TAKING STOCK 27 April 2017

 

IT MUST first be conceded that many people of my age – call it the Gold Card vintage – have not universally enjoyed the accelerating speed of change imposed upon us in the past decade.

Not all of us can always see a benefit to us in the big new ideas or technologies.

Gradually phone landlines in homes are becoming extinct, we are adapting to our grandchildren texting us rather than talking to us (let alone writing letters to us), we have become used to a postal service that hardly justifies the word service, and most of us now embrace ATM machines, rather than visit a bank.

Personally, I will continue to resist modern eating, and will never put silage or mouldy cheese on my steak.  Fortunately in my circle of family and friends such crankiness is tolerated with gentle humour.

However two more big changes are around the corner and they have major significance to all of us, even those who are Gold Card owners.

Money as we know it is to disappear soon, within a few years, I guess.

Electric cars and autonomous cars will appear even earlier than money disappears.

When Michael Warrington described in Market News this week the applications of blockchain technology to capital markets, he referred to perhaps a five-year life expectancy for cheques.

The same blockchain technology may also bring about the end of cash, as the world moves to new digital technology.

If you believe what you read, the world’s ‘’elite’’ – the unelected bureaucrats and technocrats whose thinking leads to evolution – are preparing for the next wave of change by convincing politicians of the benefits of a cashless world.

Their arguments are that cash has the following undesirable characteristics:

- It is easily stolen.

- It facilitates illegal behaviour – money laundering, drug transactions, the funding of terrorism.

- It facilitates tax evasion.

- It threatens those whose strategy to sustain social justice and financial survival is based on negative interest rates.

Any of these ugly features can easily be sold to an electorate by politicians.

Indeed conspiracy theorists will keep mouthing the nonsense that the elite organise terrible events, disguised as terrorism, to build social acceptance of new solutions, like the digitalisation of money and the abolition of cash.  No one opposes solutions designed to control terrorists.

I suspect the main attraction to politicians of digitalisation would be the visibility to governments of every single financial transaction.  This might open more opportunities than just the chance to slow down terrorism funding.

Imagine a new globally-applied tax system that could not be avoided, even by the likes of Apple, Google or Facebook.

Perhaps the tax would be based on nett income or gross revenue, or on purchases (GST, VAT etc.) rather than on esoteric definitions of ‘’nett profit’’, differing from country to country.

Before any such tax exchange could be imposed there would need to be some mindset changes in Europe, where to this day some $15 billion of old notes (deutschmarks, gilders, francs, pesetas, lira, drachma, etc.) are still retained by people who presumably believe that euros will not be much use in future.

The bulk of the $15 billion are hidden deutschmarks, as you would expect.  Many Germans worshipped the strength of the deutschmark, though it is the cheap euro that has underwritten Germany’s economic success and its full employment.

Blockchain technology, which in effect prevents a previous transaction from ever being deleted, may be the key to the security of our cash accounts but many of us will need convincing that hackers can be thwarted.

Indeed my wife keeps a credit card with a low limit for use in buying books from Amazon, so that if anyone hacked her card the damage would be bearable.

Whatever the resistance levels of those of us who dislike disruption, the probability is that cash and cheques are doomed, and the ‘’cash’’ of the future will be a fingerprint/ eyeball recognition of the person presenting a device, be it a card, a watch or a cellphone, but hopefully, certainly not in my case, a belly button piercing.

The elite in G7 countries, central banks, and the international organisations like the IMF and the Bank of International Settlements probably perceive the abolition of cash as being essential to enable negative interest rates to be enforced.

Negative interest rates – a transfer of wealth from savers to borrowers – was ostensibly designed to make corporate, council, bank state and sovereign borrowing so advantageous that reinvestment in stagnant economies would be dramatic and effective.

Savers did not react with alacrity.

Those organisations that have to stockpile cash, like the reinsurer MunichRe, reacted by withdrawing bank notes and storing them, behind armed guards.

MunichRe built a huge facility which it thought was cheaper than paying a bank to store its billions of cash.

The European Union’s central bank responded to MunichRe by signalling the imminent cancellation of 500,200 and 100 Euro notes.

The storage facility would need to have 10 times as much room if 500 euro notes were replaced by 50 euro notes.

The elite want to be able to enforce negative rates on MunichRe.

Digital currency would enable that to happen.

Ironically, the re-emergence of inflation might put a halt to the negative rate strategy, but one ought not to assume that the strategy will not reappear.

Defaulting borrowers severely damage banks.

There is no doubt at all that any significant rise in the cost of servicing debt would sabotage the ability of many major countries and companies, let alone households, to service their debt.

For that reason alone, interest rates will be at peppercorn levels for a long time.

The abolition of cash for all the reasons mentioned is imminent.  Of course the politicians will sell the need to change by focussing on the terrorism issue, not on the ability to introduce new taxes and enforce negative interest rates.

One question: Will Green Banks return to vogue?

The changes in transport are even closer to appearing.

Councils are already preparing recharging devices on council car parks, and service stations are well geared up for a rapid switch from fuel pumps to recharging sites.

Of course elsewhere there are now experiments with road surfaces that are built to recharge cars as they drive along, wireless technology doing its magic.

There is virtually no doubt that ubiquitous electric cars, ultra-light with little engine weight, are upon us.  Battery technological breakthroughs are occurring almost every month.

Autonomous cars are coming right behind.

I do regret that no one has yet told us how they will neutralise the hundreds of millions of dead batteries that will result from this move, but to sell the ‘’reduced carbon footprint’’ we may have to overlook the reality of landfills filled with toxic dead batteries.

Perhaps the flamboyant clown Richard Branson can fly all the batteries to some other planet.

The issue I want to raise here is how the governments of the world will replace fuel taxes, with which roads are maintained, with a road user tax.  They cannot simply raise the price of electricity to include road user fees.

The obvious solution is a software implant in every electric vehicle, without which the vehicle would not move.

Politicians would want the implant to be the equivalent of ERoad’s tethered black box – to report every mile of usage (sorry, every kilometre) and would want an automatic collection of a user tax, perhaps the device authorising the Crown to extract the money each week, with a direct debit.  No money to pay the charge would result in the device disabling the car.

Those with suspicion of political powers might also wonder whether the device could be used for other purposes.

Perhaps the device could be included in the car ‘’key’’ and could be programmed also to be the driving licence.

Perhaps the authorities could thus deny the suspended driver from being able to start his car, deactivating the key on the day of suspension.

Perhaps the device would monitor speed and apply automatic speeding fines to those who sometimes exceed the often silly speed limits, as virtually every driver does.

Perhaps the device could govern speeds, or govern usage, denying learner drivers any ignition after 10pm.

Indeed, perhaps the key could disarm the car if any court fines had not been paid!  Perhaps it could breathalyse the driver!!

