Monday, September 1, 2008

Who is attacking your portfolio value?

As an investor in the New Zealand stockmarket, you might think your portfolio has been negatively affected mainly by the Sub-Prime mess and its associated fallout but that is where you would be wrong my fellow investor.

The biggest impact on business and investment in New Zealand is Government, of all colours but especially rampant over the last 9 years of a Labour tenure.

Why would you be surprised?

I’m talking about the policy and legislation that indirectly affects business and investing and I’m talking about direct attacks on listed New Zealand companies.

Off the top of my head I can name a bakers half dozen of companies that have not only had their bottom line directly affected by Government meddling but had their share prices savaged as a result.

Sky City Entertainment [SKC] Contact Energy [CEN] The Warehouse [WHS] Auckland Airport [AIA] New Zealand Refining [NZR] Mainfreight Ltd [MFT] and Telecom New Zealand [TEL] have all been victims of the heavy State hand.

The biggest impact of all has been felt at Telecom, not once but twice.

The Labour Government announced a few years back that Telecom would be regulated, the share price was hit hard, then another announcement was made last year that the company would be split into three parts. The share price was whacked again.

This knocked the share price down from over 6 bucks New Zealand to as low as below $3. The share price currently sits just about $3. Billions of dollars have therefore been lost to New Zealand investors.

Just two weeks ago Telecom investors saw how the company’s bottom line was savaged from the last few years of Government regulation when a big drop in the company’s profit was announced.

One of the most publicly followed and reported recent examples of a massive impact on investor’s pockets from direct Government interference was the long winded Auckland Airport saga.

The Dubai Aerospace Investment Enterprise made its initial bid for New Zealand’s biggest airport in July 2007 , then it was turned down by Auckland Airport directors.

A subsequent bid was made by the Canadian Pension Plan Investment Board (CPPIB) a few months later and after much public and private finger pointing and negotiation, the initial bid was modified to appease a protesting Labour Government and a defiant Winston Peters.

Much value for shareholders was to be gained from the CPPIB bid/s, with additional much needed capital and tax breaks for shareholders forthcoming.

The share price leaped from pre-bid levels of below $2 to above the Dubai bid of approx $3.65.

After costs incurred by all parties involved, much time lost and investors in the airport waiting months with baited breath for an outcome, the Government decided to pass a retrospective law to put a stop to any deal based on what they called “sensitive land” that would have been part of any sale.

The Auckland Airport is a publicly owned and NZX listed company but was interfered with anyway.

Airport shareholders were subsequently faced with a share price plunge, when the CPPIB bid failed, to as low as less than $1.90 and it currently languishes at just above $2. Billions of private shareholder value was destroyed with one stroke of Michael Cullen’s pen.

Several million dollars were also incurred by the two failed bids.

A similarly long winded takeover saga to Auckland Airport is The Warehouse and bids by Food stuffs and Woolworths Australia for the company.

This particular saga is fast approaching two years in gestation and nearly a year of that has been prevaricated over by the State influenced Commerce Commission, headed by the Labour appointed Paula Rebstock.

Rebstock and her Commerce Commission are opposing any marriage between any of the aforementioned players because if any takeover occurs “competition will be lessened” in the grocery sector, in which The Warehouse is a minor player.

This has pulled directors away from their main objective, of running the company, and left them in limbo in a company development sense-especially relevant given the current harsh economic conditions having a severe impact on Kiwi retailers.

Extra costs in the millions in lawyers and associated costs for the company has also dragged on the bottom line and the whole saga is set to stretch out well into 2009 as Woolworths Australia are set to argue a new case against the commission in the Supreme Court, probably next year.

Investors in The Warehouse have seen the capital value of their company plunge from over $6.50 after Woolworths purchase of 10% of Warehouse shares for that price, to below 3 bucks when the announcement was made that the Commerce Commissions case in the Court of Appeal had succeeded in late July 2008.

