The temperature of foreign investment in Australia and New Zealand
Considering their enormous land mass, Australian companies are finding it a tad difficult to get on the radar screen of overseas investors. While the resources sector, utilities and financial institutions remain sought after, small-cap companies are finding it tough going. Spare a thought, too, for their neighbors across the Tasman in the much smaller New Zealand market.
As in Asia and Europe, if you trawl the region for 'value', sound corporate governance principles and top-notch investor relations activities are attractors. Chong Yoon Chou, investment director with Aberdeen Asset Management in Singapore and Sydney, says he has 'no complaints' about Australia in a qualitative sense, especially compared to other parts of Asia: 'Management has by far higher standards of corporate governance; there is due regard for shareholders.'
But, he says, Aberdeen is underweight on Australia because it is 'an expensive market'. He explains: 'Elsewhere in the region, due to recent upheavals, valuations have come down a lot. But Australia seems to have done quite well during that time, and now stands out as being one of the more expensive countries. But it's not like the case of Japan or the US, which may be underweight because there's something wrong on a macro level or on a corporate basis. There is simply better value to be had around the region.'
Andrew Milligan is head of global strategy at Edinburgh's Standard Life, which opened a Hong Kong office in December 2001 and which, at this stage, is 'pretty neutral on Australia' compared to countries like Korea, where the firm anticipates a World Cup-fueled consumer boom.
'Like the UK, Australia is a relatively defensive equity market,' Milligan says. 'If we are seeing an upturn globally, it is still our view and the view of a majority of investors that Australia will find difficulty in moving ahead,' he adds.
Eye on the US
As a country that relies heavily on export income, Australia needs to keep an eye on the weakening US dollar. 'It is possible that investors will diversify out of US assets to elsewhere, and they will be looking at how different countries react if the dollar drops,' explains Milligan. 'It will be a steady drop - nothing that countries and companies can't cope with, but it puts pressure on exporters. Then country analysis will become very important,' he says.
Aberdeen's Chou adds that Australia has a lot of domestic support, which has helped keep the market 'chugging along'.
'It is sometimes seen that domestic investors favor local markets a bit too much, but that may change with the maturity of investors, and as tax structures liberalize to allow investors to go look overseas,' Chong Yoon Chou adds.
Catuity is one company which has found support in the local market more reliable than its recent foray into the US. Chairman David Mac Smith describes the IT company as an 'unusual animal': 'The company was founded in Australia, but the center of business is now in the US. So it's a US company but 95 percent of our shareholders are Australian. The research and development center is in Australia, the CEO and executives are American.'
Catuity is listed on Nasdaq and the Australia Stock Exchange (ASX), and trades common shares on both. The Nasdaq listing 18 months ago, part of an attempt to grow the US shareholder base, came at 'the worst possible time,' says Mac Smith. 'It has proven very difficult.'
Catuity uses one PR agency in Australia and a different one in the US. It relies on e-mail, its web site and regional IR site irasia.com to disseminate information to its 3,000 shareholders and analysts.
'You have to somehow get analyst reports written to get to retail investors,' Mac Smith says. 'But the ability to get an analyst report on a small-cap stock is virtually non-existent. For us, it is very tough in the sense that Catuity has a market cap of about US$25 mn, so getting on the radar screen is very difficult. Many firms have shut down their small-cap coverage. That situation has been around for about a year and will probably continue. In these markets there's not a lot you can do as a small company.'
Justin Arter, joint head of equities at JB Were in Melbourne, agrees there's not much small-cap stocks can do but adds that even the larger stocks have 'taken a caning in the last 12 months.'
'The focus is on other Asian countries,' Arter says. 'In terms of value, investors have seen the Korean market at 12 PE, for example, and they think it should be at 16 PE. Australia never fell as far as these markets, so until there's an earnings recovery, that's a standard cyclical response.'
Arter explains the bias against small caps: 'In the past 12 months there has tended to be a focus for liquidity reasons on some of the larger stocks; and utilities and the defensive market like banks have been well sought-after. Investors are looking for the usual things - growth, good earnings prospects. At the moment senior resources companies offer an opportunity to tap into the better growth picture should that emerge.'
He recommends Australian companies keep in investors' faces even when they're out of fashion, pointing out that most larger caps have been continuing as usual with roadshows. Meanwhile, overseas investors are increasingly visiting Australian companies on their home turf, rather than waiting to be wooed.
Opening the kimono
Arter boasts that Australian companies generally are 'among the best at presenting in the world, in terms of articulating their strategy and outlook in the world. And his pick of Australian IR programs is ANZ Banking Group's. Stephen Higgins, IR manager at ANZ , says the bank has 'significantly increased our level of disclosure,' Higgins says. 'We call it opening the kimono.' ANZ now has strategy days once or twice a year, half-year results briefings which are webcast, and roadshows at least three times a year.
Higgins says staff were initially concerned about this level of exposure - why tell the world so much about themselves? 'But investors have responded very positively,' Higgins says. 'The feedback we've been getting is people saying how great it is, that they don't need to rely on analysts as much, because the level of trust they have in the information they are getting directly from us is greater.'
At first ANZ management feared giving away competitive secrets. 'But strategy can be replicated in other ways by a competitor, like poaching staff. In the end it all comes down to how well you execute that strategy. Over the past 18 months everyone has grown to be comfortable with the system - we certainly wouldn't now go back to having less disclosure. The challenge every six months is what else can we tell them?'