All of this could be sold to us by politicians under the unarguable headline of the need to collect road user charges and the need to improve ‘’safety’’ by stopping the unlicensed from driving.

I would place a small bet that if this new key is introduced by including with it our driving licence, the term of the new licence would not be 10 years, let alone ‘’life’’, as I thought I had arranged 51 years ago, when I paid my licence fee for my lifetime.

Of course autonomous cars will make some of these issues irrelevant.

They work off radar-like beams, rather than off GPS technology, and will result in ubiquitous vehicles, probably community-owned, making huge changes to the footprint that results from city car parking.

Already Wellington has a sub-division where home-owners will share community-owned cars, which in time will be autonomous.

You will insert your credit card, hop in the back seat, instruct the car to take you to golf, hop out when there, instruct the car to go home, and text when you want it to return.

One hopes you will be allowed to enter it after socialising, post-golf, with your mates!

Road user charges and fuel taxes, one assumes, will continue to apply to those who use diesel or those of us who want to use their current vehicles.

One other question is raised by the imminence of these changes.

How will you convince someone to buy a Ferrari if it cannot keep up with an electric car, like the BMW i8 rocket that currently sets records of instant speed?

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NEW ZEALAND investors might have been alarmed by an errant media report which theorised that foreign investors now control the majority of our companies.

The dopey media headlines were prompted by a report from a third tier broker, which expressed concern that foreign owners controlled more than half of the free float of NZ company shares.

I underline the free float because what was being said was that if you remove from the calculation all of the shares held long-term by New Zealand institutions, then of the remaining shares foreign companies and foreign-based managed funds might own half.

The reality is that many of our large companies have low levels of freely floated (available) shares.

The power generators like Mercury, Genesis and Meridian are obvious examples (all 51% owned by the Crown) as is Air New Zealand.  Foreign buyers might own 50 per cent of the remaining 49%.

The ACC, NZ Superannuation Fund, and many other superannuation and managed funds also feature as permanent shareholders, reducing the quantum of available shares in most of our leading companies.

Perhaps the foreigners own 50% of the free float, or 30% of the total.  Relax.  The media’s front pages were simply wrong.  They did not understand the research.

 _ _ _ _ _ _ _ _ _ _ _ _

ALSO causing alarm were media headlines suggesting that three broking firms were traipsing around Australia trying to find a new buyer for Fletcher Building.

There is nothing to look at here.

Brokers are always seeking to initiate deals.

It is easiest to find buyers when a company’s share price has fallen, after some bad news.

Fletcher Building has admitted that its construction division has at least $100 million of losses to file, on contracts for which it mis-tendered.

Fletchers may well pass the blame on to project designers and may threaten to sue the designers.

Meanwhile, brokers will be scurrying around seeking a new major shareholder for Fletchers, or maybe seeking buyers for the construction division, while prices are cheap.

Given construction is linked to building materials, it is more logical that a complete sale would occur than just the calving of a single Fletcher division.

The young British hedge fund fellow Mark Adamson, who at the time of writing is Fletcher’s CEO, might be the last person to celebrate the falling FBU share price, Adamson being a rare CEO with a personally paid-for holding of significance in his company.

He owns more than a million shares, which may represent a decent chunk of his wealth.

My hope for Fletchers is that it puts better resource into its riskiest division – Construction – and that the company develops a new culture, starting with more respect for its creditors.  A return to paying bills on the 20th of the month following receipt of the service or goods would be an excellent start.

Perhaps Fletchers needs to refresh its board, discover a new culture, and focus on excellent management, measurable against long term objectives.

 _ _ _ _ _ _ _ _ _ _ _ _

THE National Property Trust special meeting was a foregone conclusion last week, from the time just two shareholders agreed to vote against the transaction to link the NPT’s future to Kiwi Income Property Trust.  Their 32% alone dictated the result of the vote.

If Kiwi wanted control of NPT it would have had to put up money to buy shares to counter the two opposing parties, and it probably would have had to agree to underwrite a rights issue, perhaps first getting exemptions under the takeover laws.

It seemed to have no appetite for this, so the opposing shareholders had an easy victory.

Those shareholders, Augusta and Salt, now have control of the board, having installed Paul Duffy onto the board.

Duffy will be known to Money Managers investors as the man who oversaw the transition of all Money Managers’ poor-performing syndicated properties and eventually paid off Money Managers’ founder, Douglas Lloyd Somers Edgar, who had cordoned off the management contract.

Duffy prevailed upon the then DNZ Property Fund (now Stride property Group) shareholders to pay Edgar $33million to get rid of him, a huge sum, even if somewhat dwarfed by the $75million Jones was paid to release his contract to manage the properties of Jones’ public company, RJI, in the late 1980s ($75m, in today’s money, might be $700million).

I have regularly raged about the cost of buying out management contracts.  The extreme sums paid out confirm the extreme value of these contracts, especially when the contracts reward the manager as a percentage of gross assets, rather than nett assets.

My view remains that no board of directors should ever grant a contract that cannot be ended when the shareholders choose to do so, and with a price formula that is sane.

NPT will in all likelihood now sell its management contract to Augusta, for a tiny sum, perhaps $4million.

I exhort Duffy and the NPT board to write into the sale a formula for cancelling the contract should Augusta ever fail to deliver value for money, in the opinion of the shareholders.

Perhaps a good formula would be initial cost plus a compounding interest rate, rather than some ‘’valuer’s’’ opinion on the present value of some estimated future cash flow.

If I held NPT shares I would sell them now and perhaps buy Augusta shares, in anticipation of Augusta’s new ability to charge NPT management fees, and influence the future purchases of property for the NPT portfolio.

Augusta’s first task might be to raise capital for NPT, perhaps with a deeply discounted cash issue, which Augusta itself might underwrite, or sub-underwrite.

Let us be specific: say 200 million shares at 55c per share.  Did someone say 50 cents?  Do I hear 45c?

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I will be in Auckland (Albany, Mt Wgtn) on May 9 & 10 and in Christchurch May 23 & 24.  I will be in Wellington on Wednesday May 3

Edward will be in Nelson on 2 May and in Blenheim on 3 May.

Kevin will be in Christchurch on 4 May and Ashburton on 18 May.

Edward is available by appointment in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, to meet new and existing clients who prefer to meet in Wellington.

Chris Lee

Managing Director

Chris Lee & Partners

 


TAKING STOCK 20 April 2017

WHEN the shareholders of the National Property Trust meet tomorrow (April 21) I expect they will, by a large majority, vote against a board proposal to link with Kiwi Property Group.

Whether they also vote to boot out the directors is less clear.

The combined voting power of Salt Funds Management and Auckland property syndicator/ property manager Augusta will on its own outnumber those other shareholders who bother to vote, so the NPT board has Buckley’s show of achieving the 50.1% of votes needed to usher in KPG as a new partner.

