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Fast food, rubber goods shine in ho-hum year for NZX 50

Fast food, rubber goods shine as NZX 50 ends 2010 where it started

By Paul McBeth and Jason Krupp

Dec. 29 (BusinessDesk) – Shares of Skellerup Holdings Ltd., the rubber goods and milking equipment maker, more than doubled in 2010, making it a standout in a year when the benchmark index eked out a 2.9% gain.

With one day of trading left in 2010, Skellerup is heading for a gain of more than 130%. Restaurant Brands NZ Ltd., the operator of KFC, Pizza Hut and Starbucks outlets, was the No. 2 performer, climbing 58%, its second annual rally after soaring 175% in 2009.

The past 12 months has been a period when the economy failed to deliver the recovery many investors had bet on in late 2009, after the nation had emerged from its worst recession in 18 years. The recovery faltered, leading to a 0.2% contraction in third-quarter gross domestic product amid tepid consumer spending, a weak housing market, finance company failures, earthquake and snowstorms.

“A lot of investors and brokers will probably think of this as a year they would rather forget,” said Grant Williamson, director at Hamilton Hindin Greene. “Market indications are that the economic outlook is a little cloudy. Look at the GDP number we just had out and interest rates are very depressed.”

The NZX 50 recovered from a mid-year slump that pushed the benchmark to a 12-month low in July. Since then it has climbed 14% to end the year almost square.

Globally, analysts grew more pessimistic as the year wore on with the European sovereign debt crisis and a hiccup in America’s economic recovery putting the skids on the prospects of an early recovery. Though New Zealand’s central bank began tightening rates mid-way through the year, as it flagged through 2009, Governor Alan Bollard was forced to back away from rate hikes when it became apparent the local economy was struggling to wake up.

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A year ago, investors were upbeat about the local stock market in 2010, amid optimism the November 2009 initial public offering of Kathmandu Holding heralded a resumption of companies selling shares and going public. That never happened. Dairy company Synlait Ltd. and biotechnology group Biovittoria Ltd. were forced to look overseas for fund rather than list locally.

Only scented candle maker Ecoya Ltd. and property investor DNZ Property Fund Ltd. joined the main board this year. Total capital raised on the NZX in 2010, based on November data, was $2.9 billion, of which $1.2 billion was equity. In the same period of 2009, when some companies were forced to boost equity to strengthen their balance sheets, a total of $$6.2 billion was raised, including $3.2 billion of shares.

Hamilton Hindin Greene’s Williamson said the lack of companies coming to market was “disappointing” and a “big worry for everyone.”

“That is a major problem for the New Zealand share market – we don’t have the risk tolerance for new listings,” he said. “We saw that with Synlait earlier this year, it is very difficult to list and particularly large companies are probably going to look further afield or remain private.”

Investors are hopeful the government will step up starting in 2011, by opening up ownership of state-owned enterprises. That was among recommendations of the Capital Markets Development Taskforce, a high-level ideas group tasked with recommending ways to revive New Zealand’s capital markets.

Prime Minister John Key, who head’s into next year’s general election leading in opinion polls, has vowed not to sell state assets until his next term.

Stuart Hardie, an adviser at Craigs Investment Partners, said 2011 will need a couple of good IPOs, and this may be stoked by a pick-up in risk appetite for “good dividend paying blue-chip New Zealand companies.”

“It would be great if some (SOEs) were listed,” he said. “The scary thing is, you’ve got to have a capital market – it’s part and parcel of a developed economy – but it has been getting a bit too small here, and now a lot more people are investing in Australia for growth.”

Though investors have been looking across the Tasman to invest in equities, the return on New Zealand’s benchmark index outpaced Australia’s ASX/S&P 200 which fell 2.4% in 2010.

Though Fletcher Building Ltd. and Telecom Corp. fell 2.5% and 9.4% respectively in 2010, Hamilton Hindin Greene’s Williamson has them both on his picks for 2011. Fletcher is likely to benefit from the rebuild of Canterbury following the September earthquake, while Telecom is set to perk up as a priority bidder for the government’s $1.35 billion roll-out of high-speed internet.

