THE MARKET Profit-takers brake trend but index bounced back

Press, 30 August 1986, Page 24

THE MARKET Profit-takers brake trend but index bounced back

By

ADRIAN BROKKING

The New Zealand sharemarket took a breather this week as investors pocketed some of their winnings and adopted a wait-and-see attitude, only to be back again towards the end of the week.

Barclays’ index of industrial shares fell 11.26 points the first two days, steadied on Wednesday, and then came back slowly to put on 14.89 points to close at 2977.51 — a net gain for the week of 3.63 points. Trading was heavy on Monday and Tuesday and then settled down to a daily average of some 9.5 million shares. Total sales for the week were 53.2 million shares.

Still, the undertone of the market was definitely easier, and for the whole of the week falls outnumbered rises. It was the return to favour of investment stocks that pushed the index back up. Foremost among these was Apex, which was the subject of take-over rumour. The shares rose 27c during the week —17 c of it yesterday. Speculation about the supposed suitor included Brierleys (of course), Robert Jones Investments, and Kupe Investments. Investment stocks

regularly come under fire, but the market obviously loves them. Some brokers blamed Monday’s reversal on the remarks by Sir Robert Muldoon, who warned investors of the lack of substance, if this scared investors at all, it was not for long.

The chairman of Cable Price Downer this week renewed his attack on the boom conditions in the sharemarket surrounding the entrepreneurial companies. In a part of his address that he did not read out (copies of his speech had been distributed to the press) and that in places was almost poetic, Mr Steele said that CPD was a company that created the true wealth of the nation and provided employment for thousands.

“But on the stock exchange tens of millions of dollars change hands daily, chasing bits of paper with large amounts of money borrowed offshore,” he said. “As far as the eye could see, there were no significant jobs being created, few new companies of any substance being registered, and little capital expenditure being made on plant and machinery.” There were just rows and rows of high-rise buildings to house more and more people to shovel more and more borrowed money around a system that was making a mockery of the expression of an honest day’s work for an honest day’s pay.

“In the upswing of an economy,” he said, “the leveraging of assets (using real assets to borrow money to buy more assets to borrow more money and so on) is the classic way of making spectacular returns.” “The system works quite as spectacularly in

reverse, If there should be a reduction in the rate of return on the real assets that prop up the whole inverted pyramid of borrowing.

“I know I am not in a minority of one in expressing my concern at the white heat of today’s equity market, a heat generated in the main by highly-leveraged companies with little or no constructive track record.

“My concern is that when the heat dies down, as it will, the edifices of those ramshackle enterprises that collapse will be sufficiently far from us in commercial terms so that we will avoid hurt. “The insulation effect is what CPD is all about — prudent financing, innovative activity, and the perceived need to be around for tomorrow’s New Zealand. The Wellington sharebroking house, Frank Renouf- and Company, published a research report on CPD that predicted a time of low profitability ahead for the company. CPD imports have been hurt by the strength of yen and Deutsche mark, and its exports by the depreciation of the Australian and U.S. dollars. “As the company is exposed to the cessation of major project construction activity, we forecast an even less favoured result for the coming year,” the broker said. Frank Renouf and Company also researched Smiths City Market Group, Ltd, suggesting that the intrinsic value of the shares is about 134 c.

Clearly the sharemarket does not agree with this assessment. The shares traded as high as 230 c early this month, and closed this

week at 189 c. The annual report, published this week, contains a reference by the directors to the share price performance. “During the twelve month period to April 30 our shares were again the top performing retail stock according to the Gross Returns analysis of one of New Zealand’s leading sharebrokers,” the directors said.

Last year’s analysis showed that in the three year period 1983-85 Smiths City Market was the sixth best performer out of more than 250 public companies listed on the New Zealand stock exchange.

The SCM directors then go on to say: "However, nothwithstanding this very satisfying performance, our shares currently still have a

marked price, relative to earnings, that is below the retail sector average. “In view of our consistent profit performance, and continuing major expansion prospects, we believe our shares should be priced at a premium on the retail sector average. On this basis we clearly have potential to Improve even further relative to the sharemarket over all, and it continues to be one of our major objectives to strive to our utmost to see that it happens,” they said.

The market was also helped a little this week by a stand for 20 per cent of the Northland FM capital, at 90c a share, by the Wellington sharebroker Francis Allison Symes and Company.

Sharetable — page 26