The only hope is that before the meeting Kiwi buys out Salt.  That seems unlikely to me.

Kiwi wanted to quit Wellington after the November 2016 earthquake had rattled its confidence about rental increases in the capital city.

It wants to sell at valuation its flagship, the Majestic Centre in Willis Street, a controversial building once owned by Primaq, one of those nonsense property contrivances of the 1980s.

Kiwi also wants to quit its Porirua retail city centre, which might better be owned privately than by a listed trust.  Perhaps when the new highway by-passes Porirua, and Stride has rebuilt the dilapidated Johnsonville Mall, Kiwi foresees a fall in traffic for Porirua’s mall.

Concurrently, Kiwi would buy NPT’s internal property management contract for around $6 million and buy NPT shares at a 12% discount to asset backing, thus becoming the major NPT shareholder.

The property management contract would be unusual, for it would allow NPT to replace the manager for a fee, should the manager disappoint.

Salt, an NPT shareholder, spotted the anomaly of selling at (inflated?) valuation while buying NPT shares at a discount.  So it opposes Kiwi’s plan.

Augusta had a Plan A to buy the property management contract at a low price ($3m) and sell and broker some property deals to NPT, gaining a brokerage fee of probably $5 million or maybe more, and quitting a leveraged property.

A third proposal involved NPT buying one building, issuing shares to the vendor but retaining the management contract internally.  Perhaps this one building was too expensive for the NPT balance sheet.  On the surface, this third plan looked less invasive than the other proposals.

Perhaps a balanced perspective would have favoured the third transaction.

Augusta has now withdrawn its Plan A, at least for the moment, and has instead increased its holding in NPT to 19.9%, avoiding the need for making a full takeover offer by staying below 20%.

It would surprise me if it feels satisfied with thwarting the Kiwi offer.

I expect it to apply energy to burning off the old board at tomorrow’s meeting, though on this initiative it might not have as much support.

If it does succeed in expelling the directors as NPT’s largest remaining shareholder it might install its own nominations.  We may then see Plan B, from Augusta.

The main player at Augusta is Mark Francis, son of a major figure in Chase Corporation, Peter Francis.

Chase, of course, was one of New Zealand’s biggest ever public company failures, in an era when all manner of jokers were being trumped after a short period of media and investor madness when any old charlatan could play with other people’s money.  When Chase collapsed, it was New Zealand’s biggest-ever corporate failure.

Mark Francis has built Augusta cleverly, making it more of a deal-doer and building manager than an over-leveraged owner or developer of over-valued property.

I like Augusta’s own model.  I would far rather own Augusta shares than invest in the properties they syndicate.  Indeed nothing would induce me to invest in their syndications, where fees are generally high and other buyers generally un-energised.

The NPT model was a South Island invention, owning properties in Christchurch, including a bleak shopping mall, but owning one potentially valuable site in Auckland.

Its corporate relationships have included St Laurence and David Cushing, the latter a son of a Brierley director.  Brierley, of course, also has a disappointing history.

Sir John Anderson, now apparently reducing his corporate responsibilities, was chairman of NPT until very recently but previous line-ups did not always comprise competent people.  Anderson was, in cricketing terminology, the ultimate safe pair of hands, and holistic chairman.

NPT has for years been a no-growth company, delivering a useful dividend, but without the resources to achieve a profile with corporate investors, perhaps a sitting mallard, waiting for potshots from the likes of Augusta’s hitmen.

If I had to bet, my money would be on Augusta pushing on, gaining control of the NPT board, and using NPT as the leveraged property-owning vehicle that Augusta can control to keep itself out of the part of the market that Chase knew so well.  If I am right, I would far sooner have shares in Augusta, than in the revamped NPT under Augusta’s management.

Tomorrow’s NPT meeting may be the first of several steps Augusta needs to climb.

 _ _ _ _ _ _ _ _ _ _ _ _

ANOTHER issue to be resolved soon, this time by the Commerce Commission, is whether NZME and Fairfax can merge, to become our only meaningful newspaper group.

The CC has deferred its deadline twice, after initially making it plain that it could not see any hope of such a merger being permissible.

That it is still deliberating probably indicates that NZME and Fairfax have shown the CC that unless the merger occurs there might be no newspapers in the near future, meaning there will be no competition because there are no newspapers.

Journalists believe a merger may prolong the days of newspapers, but already all or most provincial papers are out shopping for redundancy consultants, the most recent departure being the Marlborough Express, which is now publishing just three days a week.

Other provincial papers, in areas like Palmerston North, Hawke’s Bay, Rotorua, Hamilton, Whangarei, Nelson, Southland, Timaru and even Dunedin are unlikely to be attracting the revenue needed to provide long-term roles for reporters, though I must applaud the Otago Daily Times, a genuine paper, if prone to be bullied by the tartan mafia.

If NZME and Fairfax merge, the provinces might share a page or two in the surviving nationally-printed paper, perhaps a combined Dominion/Herald paper, with local inserts.

For my age group the disappearance of newspapers would be regretted.

Where else would we find out which of our old mates, like John Clarke or Doug Myers, have moved on?

Of course the daily papers are just surviving now, living on the revenue from the TAB, which buys the racing coverage, and on advertisements which I am told increasingly demand placements in the NZ news section, or in the business pages!!

Apparently New Zealanders rarely read world news, explaining why the merry boys and girls who select our main stories regarded the pizza preferences of politicians as more riveting than the tiresome reports of mayhem in the likes of Europe, the Middle East and the South China Sea.

There is little or no attempt to cover financial markets other than glibly, an obvious example being the media failure to connect with the relevant leaders in that sector.

Another example of disrespect for investors and commerce is the idiotic waste each week of the front page of the so-called business section of the Sunday Star Times, always a one-page child-like picture relating to one of the ‘’news’’ stories inside, usually a story of how adding figs to feijoas makes a new sauce being used in restaurants to add to rocket salads, haloumi, chickpeas and dockweeds.

(When will the SST appoint a knowledgeable business editor?)

The Commerce Commission may make all these issues irrelevant.

If it insists that the two awful media groups must battle on independently, we may see both groups self-immolate.

I would argue that this would leave a gap for old-style journalists to reappear, producing a real newspaper, attracting advertising because of the relevance of the editorial content.  What a relief that would be.  A real newspaper!

Perhaps I am dreaming.

Does anyone out there believe that content is the key issue?

 _ _ _ _ _ _ _ _ _ _ _ _

OUR polite criticism of the bullying culture that prevails at Fletchers and Fonterra continues to attract horror stories from companies that interact with them, admittedly offering anecdotal comment, rather than court-standard evidence.

One director of a company that supplies Fonterra with a service noted that his talks with farmers revolve around how quickly they can switch to processors other than Fonterra.

