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New Zealand crushes Australia each year in the rugby, but our share market mauls the New Zealand Exchange (NZX) for size, liquidity and profile with global investors. That is why more NZ companies are dual listing on the ASX, creating opportunity for Trans-Tasman investors.
I have followed this trend over the past few years and believe many more NZ companies will dual list on the ASX this decade and next – or in Xero’s case, move its NZ listing to the ASX.
Several factors support this trend. First, ASX changes in September 2015 made it easier and cheaper for NZ companies listed on the NZ share market’s main board to list on the ASX. They do not need to submit a special prospectus or deal with two sets of listing rules.
Second, NZ companies, like their Australian peers, want to access a larger capital pool and attract foreign investors. On some measures, Australia’s investable capital pool is at least five times larger than that solely available for NZ-listed companies.
Third, a dual listing on the ASX provides more companies for valuation comparison. Analysts can compare a NZ agribusiness, for example, to many Australian agribusiness stocks, and decide if a higher valuation multiple – and share price – is warranted.
Fourth, many Australian fund managers that invest in large-cap domestic equities must buy and sell those on the ASX, according to their investment mandate. NZ companies that want to attract such fund managers to their share register need a NZX and an ASX listing.
The potential of these combined trends, suggests high-quality NZ companies getting a modest valuation boost when they are exposed to a much larger Australian capital base, broking community and media coverage compared to NZ financial markets.
This trend is well established. Nine of the top 10 NZ-listed companies by capitalisation, and more than half of the top 50, have a primary listing on the NZ stock exchange (NZX) and a secondary listing on the ASX. They include Air New Zealand and Auckland International Airport.
Many more NZ companies have joined the ASX this decade through the initial public offerings (IPO) market, where they start as dual-listed companies. The volume of NZ small-cap companies with dual listings on the ASX, in particular, has grown steadily in the past five years.
Fifty-eight NZ companies are now dual listed in this market, according to ASX data. NZ accounting software star Xero caused a stir earlier this year when it delisted from NZX and moved to the ASX 200, disappointing NZ fund managers.
Xero and The A2 Milk Company have starred. I wrote favourably on A2 Milk in September 2017 at $5.39. A2 Milk has soared to $10.11 and I remain positive on its long-term prospects, even though it trades on a forecast Price Earnings (PE) multiple of about 31 times. Morningstar’s fair value for A2 Milk is $13.30.
I am less enthused by Xero at its current price. Great company. Great potential. But a $7 billion market capitalisation for a loss-making company is factoring in extraordinary growth.
My concern is how much money and time Xero will need to break into the United States accounting-software market, which a few giant providers dominate. Best to stand aside for now.
In addition to A2 Milk, here are five preferred NZ stocks dual listed on the ASX.
I first took a positive view on AIA in November 2017 at $5.55, and in February 2018 nominated the NZ airport owner as an encouraging result from the interim profit-reporting season. AIA now trades at $6.73 and can go higher in the next 12 months.
Like Sydney Airport, AIA has a monopoly asset and is benefiting from the inbound Asian tourism boom. AIA’s FY18 result reinforced the benefits of investment in its airport terminal, as revenue from retail outlets leapt, offsetting slower passenger growth that crimped aeronautical revenue.
AIA has terrific property-development potential and NZ rates well with Asian tourists. Higher interest rates are the main risk for AIA and other airport stocks, but the company’s long-term fundamentals are strong, and it is cheaper and a lower risk play than Sydney Airport.
I have outlined a positive view on Kathmandu several times in the past few years. The NZ-based outdoor-wear retailer has repaid the faith, delivering an average annualised total return (including dividends) of almost 33% over three years.
Kathmandu delivered a terrific FY18 result with record sales, profit and operating cash flow. New management is doing an excellent job on brands and inventory and, as I have written before, Kathmandu’s product range has never looked better.
I still think the key to Kathmandu is its Summit Club, which had 1.72 million members in 2017 and is growing at about 10% a year. That loyalty program gives Kathmandu a huge amount of data to customise offers for members and uses low-cost channels to reach them.
Selective use of discounting is helping Kathmandu’s profit margins and it has the potential to sell more products overseas, through other retailers. In spite of the recent price rally, I sense Kathmandu still has a lot of potential growth to exploit, though gains will be slower from here.
The NZ-based owner of KFC stores is among my favoured fast-food stocks. The other, Collins Foods, also owns KFC stores. Restaurant Brands has an average annualised total return of about 30% over three years, making it one of its market’s best-performed small-cap industrials.
Restaurant Brands has 155 KFC stores in Australia and NZ, 37 Pizza Hut stores in NZ, 22 Starbucks and 82 Taco Bell and Pizza Hut stores in Hawaii. The fast-food franchisor has grown steadily this decade and is larger than many Australian investors probably realise.
Restaurant Brands’ sales for the second quarter of the financial year (16 weeks to 10 September 2018) were NZ$251 million, an increase of 11.6% on the same period last year. Acquisitions and steady same-store sales growth are driving the gains.
The performance of KFC, within Restaurant Brands and Collins Foods, impresses. Australians continue to eat more chicken – more than 46 kilograms per person each year – and KFC has excelled at menu innovation. Like it or loathe it, KFC is extraordinarily popular.
Restaurant Brands needs to deliver positive sales growth from its Pizza Hut operations in NZ and Hawaii, and show the market it has more contributors to growth, beyond the KFC division. But it’s hard to fault Restaurant Brands’ performance in the past few years and its potential to grow by acquisition.
Source: NZX (prices in NZ dollars)
The NZ-based provider of cinema software, one of the market’s genuinely global small-cap stocks, has rallied from a 52-week low of $2.25 to $3.50.
Walt Disney Pictures in September announced it will license Vista’s Movio research and analytics products and services – a deal that reinforces Movio’s potential, as film analysts use data-analytic tools to understand film demand and marketing via social media.
Vista has excellent leverage to global growth in the cinema industry. The boom in middle-class Asian consumption has sparked booming cinema attendance in emerging markets. Vista’s share of the United States cinema software market, through Vista Cinema, is 45%.
A share price above $4 for Vista within 12-18 months would not surprise.
I first outlined a positive view on NZ King Salmon Investments in September 2017 at $1.47 in a feature on agribusiness. The stock now trades at $2.44.
To recap, NZ King Salmon, one of a handful of aquaculture stocks on ASX and NZX, raised $74 million in an IPO at $1.07 a share in October 2016.
NZ King Salmon is the world’s largest aquaculture producer of king salmon under its Ora King, Regal and Southern Ocean brands. In my view, Salmon has some of the best long-term prospects of all seafood categories
Aquaculture has higher regulatory and environmental risks, which NZ King Salmon appears to be managing well. Some ethical investment funds will not invest in aquaculture stocks because breeding fish in captivity is thought to create environmental problems from fish waste.
But responsible aquaculture farming is badly needed to feed growing populations and satisfy rising western demand for salmon and other popular fish varieties. The well-run NZ King Salmon looks the pick of aquaculture stocks at current prices.