He also favours Contact Energy Ltd. in 2011, which will probably reap the benefits of a three-year capital expansion plan that comes on board in the next couple of months. Contact’s shares rose 2.3% to $6.20 this year.

The stand-out for the NZX 50 was fast-food franchise holder Restaurant Brands which backed up 2009’s 175% surge with a 58% gain to $2.65 this year as new chief executive Russel Creedy continued down the path of closing underperforming Pizza Hut and Starbucks stores, while boosting the profile of the ever popular KFC brand.

Still, Restaurant Brands was eclipsed by rubber goods manufacturer Skellerup, which replaced Pike River Coal Ltd. in the benchmark index, as it jumped 129% to $1.18 in the year to date.

Craigs’ Hardie said the company has a greater focus on the dairy sector now after what had been a hammering in 2009.

“It’s not just gumboots, a lot of their products go into dairy milking machines,” Hardie said. “They really got their shop in order.”

Trucking company Mainfreight Ltd. was the third best performer in the year, up 40% to $7.87 as it squeezed more profitability from America and eked out bigger returns from Asia.

Jeweller Michael Hill International Ltd. was the fourth best performing company as its Australasian businesses offset sagging returns in North America, even as gold prices hit record highs throughout the year. The Hill family used the opportunity to mount a takeover bid to lift its stake to 50.2%. The shares gained 32% to 88 cents this year.

National carrier Air New Zealand Ltd. rounded out the top five gainers, up 27% to $1.50 this year. The airline managed to maintain profitability throughout the global financial crisis, which damped demand for long-haul travel amid mounting fuel prices and dwindling disposable incomes.

Coal miner Pike River Coal suffered the biggest fall from grace, following its deadly explosions and receivership after a development programme that had slipped behind schedule, delaying its much-needed cash flow.

That also sent the mine developer’s 29% owner, New Zealand & Gas Ltd., to the bottom of the index, down 49% to 85 cents this year. NZOG had already stumped up funds to keep Pike River’s operation continuing and to meet mine damage and labour costs.

“Pike River Coal is really the sad story of the year,” Hardie said. “They were one of the few mining companies on the market for a long time, and the disaster effectively wiped out all their value and dragged the NZOG price down as well.”

The second-worst performer on the top 50 was NZX Ltd. The bourse operator and regulator had a tough year after it missed out on hosting an Australasian electricity hedge market and was forced to book losses on the sale of its TZ1 carbon registry.

That wasn’t helped by a lacklustre year of trading, which saw the total value of trading on its equity and debt markets drop 9.6% to $2.2 billion in the first 11 months of the year, compared to 2009. The shares slumped 32% to $1.55 this year.

Two strugglers from last year, Fisher & Paykel Appliances Holdings and Nuplex Industries Holdings, were at opposite ends of the spectrum in 2010. Whiteware manufacturer F&P kept treading water after last year’s deeply discounted share sale to bolster its balance sheet, with the shares falling 13% to 56 cents, while resins maker Nuplex turned itself around with the stock up 19% to $3.50.

Retailers had a tough time in 2010 as households used record low interest rates to focus on repaying debt rather than ramp up spending.

Alan Moore, who helps manage $600 million at Milford Asset Management, doesn’t expect the sector to rebound any time soon. One of his winners for 2010 was clothing chain Hallenstein Glasson Holdings, which rose 24% to $4.09 and managed to boost profits in a hostile environment.

Outside the NZX 50, the best performer in 2010 was software company Diligent Board Member Services Inc., which soared 152% to 63 cents, having reported a break-even cash-flow in the September quarter. Moore said Diligent will be a stock to watch in 2011 as it “really stands out as the leader in the market.”

Juice maker Charlie’s Group was the second-best stock on the broader market, climbing 144% to 20 cents after it secured an Australia-wide roll-out into Coles supermarkets.

Allied Famers Ltd. was the worst-performing stock on the NZX, falling 81% and marking its second consecutive year as the biggest loser. The company, whose Allied Nationwide Finance unit fell into receivership, was punished after the failure of its ambitious plan to convert into a major financier by acquiring the Hanover Finance and United Finance loan books in a debt-for-equity swap last year.


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