Again billions of dollars of money has been directly lost by this Government department and their interfering in a listed company and more moola looks likely to go the way of the dodo and the hula hoop as the story drags on.

Contact Energy’s announcement of a stagnant full year profit last week, at a approximately NZ$232.8 million, this was crimped by Labour’s insistence on not building sufficient new power supplies over the last 9 years-for political not practical reasons-and Contact Energy having to use expensive diesel, coal and gas to service its customers.

A similar influence affected the profit of New Zealand Refining announced last week. Its profit was down 10% due to “high energy costs” and that is directly related to the inability of the government to build more power generation.

Millions of dollars have been lost to investors and from the bottom line of both Contact Energy and NZ Refining and future profit increases and investment in expansion of both companies are at risk because of expensive and uncertain power supplies.

The Tiwai Point aluminum smelter has also lost 10s of millions due to power shortages.

In the larger scheme of things, the current power crises has also impacted directly to the tune of a 3 billion loss to the New Zealand economy and associated crimps on future business development and investment in businesses like Contact Energy, NZ Refining and every sector of the economy, listed on the NZX or otherwise.

We all use energy.

Mainfreight Ltd [MFT] are going to face intense competition from the new State run rail company KiwiRail. Subsidies to business who need goods hauled will give an unfair advantage to the rail operator when competing for business.

While Mainfreight have both long and short haul divisions and operate trucks from seaports, airports and rail hubs and therefore may be able to transform their long haul business and capital expenditure to focus on a possible busier short haul business-Labour have a goal of doubling current freight volumes, the cost to do this is clear. It will be large.

Impacts on Mainfreight's New Zealand business in the future will be contingent on any other Government attempts to allow an inefficient State rail compete with trucking firms like Mainfreight by applying more cost to their business through additional legislation.

The biggest effect Government has had on me financially in a personal way and every other investor is with regulation affecting the prospects of Sky City Entertainment.

The banning of smoking and direct regulation over the size denomination of bills used in New Zealand casinos meant that company profits were cut by a huge amount in the 2005 year and the spectacular growth that the company had experienced in successive preceding years came to an end, like the dull thud of Winston Peters political career.

Management of Sky City haven’t helped their company situation in the past by making very poor decisions but the biggest impact on company bottom line has been without a doubt Government inference in our business, again for no other than political reasons.

The company seems to have turned a corner post regulation but they will never return to their previous year on year growth figures.

Last but by no means least, and a complete 180% turn from what I have talked about so far, let’s look at one example of how direct Government interference has positively affected NZ Windfarms Ltd [NWF]

Political posturing over the “climate change” issue has impacted on this company’s prospects to a huge extent.

The same Government legislation that has hurt Contact Energy, NZ Refining, Tiwai Point, a long list of other NZX listed companies and our economy as a whole, has had a positive impact on the NZX listed NZ Windfarms.

“Climate Change” law and other associated legislation has favoured the wind power generation of NZ Windfarms over the other forms of energy production of New Zealand’s traditional energy generators, that the likes of Contact Energy produces.

The shareholders’ of Windfarms have done well from their investment. Even one of the current Governments supporters, Jeanette Fitzsimons, from the Green Party, who is either a shareholder directly or indirectly through a trust, has done well out of law that she helped pass to benefit companies like NZ Windfarms.

My regular readers will know that I am not a huge fan of the current administration but this piece is not about attacking that administration per se.

What it is about is the perception that your investments in New Zealand are currently impacted mostly by other factors other than management, macro and micro economic factors or the subprime fallout.

The cost to shareholders has already been billions of dollars but more will be lost if inference in the private property rights of investors continues.

Keep that in mind when you are picking your investment and your leaders.

**Disclosure I own SKC, WHS, MFT and AIA shares

Relevant Share Investor reading

NZX share trades with strings attached

Port in a storm

Auckland Airport deal vetoed by Government

Vector sale hangs on political knife edge

KiwiRail will cost Mainfreight

c Share Investor 2008