Why does size so often destroy culture, and lead to bovver boy behaviour?

The only satisfactory solutions revolve around leadership and long-term ambition.

Mainfreight is a large company, with an admired culture, and with shared long-term aspirations.

It has had two excellent leaders who are far more focussed on making great long-term decisions, than on boosting its share price or executive bonuses.

Share price increases and bonuses follow excellent decisions and performance, rather than balance sheet juggling, if judged over time.

Mainfreight is in Australia, China, Europe, USA and NZ, has around 240 branches, says it has a 100-year plan, and calculates bonuses on client-related matters, like error rates.

Chairman Bruce Plested founded the company 39 years ago.

Managing Director Don Braid has been with Mainfreight for 23 years.

Carl Howard-Smith is general council (a lawyer), Richard Prebble (a rare politician with a commercial focus) has been on the board 20 years, Bryan Mogridge is an independent director well past his use-by date in my opinion, Simon Cotter is an investment banker, Kate Parsons an accountant, Sue Tindal a banker.

The board’s mix does not explain excellence.

My guess is that Plested and Braid are the key to Mainfreight’s culture and its long-term focus.

Is it as simple as that – excellent leaders with a focus on very long-term objectives?

_ _ _ _ _ _ _ _ _ _ _ _

MY recent somewhat less polite criticism of Powerhouse Ventures Ltd (PVL) resonated with investors but should now be faintly modified, given the company’s subsequent behaviour.

Maybe I was not exactly disgruntled but I was certainly far from gruntled when I observed that Powerhouse had issued shares at very full valuations while at least some of their star incubated companies were stalling.

Investors seemed to agree with me.

However since that grumpy item, Powerhouse’s highest-valued investment, in Hydroworks, has been discussed in a helpful Hydroworks newsletter, and one PVL director has forwarded research from an Australian research publisher, Bligh Group.

Bligh is not exactly the Bible of all research publishers, but its research is nevertheless interesting and readable.

It rates PVL as a buy, given the gap between PVL’s acclaimed asset backing and its market price, a discount of some 25%.

I understand the discount, given my belief that valuations are merely someone’s opinion until a market transaction validates the valuation or sets a real price.

Bligh discloses that the incubated companies Hydroworks and CropLogic are both facing a listing in 2018, not 2017.

Helpfully it shows that a handful of the incubated companies are now enjoying significant increases in value, in the opinion of the valuer, and the researcher hints at likely sales of some mature investments, one of them at a nice premium.

PVL has had annual ‘’valuation’’ increases averaging 35% per annum for five years.  Its directors expect each incubated company to at least double in value every three years.

Its board would have 20/20 foresight if this record was attributable to their skill in stock picking or was sustainable.

PVL has some distance to go before it validates its model.

Investors in PVL who did so via our company will have had an emailed research piece sent to them last week.

 _ _ _ _ _ _ _ _ _ _ _ _

INFRATIL’S commitment to the retirement and care sector is now focussed in Australia, where the standards are well below the best of standards here.

By selling its 19.9% holding in Metlifecare Infratil seems to be demonstrating a belief that opportunities for rapid improvement, converting to unusual levels of reward, are visible in Australia but much less so in New Zealand, where regulations must be overcome, and where many villages are now mature.

Infratil made an unusual agreement to sell its holding in Metlife to the Dunedin sharebroker Forsyth Barr, which very rapidly flicked off the shares, finding so many institutional buyers at a discounted price, that some institutions, but not all, were ‘’scaled’’, sold less than they wanted.

This transaction was a triumph for Forsyth Barr which has previously lacked the access to large lines of credit, constrained by the lack of shareholder wealth, and the absence of a relationship with an international bank.

Perhaps the successes of the Edgar sons in acquiring wealth overseas has given some new grunt to the company’s ability to access bridging finance, the basis on which such broker obligations are usually underwritten.

If FB now has some deeper pockets in its midst, it may well begin the transformation that all capital market participants would welcome.

NZ needs brokers with fire power to ensure that the big transactions do not get passed only to those with access to international banks.

For example FNZC is backed by Credit Suisse, and Craigs by Deutsche Bank, enabling FNZC and Craigs to bulk buy and distribute, sharing the revenue with their international backers.

One imagines it is only a matter of time before the Dunedin broker Forsyth Barr, whose largest shareholder is the Edgar Family Trust, arranges for the Edgar sons to hold the tiller, especially if it is their acquired wealth that is opening the door to investment banking transactions.

The competent and industrious new CEO of the NZX, Mark Peterson, will be celebrating if he can see new signs of growing strength in our smaller broking firms.

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NO ONE who regularly reads this newsletter will be even faintly surprised at the news of alleged corruption in Christchurch, the allegations centring on people who exploit their paid positions.

A full enquiry and investigation is long overdue.

Those on the streets – the subcontractors doing the work, those whose properties and lives were shattered – will tell you of countless examples of exploitation of privilege.

We did not need South Canterbury Finance’s fire sale of assets to demonstrate that hundreds of millions, indeed billions, of wealth gets transferred from the Crown to greedy people during a period of mayhem.

To ensure any future enquiry is not unjust, every person in Christchurch with the power to exploit the Crown and the insurance sector should be investigated.

Any wise people in public office will not have bought property to exploit inside knowledge, nor will their family trusts, nor will they have performed hidden deals that are not reported until years later.  Not everyone is wise and moral.

The Serious Fraud Office may or may not find smoke in the rooms they are currently investigating but you can guarantee that a full investigation will find embers all over the town.

Christchurch people generally have been heroic in their resilience but they may not have been so resilient had they known the levels of cheating that have occurred.

Is now the time to begin a full investigation?

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TRAVEL

I will be in Auckland on May 9 and 10, in Hastings on May 16, and in Christchurch on May 23 and 24.

Kevin will be in Christchurch on 4 May and Ashburton on 18 May.

Edward will be in the Wairarapa on 26 April, Napier 27 April, Taupo 28 April, Nelson 2 May and Blenheim 3 May.

Edward is also in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Chris Lee

Managing Director

Chris Lee & Partners Limited


TAKING STOCK 13 April 2017

 

THE Financial Markets Authority has a new concern about the advice/broking industry.  This concern will lead to another version of the laws affecting advisers.

It is worried that investors might be confused by the difference between qualified advisers, unqualified but registered advisers, and advisers qualified or not, who represent large organisations, selling sometimes more than one brand of products, and calling themselves Qualifying Financial Entity advisers.

Currently the senior advisers are called authorised advisers, the juniors are called registered financial advisers and are not allowed to advise on most securities, and those protected by their large organisations are called Qualifying Financial Entity advisers (QFEs).

You can see why the FMA recognises investor confusion.

Of course historically you had sharebrokers and you had insurance or superannuation salesmen, later called financial planners or financial advisers.

