Share Market’s Reversal Sharpest Since October

Press, Volume CVIII, Issue 31725, 8 July 1968, Page 15

Share Market’s Reversal Sharpest Since October

Heavy selling of leading stocks on the New Zealand share market last week produced the severest reversal since the beginning of October last year, when declining prices at the Dunedin, Christchurch and Napier wool sales forced the Wool Commission to lower its floor price.

The Reserve Bank’s share-price index for the week to July 4 is likely to fall between 1| to 2 per cent, or about 20 points. This compares with the fall of 29 points (adjusting the old index to the new) to the level of October 5, 1967, which was then the lowest since 1961.

The reversal of last week, after a lesser decline in the previous week, was fundamental and affected all shares, especially leaders.

It appears to have arisen from a reappraisal Of New Zealand’s economic future which was prompted by the World Bank mission’s report, the possibility of industrial unrest, and the crop of company reports which do not point to favourable prospects for shareholders. Dealing with the latter case, profits over-all have been better than expected.

but there the expectations end.

Looking beyond these profit figures and into their effects On the companies' financial position, one finds a different picture not related to the better-than-expected profit results. Liquidity Position

One of the major points arising from this year’s accounts is that profit figures are meaningless if they cannot be related to a compensating improvement or deterioration in the company’s liquidity position. Too many companies showing dividends which appear to be sufficiently covered by

profits (between 1.5 to two times) have high Inventory levels arising from a falling in demand, and consequently higher bank overdrafts. A continuation of reduced trading will place these dividends in jeopardy in the New Year unless inventory levels can be reduced and liquidity improved. However, in spite of the two weeks reversals on the

New Zealand share market and the likelihood of a fur-

ther fall in the Immediate future, the effect of this could be to return some sanity to a market which has been progressing too fast in view of likely company results. Once the present decline has run its course, which is expected to be more of an

adjustment to a realistic price level, the market should resume its upward trend, although at a reduced and less uncertain level than investors have been accustomed to since February. The Wool Commission’s decision to delay setting a new floor price f6r wool until after the winter sales at the end of August postpones one of the most important factors in the setting of share prices. Preference Shares When U.E.B. Industries and N.Z. Forest Products hold their annual meetings soon they are likely to meet strong opposition from ordinary shareholders on the companies' proposals to raise the preference dividends.

U.E.B. has proposed Increasing the preference dividend from flj to 7j per cent while N.Z. Forest plans to increase the dividend from 5} to 61 per cent. The reasons for the increases appear to lie in the declining value of the preference shares on the market and their inability to appreciate and thus give capital gains to the shareholders.

However, buyers of preference shares must be aware of this when they take them up and presumably the advantages of preference to dividend and tax concessions once the shareholders’ tax rate rises above 35c in the $l, would be the chief reason for their acquiring them. Unfortunately, preference shares are often misnamed; some are preferred to dividends only, which place them in a position where they are little better and perhaps worse than debentures, while others are preferred to dividends, and disposition of assets on winding up. Any buyer must read the company’s articles of association to see what rights accrue to the preference shares but this is often impracticable. Preference shares of both companies were selling below par before the dividend proposals were brought up. However, the payment of higher preference dividends is not in the best interests of ordinary shareholders, and is also contrary to the principle of maximisation of earnings which most companies profess to hold. Because of the declining interest in preference shares, a better scheme might be to buy out preference shares, or exchange them for ordinary shares or debentures, with eventual gains to both the company and ordinary shareholder. Sea Products The strong probability that New Zealand Sea Products Export, Ltd, can get the appropriate Government assistance to help to overcome its present difficulties removes a great deal of the uncertainty surrounding the company’s operations. For one, this assistance, which implies something other than just financial support, will reassure shareholders that the control of their company will remain in the hands of the board, and not be dictated largely by creditors.

Also, Sea Products can now proceed with its capital reorganisation plans which once this financial crisis is overcome, will be th 6 major factor affecting the future of shareholders. There seems little doubt that the only practicable solution to increasing the capital structure is to issue more shares at somewhere below the present par value of 50c and as much as possible below the market price of the shares, to attract shareholders and others to take up the issue.

Because of this, it is important that the market value of the shares does not fall below perhaps 25c. The strong probability of Government aid and the possibility of improved catches make this more likely than one would have thought two weeks ago. Marketing Another point the company must make is that its marketing arrangements for its catches are sufficiently well organised to ensure that all fish caught can be sold at satisfactory prices.

The Government appears to recognise the dual role being

carried out by Sea Products which is benefiting New Zea. land. This is the considerable amount of research being done and the earning of overseas currency.

The late Dr W. F. Hampton, who made a study of the fishing industry late in 1966 and whose report was released last week, contrasted the paucity of research into the fishing industry with that poured into dairy and meat research.

Both industries have the same primary objective, that of earning foreign exchange, but while Government and farmers’ money has been readily put into dairy arid meat research in the past, the financing of the fishing industry research seems largely in the lap of companies such as Sea Products. Issues, Calls Pending Al«x Harvey.—. Bonus l<iu« 1:5. Booke cloee. . . July 13 Coneol. Blastic Bonue istue 1:3. Ex bonue .. July 22 P.T.Y. Industries.— Bonus issues 5.7. Ex bonus .. July 22