tmmonline.nz  |   landlords.co.nz        About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds

NZ's Financial Adviser News Centre

GR Logo
Last Article Uploaded: Thursday, March 28th, 10:13PM

Investments

rss
Investment News

Tech stocks: Sector too big to ignore

The first article in Good Returns' technology series focussed on the background to the sector. This second article looks at the options for direct investment into the tech sector, through either listed or unlisted companies.

Sunday, March 26th 2000, 12:00AM

by Philip Macalister

There is a growing recognition that investors need to have some sort of technology exposure in their portfolios as IT is driving major changes in the global economy.

As sharebrokers Ord Minnett says the sector overall is too big to ignore.

Some of the questions investors and their advisers need to ask is whether they do it directly through shares (either listed or unlisted) or whether it is done indirectly through a sector specific managed fund, or whether the tech exposure in a general equity fund is left up to the individual manager's discretion.

New Zealand investors last week demonstrated their enthusiasm for listed tech stocks through the Beauty Direct IPO. Beauty Direct, an online cosmetics store, aimed to raise $2.5 million through an IPO and ended up closing the offer after just 8 days as it was heavily oversubscribed.

What's more the company raised an extra $1 million through oversubscriptions.

That enthusiasm is also clear in the way the handful of tech stocks listed on the New Zealand Stock Exchange have been strongly bid up.

London-based Henderson TR Pacific fund manager Michael Watt says there are very few opportunities to invest in tech in Australia and New Zealand.

Therefore it is reasonable to expect, when the sector is driven by momentum buying, that the lack of script supply will put upward pressure on prices.

How do you evaluate a tech stock?

Valuation of a tech stock is one of the issues which is perplexing experts across the globe as the high prices stocks are currently trading at are unsupported by traditional valuation methods of PE ratios, dividend yield, cash flow multiples etc.

Ord Minnett says the most common method used presently is to adopt a three pronged valuation approach that looks at: the blue-sky potential of a company's operation, the company's competitive positioning and the consequential revenue and profit potential of the future market share.

The following two tables illustrate how this approach has been used to evaluate the limited offering in the New Zealand market.

Valuation Matrix

Grading

Blue Sky potential

Market positioning

Profit potential

A

Unlimited

Monopolistic

Very high

B

High

Strong

Excellent

C

Good

Good

High

D

Low

Fair

Fair

E

Limited

Poor

Poor

F

 

Weak

None

S

Speculative

Speculative

Speculative

Source: Ord Minnett

The Current NZ IT Stocks:

How they measure up against the matrix

NZ companies

Blue Sky potential

Market positioning

Profit potential

Telecom

B

A

B

Advantage

B

B

B

IT Capital

B

C

C

Strathmore

B

C

C

Spectrum

B

C

C

Ephone

C

D

C

Newcall

C

D

C

Heritage

C

C

C

Paynter

C

D

S

Aquaria

S

S

S

Frontier

S

S

S

Source: Ord Minnett

"The principal risk in the sector lies in the over-valuation. This arises in many instances from the unproven and uncertain nature of the companies' products, services and operations as well as the long forecast horizon," Ords say.

"A lot can change in the sector in one month - let alone 10 to 20 years."

"The most common cause of over-valuation is however excessive optimism by investors and traders who push the prices of IT stocks to well beyond any resemblance of value."

Ords says that many of the IT stocks available suit investors looking to speculate who can wear day-to-day losses.

While there is some opportunity to invest in technology in New Zealand, most experts consider the best way to get tech exposure is to invest into offshore markets, particularly the United States.

One of the issues investors need to be cognisant of in this stage of the technology cycle is that there are a plethora of companies, globally to invest in, however there is also considerable consolidation going on within the sector.

While one option is to buy lots of different tech companies and hope one is the winner, the other option is to leave that to the experts.

One of the key advantages of going into tech through a fund is that, because of their size, the manager has access to better information than the retail investor, plus they have the opportunity to partake in new issues and floats.

Options other than dot.coms

What's often overlooked in the tech sector is that there are other ways to get involved in it other than just the pure plays such as Advantage Group and Strathmore.

Companies like Telecom and INL are moving from the old economy to the new and others are learning to reinvent themselves along this line too.

BT Funds Management chief investment officer Craig Stobo says there are three trends in the development of the E-commerce sector.

Firstly, there is the dot.com mania where people are throwing money at Internet companies, even if they have no business. The middle stage is the technology infrastructure companies, such as the Microsoft and Cisco Systems in the US which are building the components that the dot.coms use, then there is the third stage of "clicks and mortar" where old economy companies use technology to better distribute their products, thus taking on the dot.coms.

Unlisted sector

Besides the listed sector there are also a number of companies in the unlisted market (as opposed to unlisted funds).

The three main ones in New Zealand are MoneyOnline (formerly Global Register) which is run by former BNZ adviser John Commins, Henley Global Investor and Global-E Bonds.

MOL has a whole raft of businesses in its stable, however its core business is a bucket shop for managed funds. The company aims to raise $1.5 million and use the money for advertising its services.

Under the Ords matrix it would probably rate a DDD. There is limited blue sky potential for the growth of the business that is little more than an online catalogue company, plus it can be easily replicated. In this sense its position is not particularly strong as a new player, which sufficient money, could come in and blitz its market position.

As for its profit potential that is a trade off between advertising costs versus the trail commissions (generally 0.25 per cent) earned on funds under management.

Henley is a charting software business run by Fraser Guthrie who was convicted, in 1991, on white-collar crimes and sentenced to 3.5 years in jail.

The company is aiming to raise $5 million to provide for the increase in profile, market expansion and growth of Henley’s subscriber base.

Currently the company is expecting sales to total $51,000 in the 12 months to March 31, 2000 and these are forecast to increase to $5 million a year later. Its profit projections are based on the company signing up 40,000 customer by March 2002.

Global-e Bonds is the third unlisted business seeking to raise money in the market at present.

« Advisers' view: Is Australia part of the local marketerKing builds an empire »

Special Offers

Commenting is closed

 

print

Printable version  

print

Email to a friend

Good Returns Investment Centre is brought to you by:

Subscribe Now

Keep up to date with the latest investment news
Subscribe to our newsletter today

Edison Investment Research
  • Electra Private Equity
    27 September 2021
    Introducing Hostmore and Unbound brands
    On 16 September, Electra Private Equity (ELTA) issued a trading update for its largest remaining hospitality brands, Fridays and 63rd+1st, and named the...
  • European Assets Trust
    21 September 2021
    Performance, income and a well-balanced portfolio
    European Assets Trust (EAT) aims to achieve long-term growth of capital through investments in smaller European companies (excluding the UK). EAT’s...
  • Georgia Capital
    13 September 2021
    Value creation on the back of macro recovery
    Georgia Capital (GCAP) posted a 13.2% NAV total return (TR) in local currency terms in H121 (15.2% in sterling), driven by an improved operating performance...
© 2024 Edison Investment Research.

View more research papers »

Today's Best Bank Rates
Rabobank 5.25  
Based on a $50,000 deposit
More Rates »
About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox  |  Disclaimer
 
Site by Web Developer and eyelovedesign.com