You expected sharebrokers to have expert knowledge of individual securities.

Insurance salesmen sold various insurances and a brand of funds and left it to the brain box in head office to know about individual securities.

The changes in the 1980s arose because the sharebroking industry neglected retail investors.  Indeed in 1984 a young sharebroker told me my $250,000 portfolio was ‘’peanuts’’ and unworthy of his attention.

That attitude led to an army of untrained, unmentored, unsupervised barrow boys, like Douglas Somers Edgar, gaining free access to retail investors, selling themselves as financial planners or financial advisers, without any relevant experience or supervision.

Insurance salesmen became salesmen of securities and dozens of people who had never worked an hour in capital markets suddenly were bombarding the public via the radio or the newspaper selling Bridgecorp or contributory mortgages, or the various offerings of Money Managers, Reeves Moses or Vestar (Radius shares anyone?)

Eventually, when at last we had a Minister of Commerce (Simon Power) with commercial knowledge and energy, we did something about it.

The first step was the Financial Advisers Act and its accompanying Code, a set of prescriptive rules making advisers accountable.

Sadly, those who sought to create the initial code included some attention seekers publicly identified later as inept and lacking credibility, so the first pass at the Code was impractical and ineffective.

A second grouping produced some credible work and for six years we have had no real problems, the Act being okay, the Code, if somewhat complex, administered sensibly.

There have been occasional problems, David Ross being an obvious example, but in a benign investment period, with very few financial failures since 2011, the FA Act has worked okay and the Code has been effective in getting rid of most of the Megs and the scoundrels who rorted the markets when there were no rules.

Of course it was not only advisers who had caused grief.

Dishonest owners of some 57 finance companies cheated or were proved incompetent, contributory mortgage funds failed in most cases, and trust companies proved most untrustworthy.  The like of the NZX had an ugly era under Mark Weldon, failing to perform its basic obligations with companies like Dominion Finance, Strategic, St Laurence, South Canterbury Finance, Lombard, NZ Finance and MFS, all of which had listed securities and had NZX obligations that were ignored and not adequately supervised.

Things are much better now but there are still two real potential problems, according to the FMA;

- Retail investors do not understand what to expect of the different categories of advisers.

- No advisers will help people who do not have large levels of savings.

My own experience is that both potential problems are not real.

We have several thousand clients and virtually never are asked what we, as authorised advisers (AFAs), do.  Our clients seem to know exactly what we do.

And we have thousands of clients whose savings are at normal levels, not in millions.

Clearly our clients will not benefit from any rewrite of the rulebooks.  They will hope we do not pass on the costs of change.

Those who make up the 90% of the public who have no contact with investment advisers outside of the banks and KiwiSaver providers must be the object of FMA concern.

To help with better definitions I have submitted that there are four clearly different groups who interact with investors, and should be better defined.

What I call investment advisors, previously called sharebrokers, are those who study the different securities, meet and talk with investors, attend analysts’ or product briefings, visit the issuers, communicate with issuers, and seek to match investor needs with individual investments.

The five advisers we employ are qualified experienced investment advisers.

Another group of ‘’advisers’’ are what I call financial planners.

They also talk to investors, they seek to advise primarily on asset allocations but may also help select appropriate fund managers and they may have knowledge of the different fund manager investment styles.  They also sell some insurance products.

Rarely do financial planners have access to new issues of securities.  Even more rarely would they attend briefings or meet with the issuers of securities.

They leave that work to the fund managers who study the securities and select the portfolio stocks.

Effectively financial planners are intended to be fund manager salesmen.  They earn 0.25% - 0.5% annual charges by assisting with knowledge about insurances or wills, or budgeting, and by matching asset allocation to risk tolerance.

The third category would be those who simply sell their employer’s brand of products; insurances of different types, managed funds, credit cards, bank deposits, KiwiSaver etc.

The best of these might be inquisitive and develop knowledge of their company’s different portfolios but in essence the retail investor who invests via these product salesmen is trusting the employer to invest wisely, and to pay for mistakes.

These people may be selling for the likes of AMP or the banks.  Currently trust companies also employ such salesmen though it is my hope that in the very near future the trust companies will move out of funds management, where their competitive advantage is nil, and their history bleak.

I can think of no reason for anyone to allow trust companies to select or manage investments.

The fourth category is what I would call personal investment managers.

These are the private wealth officers in banks or sharebroking firms, or very rarely the truly competent financial planners, who do attend briefings and stay in contact with capital markets, and have some useful knowledge of capital markets.

These Personal Investment Managers (PIMs) will not only advise on asset allocations but they will select securities and get their clients to authorise the adviser to manage the portfolio using a Power of Attorney.  The adviser becomes a fund manager.

The sharebroking firms Craigs and Forsyth Barr have more than 100 people offering this service.

These advisers require a special licence to operate with their own discretion.  I presume that those who came out of Money Managers, Reeves Moses or Vestar would never get a licence to be a PIM.

PIMs need to be outstanding advisers to perform this task well; very experienced, strong enough to decline to invest in products promoted by their company; utterly client first and focused.  Very few advisers have these qualities.

But I have met such people and admire those that clearly have the knowledge, integrity, strength and work ethic to be worth the per annum charges.  (The charge is often a portfolio per annum percentage – 0.5% to 0.75% - of risk assets such as shares.  Rarely would there be any significant charge for cash or fixed interest).

So if I were king for a day I would decree that we have four groups offering quite different services:

Investment Advisers

Financial Planners

Product Salesmen

Personal Investment Managers

All would be subject to the Code, if I made the decisions.

The problem of how people with a few thousand dollars can access any advice would be solved by referring them to product salesmen, usually at banks or insurance companies, which should have the staff to cope with visits and should be accountable for poor selling.

Ironically when the public is asked to rate those who work in the field of financial advice, they often respond, despite never having met or worked with those they are being asked to judge.  How do they form an opinion worth recording?

Quite why anyone would survey those who have no connection with the financial advice sector is a question for others to answer.  If I were asked to judge the embalming industry I would rightly respond that, thank heavens, I have no personal experience of that service.

My opinion is that most of the glaring anomalies that were ruthlessly exploited by inappropriate ‘’advisers’’ have now been addressed.

Cheats now go to jail.  They did not, until Power brought in better law.

Perhaps there is a problem of having people, with no capital markets experience and no product knowledge, writing newspaper columns, often in weekend newspapers.

I suspect their worst influence is in putting people to sleep, bored by the platitudinous emptiness of the offerings.

Personally I believe the exemptions granted to journalists should be removed.  Investors may need help in recognising any vessels that are empty.

But by and large the system works fairly well.

The next phase of tidying should not need millions to implement, nor should it address those problems that no longer fester.

A better definition of the various categories of advisers might solve a problem, with very little implementation cost.

