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South Island Companies Endure Tough Quarter

South Island Companies Endure Tough Quarter
Deloitte South Island Index released

South Island companies found the going tough in the three months to September 2009, with the 32-strong Deloitte South Island Index losing $166m worth of value in the quarter, a decline of 5.3 per cent. Overall, the combined value dipped below the $3b mark, slipping back to $2.98b. In comparison, the NZX50 enjoyed a relatively fruitful period, increasing by an impressive 13.1% during the quarter.

For the first time since the Deloitte South Island Index’s benchmark opening date of 31 December 2006, it was overtaken by the NZX50, the ASX and the Dow Jones in terms of market capitalisation movement.

The largest decreases in market capitalisation came from the primary and financial services sectors, with respective declines of 23.7% and 65.7%. Pyne Gould Corporation and PGG Wrightson bore the brunt. PGW saw its market capitalisation drop by $155m (43.4%) in the quarter, reflecting the impact of the recession on the rural sector, and the downturn in dairy activity as the financial year came to a close. Meanwhile, PGC’s market capitalisation declined by $158 million (79.0%) in the quarter as its share price was driven down as shareholders sold down in order to fund the purchase of cheaper shares in the company’s $237 million rights issue.

At the other end of the scale, biotechnology companies increased their value by 50.5%, led by BLIS Technologies and Pacific Edge Biotechnology, although this sector comprises just 1% of the overall Deloitte South Island Index by value.

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Paul Munro, a corporate finance partner at Deloitte in Christchurch, said there were some positives amongst what could be seen as a haze of bad news. “For example, we’ve just seen Kathmandu launch its initial public offering as it looks to raise up to $457m on both sides of the Tasman – that’s a pretty strong signal that not everybody is predicting doom and gloom. And even if we look at the 32 companies’ performances in the quarter, there are actually 18 that have increased or held their market capitalisation steady in the past three months, with 14 losing ground.”

Kathmandu is expected to join the Deloitte South Island Index next quarter, lifting the number of companies in the Index to 33.

Mr Munro said Deloitte had seen those involved in New Zealand capital markets shift their focus away from revenue growth and market share. “The challenging economic environment has seen a switch as people zero in on underlying earnings and normalised profits instead. As the pendulum starts to swing back towards optimism we expect to see an increasing focus on bottom line results in terms of both profit and cash flow.”

He said the combination of the credit crunch and a recession with possible deflation creates a unique set of circumstances where companies have dual challenges. “The first is to manage their short-term credit, cash and performance needs. And the second is to effectively position their businesses to utilise assets with an eye towards growth as they climb out of the recessionary trough.”

Other findings:
• Ryman Healthcare was the outstanding performer in the quarter, with a gain in value of $115m (14.4%). It remains the largest Deloitte South Island Index company with market capitalisation of $915m, with a significant gap back to second-ranked Pike River Coal ($354.4m).

• South Port New Zealand Limited, the southern-most commercial port in New Zealand, had its biggest quarterly increase since the inception of the Deloitte South Island Index, gaining $24m (45%).


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