SHAREMARKET Mild Budget kicks recovery along

Press, 29 July 1989, Page 24

SHAREMARKET Mild Budget kicks recovery along

By

NEILL BIRSS

The Budget and some good results this week increase confidence that the sharemarket is recovering. The steadiness of the markets yesterday showed the Budget was well anticipated by business. By largely conforming to monetarist policy it maintained business confidence. The chief benefits for the sharemarket will be: • Lower inflation, which will improve shares as an investment relative to fixed-interest investments. • Falling interest rates, and a stable environment, which will help the recovery of firms listed on the Stock Exchange. The medium and large businesses that dominate the market listings will also benefit from crumbs such as the lowering of land tax for larger firms and cheaper diesel (this will help firms such as Wilson Neill and Fletcher Challenge with fishing operations). The increased duty on liquor may hit Magnum and Lion Nathan, but Wilson Neill has got out of the business in time. The Barclays index rose 0.89 points yesterday, giving a gain for the week of more than 58 points. Another week like this and the index, at 1978.97 yesterday, will be through 2000. Rises on the market outnumbered falls yesterday, 21 to 17. Overnight Wall Street rose again, the Dow Jones closing 23 points up at 2636, a 50-point gain for the last two sessions. Confidence interest rates will fall and take-over fever among pharmaceutical companies were the driving forces. Australian prices were steady yesterday, but Tokyo again eased, the Nikkei index falling 79 points on the Thursday close after reaching a record high just after the opening. Wilson Neill topped the turnover yesterday, 6.2 million shares selling for a total of $3.6M. Smiths City The institutions shuffled their

shareholdings in Smith City Group in the week leading up to the company’s reporting a loss for the 12 months ended April 30 of S6M. One of them, the National Provident Fund, yesterday was given permission to lift its stake in Smiths City to 100 per cent. Mr John Perham, the chief executive of the fund, says National Provident has no intention of taking over Smiths City — it is not in the business of managing investments. But with the one-for-five issue of converter notes by Smiths City National Provident will lifts its stake to more than 20%, which is the threshold beyond which Commerce Commission approval must be obtained. Smiths City Group has emerged from a tough year. Retailing has been hard for everyone, but Smiths City has had additional problems digesting the Smith and Brown retail chain. In the short term, the purchase was probably wrong, Smiths City emerging with surplus sites and property when prices were falling, and with stock to quit, often at a loss. In the longer term, the increased market share in the North Island may justify the purchase. The appointment of a new group chief executive under the former chief, Mr Kevin Smith, who continues as chairman, other executive appointments, redundancies, and general trimming have shown the company is addressing its problems. With an economic recovery, the group should produce a much better result in the current year. The changes in land tax will help slightly: they reduce the bill for large organisations such as Smiths City and increase the burden on small specialist competitors. ‘Doers’ thrive PDL’s improved profit (see previous page) shows that manufacturers and exporters are performing well. Some manufacturing has been moved overseas, but the research

and development is still done wholly in Christchurch. The company spends 3% of its revenue on R and D, all done within the firm, and this is obviously paying off. Fernz Corporation, the Auck-land-based chemicals and fertiliser firm lifted its profit a quarter in its latest year. It is export oriented in that it services farmers. Applefields is another example of an exporter being smiled on by the market. It rose to 195 c this week — and is now 129% above its price at the beginning of the year, 85c. One reason the market is backing “doers” rather than speculators is imputation. This is the passing on of credits for tax paid by the company. Generally these are not available from capital gains in a firm’s assets. So suddenly there are two kinds of dividend money: that which comes bar; and that which comes with the imputation credits, and generally from firms which were overlooked in the hallucinatory days of the sharemarket boom. Cavalier Corp The remarkable performance of Cavalier Corporation shares confirms the market is rerating firms that “make and do things” and preferably export. Shares in such firms are in short supply after the take-over mania. Cavalier’s shares were checked 3c on Thursday after they reached 170 c on Wednesday, exactly double their price in January. Mr Anthony Timpson and Mr Grant Biel, executive directors, control about 35% of this wool and carpet company, which was formed in July, 1984, through the merger of Cavalier Carpets and E. Lichtenstein, a major wool scourer. In June last year Cavalier took over the UEB subsidiary, the Bremworth Carpet Group. Mr Timpson, from Christchurch, once worked for Bremworth. He has a background in accounting and sales. (He will be re-

membered by some Canterbury people as a club cricketer in the 1950 s and 19605.) The New Zealand market for carpet is lifting slightly, but the Australian market has been hit recently. Mr Timpson points out that the sales of Cavalier shares have been on small parcels. The company is tightly held. Still, 100% gain in seven months is excellent performance in these times. The market’s interest in the two newspaper stocks, Independent Newspapers and Wilson and Horton, was justified by INL’s good result yesterday of $20.6M before extraordinaries, which is up 28% on revenue up 60%. INL is now at 440 c, which is up 6% this month, and up 20% for the year. Wilson and Horton continues to rise. It lifted 3c yesterday to 725, bringing its lift for July to 6.9% and its lift for the year to 30%. N.Z. Steel The take-over of New Zealand Steel by Helenus should help along Fisher and Paykel shares, due for rerating as a manufacturer and exporter. Fisher and Paykel rose 3c to 408 yesterday, bringing its rise for the month to 7.3%. Fisher and Paykel has 25% of Helenus, and will benefit further by receiving S9BM for its onequarter stake of N.Z. Steel. The net gain for Fisher and Paykel is a cash inflow of S2SM. BHP has 31% of Helenus, and the deal draws attention to this prospering giant. Its greatly improved position in the steel industry (even before the N.Z. Steel bid), higher prices for oil, and its increasing output from the Timor Sea oilfields make BHP’s prospects good. In recent years’ BHP has invested more than SNZI2 billion in diversified industries, and these are beginning to give returns. In its latest year, BHP reported a net profit of more than $1.5 billion.