 _ _ _ _ _ _ _ _ _ _ _ _

THE failure of Orion Healthcare to increase its revenues has spooked the markets, the Orion share price slumping to a low that implies its ambition is unachievable.

Orion Healthcare (OHE) has announced revenue will be around $200 million and that it has just a few million of cash and a bank facility with ASB to meet its cash burn next year.

Its cash burn last year was around $35 million.

Problems are ahead, if not addressed now.

One obvious strategy would be for Orion Healthcare’s mathematician founder, Ian McCrae, to accept that he needs more years to achieve his ambition, and to buy the time by introducing a new corporate shareholder.

That would mean McCrae’s 51% ownership might be diluted.

He has cherished his control.  Apart from his home and his large young family, McCrae’s main asset is his shareholding in Orion Healthcare (and his highly tuned intellect).

A rights issue would dilute his holding as he pays himself modestly and may not have the money to take up his rights.  A placement would have the same effect.

Those with no responsibility to resolve the problem, like junior commentators, might sneeringly observe that he should have solved the problem last year.  They make no useful contribution to the solution with lollypop analysis.

McCrae recognises that the process of selling his health solutions takes time.  Politicians and corporates will approve spending only when they must, not in anticipation of the building pressure to find long-term solutions that McCrae and his team will be addressing with their advances in technology.

McCrae could address the immediate problem by reducing staff numbers, cutting back his developmental work, and thus further delaying the day when his solutions might be in common practice.

He knows the world must address health problems differently.  His efforts are aimed at reducing unnecessary health problems and costs so that the inevitable health issues can be afforded.

In simple language he wants to help people avoid the need for surgery or medication by showing them how to avoid future problems.

His company wants to cut down the duplicated costs, and the cost of delays and errors, by sharing data amongst health professionals.

In the USA, health costs are largely met by insurance companies so OHE needs to have them as co-investors in his ideas.

Much of what he and his large team are doing is cutting-edge work, with no certainty that all developmental work will achieve its goal.  He has long-term goals and is not obsessed with quarterly targets, the focus of fund managers and commentators.

If OHE were to achieve McCrae’s ambition, in financial terms $1 billion of licensing revenue per year, OHE would likely be New Zealand’s most valuable company.  It has not abandoned this aspiration.

Its ideas and software are used in approximately 30 countries, its database covers millions of people, and its vision is admired by sector experts in many of the world’s most advanced countries.

This is a pretty darned impressive achievement for a mathematician in New Zealand.

Can he maintain a 51% controlling ownership?

The markets say ’’no’’.

Ideally he needs more capital to enable OHE to push on, financed by deeper pockets.

I admire his decency, his ambition and his lack of greed for personal assets.

Logically he should have diversified his wealth years ago and be willing to let others with the same vision but deeper pockets convert OHE into a division of Google or some such giant.

But McCrae is a boffin; has no personal wealth plan and undeveloped capital market skills.

The world needs more of his type, but his company has to survive if it is to make the difference that drives him.

A corporate partner, issued shares at a discount, sadly seems the most viable solution to the short-term cash deficits.

 _ _ _ _ _ _ _ _ _ _ _ _

BY contrast, the British showman Richard Branson is a clown, in my opinion.

Those who paid $1,000 to watch him interact with the circus leader, John Key, in Auckland last month will no doubt have enjoyed their oysters and bubbly, and the light-hearted, low-brow banter, leading to Branson’s suggestion that our farms should convert to marijuana plantations.

A few may believe Branson is some sort of genius, an innovator, a visionary.  A billionaire.

They should read the biographies of this fellow, beginning with a judge’s decision to give him an age-related discharge for cheating the tax department in Britain, importing and on-selling cassettes, without paying his gst (VAT as it was known – Value Added Tax).  He is not the first rich person to begin with cheating the poor old Brits, going right back to the 1950s.

Branson’s ‘’genius’’ is in exploiting the media, gaining idolatry by offering free Marque Vue, free strip shows, balloons and sausage rolls, and rides in hot air balloons.  How merry!

Years ago he recognised that the surging discontent with monopolies meant he could tackle the giant British Airways, forcing from them concessions that enabled him to offer cheap flights and leverage off all the facilities and services BA had helped to build.

He tried all sorts of ventures, always, it seemed, based on leveraging off the work of his competition.

Airlines, train services, cellphones, banking, fizzy drinks, credit cards and many other copycat services have flowed, most finishing poorly, most being sold to the public before the financial struggles were visible, leaving the public to lament their losses.

From all of those sales, Branson became enriched.  He seems to be clever at selling his ideas.

The world has not been enriched, in my opinion.

Whereas the likes of Ian McCrae would make a leap for mankind if his ideas were implemented, Branson’s ‘’vision’’ has largely been a pile of money, admittedly having fun while he acquired the pile.

Key would be more dignified if he interacted with real contributors, like McCrae.

(Problem; McCrae would not spend money on the fee!)

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I will be in Auckland on May 9 and 10, in Hastings on May 16, and in Christchurch on May 23 and 24.

Edward will be in the Wairarapa on 26 April, Napier 27 April, and Taupo 28 April.

Kevin will be in Christchurch on 4 May and Ashburton on 18 May.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment please contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 6 April 2017

 

THE expected decision of Oceania Healthcare to list its shares on the NZX can be attributed mostly to a government decision last year to buy peace with retirement village and rest home operators.

During the past two years the Crown has had talks with geriatric care providers who made it very clear that there would be no expansion of care beds, until the Crown approved some price increases.

Expansion of bed numbers were essential to cope with the rising demand of an ageing population, with the numbers reflecting post-war population growth, the Crown asserted.  The Crown does not want to be the provider, but sets the price for rest home/ private hospital care, because it has to pay for all those (more than 50%) who cannot pay for themselves.

The operators responded negatively because the Crown was, and is, under-paying operators for the people requiring subsidies for geriatric care. The Crown demands high standards but will not accept the cost to the operator.  Perhaps the Crown’s budget could not be stretched.

So an impasse was reached, the Crown unwilling to budget more funds, the operators refusing to expand a service that loses money.

Perhaps the Crown wanted the operators to cross-subsidise care from the real estate profits the operators harvest.

To solve the impasse the concept of allowing operators to charge wealthier self-paying patients more for ‘’premium rooms’’ was floated and eventually this solution met the needs of both parties.

The rest home/hospital care operators could charge whatever they liked to unsubsidised clients who could afford a premium room.

The definition of a premium room was one with a ‘’view’’ or one with a personal bathroom.

Crown-subsidised people would be given ‘’standard’’ rooms while those with significant wealth and not subsidised could pay more to enjoy a view or a personal toilet.

It was this solution that flushed out some value for the troubled and disparate villages cobbled together to produce Arvida, listed two years ago.