ANZ has been increasing the frequency of its visits to European centers like Frankfurt and Milan. 'Brokers keep telling us there's money there,' Higgins says. 'We are seeing increased investment coming from those centers, and our advice is that those funds will continue to grow.'
Investment manager William Malcolm with Standard Life Investments in Hong Kong agrees that ANZ stands out for its IR but says it is a 'classic case of a disaggregation between what is seen as a good company and a good investment. Even though new management has instilled a far greater rigor and there has been a marked increased in investor confidence, that has already been factored into the share price.'
Nevertheless, ANZ is continuing to think of ways to stand out, for example increasing the number of people from different management levels who attend roadshows and make presentations over the next year. 'We want to have people beyond the CEO and the CFO, and start getting the next level of management out there more often,' Higgins expands. 'Investors often go by their gut feel on management, and if they've never actually meet those people it is hard for them to make those judgments. We've already been getting more senior management out and about in Australia, and held a couple of major briefing days,' he says.
For Higgins, webcasting is the most significant IR development of the last few years. The downside, however, is the loss of an audience to engage with. 'There's a certain warmth, and a possible engendering of trust that can happen when you're eyeballing someone in the same room.'
It is that personal touch that John Doran, CEO of exploration company Roc Oil, says works for him. While Roc Oil doesn't employ anyone in a specific IR role, they do undertake what Doran calls 'permission marketing'. This entails 'not staying in comfy clubby zone,' but 'continually intersecting with new people.' Over time, building up rapport can lead to an investment, he says.
Since forming in late 1996, Roc Oil has privately raised more than US$35 mn from corporate entities and high net worth individuals worldwide. It listed on the ASX in 1999, raising A$150 mn.
'Our shareholders are predominantly Australian. Compared to most of our peer group we have lots of overseas investors, though the bottom line is that there are less than there should be,' Doran says.
Betting on companies
It seems investors are keenly following Australian stocks on a company basis rather than making sector bets. 'We are looking within sectors for companies that represent best-in-class at the right price,' Standard Life's Malcolm says. 'We spend a lot of time looking at return on capital with money going back into business, and relating that to the price of shares in the market. As a result we find that the value opportunities are limited at the moment.'
That said, Malcolm insists Standard Life takes investor relations seriously: 'There are three things we look for: accessibility to management, a high level of transparency, and consistency of information dissemination. Levels of corporate governance in Australia and New Zealand are first class. If you compare them with somewhere like Malaysia, it's a classic case of chalk and cheese. But in a way we take good IR in Australasia for granted.'
Standard Life's fund covering Asia-Pacific ex-Japan, amounting to £2.5 bn has a weighting of about 35 percent Australia and 1-2 percent New Zealand.
'Ultimately the reference point we use is the MSCI. New Zealand is small, and we place emphasis on managing risk for clients. It is a micro market, very heavily weighted towards NZ Telecom. So even if we love New Zealand, we have to be circumspect. We are very much stock specific, and that might be only one company out of about 50-60 names in a portfolio,' Malcolm explains.
That one company is likely to be Carter Holt Harvey (CHH), which Malcolm says has 'impressed with its reasonably new management and a good level of transparency.' He adds that the standard of IR in New Zealand is comparable to Australia, with companies wishing to attract more overseas attention positioning themselves as Australasian. This often means pursuing a listing on the ASX as well as - or in the case of CHH, instead of - a New Zealand listing.
ABN Amro's New Zealand forestry analyst, Dennis Lee, points out that while CHH is currently a dual-listed stock with the ASX as its secondary listing, it has applied for a primary listing on the ASX. 'This should help in terms of capital raising,' he says, adding: 'It is important for them to be listed in Australia, because most of their major assets are there in Australia, and they are a major player in the country.'
Fisher & Paykel is another New Zealand company which recently listed in Australia and on Nasdaq. This move followed the spin-off of the traditional white goods side of the business, Fisher & Paykel Appliances, and the renaming of Fisher & Paykel Industries which became Fisher & Paykel Healthcare.
The reason for the reorganization was to 'realize shareholder value,' according to Annabel Cotton, principal at Merlin Consulting, who is an IR consultant to Fisher & Paykel Healthcare. But since the listing, the stock has had mixed success with US investors, she reports: 'The way the IPO was done was to place all shares as ADRs in the US. The register has changed substantially since then, going from about a 10 percent Australian shareholder base to 25 percent, with the reverse in the US, which has declined from 25 percent to 10 percent.'
The company undertakes a number of IR activities. There were extensive roadshows in support of the IPO, and it's attended three US broker conferences already this year. Cotton says Fisher & Paykel was the first New Zealand company to do a webcast, putting it at the cutting edge of IR activities in the country. Apart from NZ Telecom, which has three people full-time in IR, it is rare for a New Zealand company to have a full-time IRO.
It's clear that in Australia and New Zealand, as elsewhere in the world, good IR is becoming an investment criterion in its own right. Standard Life's Malcolm concludes with a comment about one of his favorites, surfwear manufacturer Billabong: 'Good access to management and consistency in terms of the information they give. At a micro level we take comfort in the potential a company management demonstrates to guide their own destiny.'