks. The Funds segment is a cash cow and has been run well — hats off to Graham and co. for seeing that through. We continue to think the NZX is worth more than the sum of its parts; its conflicting businesses (funds and markets) price it at a discount, and we think management and the board need to seriously pull up their socks and think what they are going to do about the markets segment. CEO Mark Peterson was awarded $600,000 in base salary in 2022 and he was awarded another $600,000 as part of his short term incentives plan based on key targets and KPIs set by the NZX board. I.e total compensation of $1.2mn.
At the end of April 2017 when Peterson was appointed CEO of the NZX the stock price was $1.07 (1 May, 2017). As of writing the stock is at $1.07. This is in spite of a high margin funds management business being created in the meantime from essentially nothing, with ~$11bn of FUM.
Inflation adjusted, $1.07 in today’s money is worth 83 cents in 2017 money. This isn’t accounting for stock issued, etc. “In the long short run the market is a voting machine, in the long run it is a weighing machine”.
Another thing — regarding losing listings (including DGL, Xero, etc). We risk becoming like the LSE, which continues to lose listings to the yanks. I.e this in y’dys FT
We continue to think the NZX trades at a material discount to its true value and we think John McMahon is doing a great job as chair. The funds business is a cash cow. However, the markets business needs some serious work and the board and management need to be thinking about how to catalyse value.
They see me rollin’…
We almost forgot to mention Du Val and their mooted IPO. Read it and weep:
Du Val Group says investors who don’t agree to convert their investment and outstanding cash distributions into equity could forgo any returns for years. The firm’s long-awaited information memorandum, released this month to investors, would see a reformatted Du Val Property Group issue 200 million shares at $2-a-share to convert $94.4m of existing lenders’ debt to equity.
The FMA has gone after Du Val countless times and the idea of saying, to investors who had invested in funds they thought were going to pay out a steady return in a predictable manner, that actually, sorry, you can’t get your money back but you can get stock in our company that we are arbitrarily valuing at $400mn — or else. Well, it’s a Hobson’s Choice! No sane investor is going to purchase stock in a co which has suspended payments to investors and gave its investors a choice between — well, no returns for years , or maybe some stock in our company that has routinely censured by the FMA and isn’t making enough cashflow to pay investors who thought they were buying a nice solid fixed rate product. I don’t know if a company with those characteristics is worth $400mn! I am not sure if founders/owners who advertise themselves like they’re in a 90s rap music video are people I would trust with an equity listing! There’s a roller in the background… I am not sure if this is the image you want to be projecting to investors when you have suspended payments…
If IPO occurs (and I’ve serious doubts it will) this is one I would be avoiding at all costs.
On that goodwill at Countdown — two differing viewpoints from a good Businessdesk article here. One chap from Monopoly Watch sez it doesn’t pass the sniff test while a fellow from Coriolis says it’s a simple case of paying too much (several billion too much??). I wonder whether it’s the Aussies preparing for the comm commission to come in and advise on the breaking up of the duopoly (duopoly, us?!). Remember how the French Revolution started — bread riots.
A third player is needed — as well as a firmer hand when it comes to government pricing controls on essentials. Even the Aus govt did this across the ditch with price controls on meat. Competition is healthy. In the US supermarket stocks — with the exception of CostCo — aren’t valued like some kind of trophy asset you keep in your safety deposit box. Kroger (KR) trades at 18x earnings while in the UK Tesco (TSCO) trades at 15x. Woolworth’s trades at 25x. The premium is unjustified and there are better things with more durable monopoly-like characteristics to buy with your money.
Intl earnings
GOOG — slight beat on EPS estimate — $1.64 vs $1.59. Advertising revenue flat at ~$65.5bn. Cloud a disappointment — $9.19bn, growing from $8.95bn. Hold rated — trading at fair value. Trading down aftermarket.
MSFT — slight beat on revenue, EPS of $2.93. Azure grew 30%, while Office 365 grew 17%. A good result, but not loving 40x earnings multiple…
SBUX — trading up after hours, less of disappointment than the street expected. Net income up to $1.02bn vs $855mn the yr previous. Same store sales grew 5%, while intl same store sales grew 7%, showing signs of recovery. China was a mixed bag — same store sales grew 10% but the average ticket per customer fell 9% (I.e 1% organic growth). Continue buy rated on what we view as a quality franchise with high margins — the China story is what we are keeping our eyes on.
DGE — our problem child continues to be something of a problem.$11bn in sales sat flat excl fx, but LATAM saw a 23% drop — ouch. Organic sales elsewhere grew modestly, ~1%. Operating profit down 11% to $3.3bn. Traded down 3% on the news. Now v cheap at 16x — you are getting the world’s number one whiskey brand, Johnny Walker, etc. Retain buy — LATAM issues should resolve and we don’t see the world’s drinking habits changing anytime soon….massive brand loyalty to Guinness, Johnny Walker, etc. Pernod Ricard also interesting at 17x. A wee dram…
What I’m reading — Lauren Sherman on why a Hermès is best of breed:
Talk to any Hermès executive, and they’ll tell you that their prices are not a marketing tool but rather a reflection of the cost of goods. Whether or not that’s true, they make it feel like it’s true. The strategy most germane to Hermés, however, is the manner in which it controls its demand chain. While the company’s leather goods production capabilities have increased by 6-8 percent in recent years, Solca and his team found that their output is still far short of what the market can bear. (In 2022, the company employed 9,469 people on the production line, up from 8,846 a year earlier.)
Hermès makes up for this, according to Bernstein and its mystery shoppers, by “encouraging” clients to buy other items in order to gain access to the Birkins and Kellys. It’s sort of like a carrot-and-stick managed shopping journey built around intent. Loyal consumers who buy a stool during one appointment, and a leather coat during another, might subsequently be offered a chance to buy a rare bag at their next. That is, if you can get an appointment, which is not easy. But that’s part of the fun. One of the problems with luxury today is its perceived availability, and building the right amount of friction—playing hard to get—can create more desire.
AI, the future of music, and the CEO of UMG — link
Cathy Horyn’s review of Margiela — link
Warren Buffett’s 1983 letter — read down to the end about accounting for goodwill. Link.