Arvida, after a listing priced at 95c, had faced an unknown future, and shortly after listing had raised more capital, at a price that was less than the listing price.

One of its problems was that its complexes largely comprised care rooms, not land and villas, so its ability to create real estate profits was limited.  It was looking like a low-margin operator with no comparative advantage.

At that point Arvida looked to have bleak prospects, made the more difficult by the long-term problem it faced (and faces) of integrating dissimilar villages, each one previously owned independently, usually by a couple who were quite used to making their own decisions, and being bound by no corporate management.

Arvida bought these disparate, largely South Island, villages and imposed a corporate culture with a rule book.  The previous owners did not (and might still not) like the structure.

Throw in the likelihood of poor financial performance caused by the Crown’s unfair controls on pricing, and you had a mix that would appeal to very few fully-informed investors.  There was not enough real estate profit to compete with the bigger rivals.

The game changer, of course, was the new ‘’premium room’’ surcharge, an unanticipated solution.  Suddenly profitability became a real prospect.

Now every village, owned by industry leaders like Ryman Healthcare, down to the tiny, local, Mum and Dad owned little rest homes, can charge more for ‘’premium’’ rooms.  Those with no premium rooms might cut out space for a new window!

Ryman Healthcare added more than $50 per day to the cost for its residents in some premium rooms, an annual impost of some $18,000 to some self-paying residents.

If Ryman applied this new charge to half of its rooms, the result would be new income, with no more cost, of tens of millions.

Arvida must have had some premium rooms too, as its share price soared from 90c to $1.25, a 40% increase not imaginable without such an unexpected boost.

Summerset and Metlifecare, along with Ryman the dominant players in the market, also were able to lift income, their share prices rising.  Summerset’s performance has enabled it to attract a $600 million syndicated debt facility, to underwrite its land bank and growth.

Beyond Ryman, Summerset and Metlifecare, the next biggest operators are Bupa and Oceania, no other operator having any real scale.

We now have Oceania about to list its shares, probably waiting until its published accounts can pick up the extra revenue it has harvested through ‘’premium’’ room charges.  Its profit, before interest depreciation and other balance sheet adjustments, is forecast to be $62m in 2018.  In 2015 it was $26m.

Oceania, however, has more than just one good feature.

It has many villages, some with under-utilised land and a few with such prime locations that complete rebuilding programmes would make sense.  This type of expansion is described as Brown Field.

For example, in its Lady Allum village in Takapuna, it is adding apartments on its rooftops and selling them for more than a million dollars each, exploiting the valuable location.

Given the apartments are typically small, say 75 square metres, the pricing reflects demand, not cost.  I assume the margin is around 100%.

Oceania has a village in Browns Bay, an area of Auckland that now attracts well-heeled people.  It is being redeveloped.

Oceania will raise capital to exploit more building on high-value land, and will provide forecasts of growing dividends.  I believe the forecasts, implying a gross dividend yield of between 5-6% next year.

Of course Ryman, Summerset and Metlifecare provide very small dividends, using their huge profits to maintain a land bank and a pipeline of more villages (Green Field developments).

Ryman, the leader, now seeks growth in Australia, Summerset plans many more villages in NZ and Metlifecare, now Auckland-centric, may well consider much better standards of accommodation to do justice to its land value.  It might also expand its care services offered in premium rooms.

The key for those villages, like Arvida and Oceania, which rely largely on rest home margins, has been the Crown’s acceptance of the ‘’premium room’’ charge, as the incentive to build more care beds.

That solution was elegant in that it cost the Crown nothing and facilitated the growth in geriatric care, a social need that governments do not want to fund.  Users will pay if they can, or be housed in non-premium rooms if they are subsidised.

Oceania’s plan, when it arrives, will describe much better prospects than the company could have discussed two years ago.

Kevin has written a research article on our client private web-page. We encourage those who wish to invest in Oceania to read the article.

Disclosure:  For thirty years I have been deputy-chairman or chairman of Parkwood Retirement Village, a mature development owned by a charitable trust.  I have no financial interest.  My role is unpaid.

 _ _ _ _ _ _ _ _ _ _ _ _

THE doubts about the true worth of ‘’independent’’ valuations is a subject previously addressed here, usually relating to property valuations, but often to the ’’value’’ of shares, during periods of proposed takeovers or listings.

Property valuations are notoriously fickle and are regularly abused.  Astonishingly the banks are a complicit party for allowing the expansion of loans based on revaluations that are often doubtful.

Of course the valuers cover themselves, carefully stating that if Box A is identical to Box B, (its next-door neighbour) and if Box A sells for X, then Box B is likely to be worth X.

The problem with this concept is revealed when it later transpires that a desperate buyer needed only one Box and was prepared to pay an unreasonable premium to a reluctant seller.

There may have been only one really motivated buyer for a box.

Another clearly absurd example occurs when buildings are valued at a multiple of the cash that comes from rentals that are not sustainable, or at risk.  The November earthquake in Wellington, for example, highlighted the volatility of property prices in the CBD.

Many years ago various crooked Auckland lawyers oversaw a transaction in Foxton where a $1, nonsense company signed a lease agreeing to pay $15,000 a year to occupy a modest house that had recently been bought for about $23,000.

The valuer reported that the high rental meant the house was ‘’worth’’ $150,000, enabling the crooks to arrange a $100,000 mortgage on a house that was really worth . . . $23,000.

The outcome of this deception was inevitable.  The rent was never paid.  Nor was the mortgage paid.

How many property owners could be named as living off the valuers’ view of their portfolio wealth?

In Wellington there are commercial property owners borrowing up to 70% of the amount at which their buildings are ‘’valued’’, using their borrowing ability to buy more, or to finance lifestyles.  The media perpetuates the myth.  Wait for the next downturn.  Banks might relearn a lesson.

It restores faith to observe Wellington’s leading commercial property owner, Mark Dunajtschik, whose philosophy is to minimise the use of debt and whose sector leadership is reinforced by his willingness to lend to other developers, at generously low rates.  He dwarfs all others in status, by my estimation, though I do ponder his money lending generosity.

It does nothing for one’s blood pressure to consider all those risk-takers who fund their corporate lunches off valuations that are often shown to be absurd, in inevitable downturns.

Quite why banks allow anyone to gear at levels that are extreme (60% or higher) is a mystery. 

Valuations of companies are even more arbitrary, more fickle and, in my opinion, more challenging to accept.

They often include a premium for control that some might argue should be a ‘’discount’’, as in the case where the owners are taking on considerable risk in pursuit of added future value.

Does anyone recall that someone once valued Hanover Finance shares as being ‘’worth’’ a billion dollars?

The valuation Grant Samuel recently put on Abano Healthcare was at very least controversial, certainly not related to how the market is valuing the company.  Markets are usually right, valuers usually wrong.

So it was pleasing to read Spark denounce the equally surprising value being put on the takeover target TeamTalk, a communications company that has made a series of errors and was a few months ago seen as a penny dreadful.

Spark, a logical owner, offered to take over TeamTalk at a price two-thirds higher than the market valued the bumbling company, chaired (sigh) by another ex-politician Roger Sowry, once National’s deputy leader in the era of Jim Bolger and Jenny Shipley, both also used as company chairmen (wrongly, in my opinion).

TeamTalk’s valuer says the company, whose shares were 50 cents before Spark bid 80 cents per share, are really worth $1.52 to $2.11.

What a bunch of thickheads the capital markets must be if they valued TeamTalk at less than 50 cents just a few months ago.

Grant Samuel is no doubt independent and believes in its valuation methodology.

I can think of other valuers who, with some cynicism, I view as being flexible enough to deliver a methodology that produces a ‘’convenient’’ price range for the person or company that is paying for the valuation.

Some valuers have achieved notoriety because of their ‘’customer focus’’.

Spark’s CEO, Simon Moutter, seems to believe that Grant Samuel’s valuation of TeamTalk is somewhat over the rainbow, where pixies and fairies deliver hot meals to the table without cost.

Moutter has done us all a favour by questioning in public the merit in valuer behaviour or methodology.

If we think back to the 1960s and 1970s, when the stamp trader Ron Brierley was analysing balance sheets, we should recall the accounting standards and stock exchange requirements of the time, which enabled companies to report their assets at cost minus depreciation, rather than disclose their true market value.

A car yard would report on the cost of its stock, and the cost minus depreciation of its car yard land, and thus appear to have a value perhaps lower than the car yard land itself.

Brierley, now seen in a very different light from that which prevailed 40 years ago, sought to exploit that information gap, seeking to buy the car dealership, sell the land, lease it back, and capture the cash gain, or indulge in similar plans that captured profit without adding value.

We called it asset stripping.  It was facilitated by misleading balance sheet valuations.

Of course the car dealer could have done the same thing as Brierley did without handing over any gain to the raider.

Today balance sheets are more closely reflecting the true value of assets, or they should do after the notes to the accounts are completed.  (Who knows if a lease will be renewed, or whether technology is about to make products obsolete?)

Obviously there are imperfections and anomalies in subjective matters, like the risks of asset value changes or liability value changes.

And the IFRS rules still allow misleading nonsense, like valuing tax losses in companies with no or tiny prospects of ever using tax losses.

I well recall dunderheads in the finance company sector talking about the value of deferred tax losses as though this was ‘’real capital’’ and could be included in any calculation designed to demonstrate a company’s actual wealth (nett shareholders’ funds).

Valuers, today, are not tasked with assessing the hidden discrepancies in asset values or liabilities.

They are expected to calculate the value of a brand, or of a monopoly position, or of some special value and they take a stab at what extra value there is to the majority shareholder, for having control, if any.

I much prefer to operate on the basis that a company, like a building, is worth only the sum that a new buyer is prepared to pay.

For Grant Samuel to surmise that TeamTalk’s shares are ’’worth’’ twice what the highest bidder is prepared to pay is an unlikely piece of ‘’logic’’, in my opinion.

If Spark can benefit from synergies, but no one else can, then let Spark proceed to do so.

TeamTalk does not deserve the support of its shareholders, a group that has tolerated very poor performance, highlighted by a dreadful purchase of Farmside, now shown to be worth a quarter of what TeamTalk’s dopey board agreed to pay.

The shareholders clearly are better off with Spark in charge or with Spark’s money in their pocket.

 _ _ _ _ _ _ _ _ _ _ _ _

LAST week’s item tracing the performance of Fletcher Building over the past two or three decades led to an astonishing level of feedback, from councils, universities, sub-contractors, former directors, former executives and retail users of their products and services.

It must be accepted that our clientele and readership is not necessarily representative of all those able to judge Fletcher Building but there still was ample material to interest anyone at Fletcher Building with a mission to improve its culture and its reputation.

Fletcher Building is trying to evolve, is trying to become a global player, is aware of the value of digital technology, and does have a plan.

The plan was initiated when former chairman Ralph Waters employed the Englishman Mark Adamson, from a private equity background, to pursue Adamson’s forceful views.

According to Adamson when he was employed, Waters would say that he did not necessarily agree with what Adamson was doing but that Waters did not give Adamson the job to interfere with the Englishman’s plans.

‘’I don’t really understand what you are doing but I really like the outcomes,’’ Waters is reported to have told Adamson.

Adamson said that if he could say so, Waters had learnt a bit over the time since Adamson arrived.

The Englishman came to NZ after a stint with the American Formica subsidiary, after many years in private equity.

‘’I come from a North American private-equity remuneration background,’’ Adamson said, shortly after his appointment.

‘’You get paid a bucketload [rephrased] of money for success and if you fail you get fired.  It is very binary – there is nothing in between.

‘’I came to NZ, the land of the tall poppy.  I came to the biggest public company that is under daily scrutiny and the board is well connected with society and value their role on that board.  It is a real clash of culture.  It is the one issue that I have outstanding to resolve.’’

Adamson vowed to push for people to be recognised ’’handsomely, for what is massive value-add’’.

‘’My continued debate with the board going forward is, if I am to recruit the best of the best in the world, as I have done, to really make this into a high-performing business creating significant shareholder value, those individuals need to see a part of that (value).

‘’I managed to get guys and girls to join me because they liked the story.  But they are not a work of charity.’’

Taking Stock records the above from an interview Adamson gave to The Australian newspaper three years ago, shortly after his appointment.

Fletcher Building is now chaired by Ralph Norris, a former ASB/CBA banking executive, well conversant with the era of executive glorification.

In his days at CBA, salaries and bonuses often exceeded $10 million per year.

Waters was a previous CEO of Fletcher Building, but is no longer on the FBU board.

The Fletcher Building board is Norris (chairman), Adamson, Antony Carter, Alan Jackson, John Judge, Kathryn Spargo, Cecilia Tarrant and Steve Vamos.

Norris was a banker, Adamson an accountant, Carter a retailer (Foodstuffs, Mitre 10), Jackson a management consultant for 30 years, Judge an accountant, Spargo a lawyer, Tarrant a banker, once an investment banker in the USA, Vamos an expert in online media and technology.

Most are directors of several companies.

_ _ _ _ _ _ _ _ _

TRAVEL

I will be in Nelson on April 20 and in Christchurch on April 27.

Michael will be in Tauranga on 18 April (morning).

Edward will be in the Wairarapa on 26 April, Napier 27 April, and Taupo 28 April.

Kevin will be in Christchurch on 4 May and in Ashburton on 18 May.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Chris Lee

Managing Director

Chris Lee & Partners Limited


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