HK stocks edge up, low turnover points to caution - Reuters HK stocks edge up, low turnover points to caution - Reuters

Tuesday, June 5, 2012

HK stocks edge up, low turnover points to caution - Reuters

HK stocks edge up, low turnover points to caution - Reuters

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Europe Stocks Buoyed by U.S. Services Data - 4-traders (press release)
06/05/2012 | 01:32pm

By Barbara Kollmeyer

European stocks broke a four-session losing streak on Tuesday, ending higher after a gauge of activity in the U.S. services sector rose slightly in May and investors got ready for a European Central Bank meeting.

Meanwhile, Germany again underperformed the wider market and stocks in Greece sank.

The Stoxx Europe 600 index rose 0.3% to close at 234.59, following a 0.5% loss to 233.87 on Monday. That was a closing low for the year and the fourth-straight loss for the index.

Against this backdrop, oil stocks provided the biggest lift for Europe's main equities index, with Total SA trading up 1.1% in Paris and Royal Dutch Shell PLC adding 0.5% in Amsterdam.

Group of Seven officials and central bankers agreed to closely monitor developments in Europe during a conference call earlier Tuesday, the U.S. Treasury said in a statement.

Looking ahead to Wednesday, economists said the European Central Bank is likely to hold its fire but couldn't entirely rule out a move amid weakening economic indicators and escalating worries over the euro-zone debt crisis.

Hoping for a rate cut

Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said markets are in a wait-and-see mode, hoping for a cut in key interest rates or for additional bond buying from the central bank.

"People are short covering [ahead of the ECB meeting]. If nothing comes out of it, they'll push the market lower," said Gijsels during the Tuesday session. "When you're short and you've made some good money, it's time to go flat."

Greece returned to sharp losses after markets there closed for a Monday holiday. The Athens General Index sank 5.1% to 476.36, with shares of National Bank of Greece SA moving down 8.5% and Coca-Cola Hellenic Bottling Co. SA dropping 6.7%.

Late Monday, Standard & Poor's Ratings Services said it sees a one-in-three chance Greece will exit the euro zone in the coming months, on the heels of June 17 elections.


In Spain, the other sore point for markets at the moment, investors were weighing comments from Treasury Minister Cristobal Montoro.

He said in a radio interview Tuesday that high current borrowing costs had effectively shut the market door to Spain. Thursday will bring a key auction of longer-term debt.

However, Spanish stocks made gains, with the IBEX 35 index rising 0.5% to 6,267.80. Shares of BBVA SA rose 0.7%, while Banco Santander SA showed a 1.2% advance.

The French CAC 40 index pulled ahead in Europe with a gain of 1.1% to 2,986.10, lifted by in part by Total. Also lending support, shares of Societe Generale SA surged 4% as BNP Paribas SA rose 2.4%.

Germany's a laggard

The German DAX 30 index again trailed the rest of the market, slipping 0.2% to 5,969.40. Utilities such as E.On AG and RWE AG showed losses of 1.2% and 1.4%, respectively.

The DAX fell more than 1% on Monday, whereas the CAC-40 rose slightly. BNP Paribas's Gijsels said German stocks are mildly positive for the year, whereas all other major markets are down. "There's still flight to quality going on and as you can't buy the German Deutschemark, you buy German bunds and equities," he said.

Recent losses reflect investors giving back some of that. "I wouldn't read too much into it," said Gijsels.

Downbeat data from China had weighed on German stocks on Monday. On Tuesday, data showed China's service sector expanded at its fastest pace in 19 months in May, according to the HSBC Purchasing Managers Index.

London markets remained closed for the second of a two-day holiday to celebrate Queen Elizabeth II's Diamond Jubilee. Egan-Jones Rating Co. on Monday cut the U.K.'s sovereign rating to AA- from AA, saying its economic situation is worse than it looks.

Write to Barbara Kollmeyer at

Smart money to follow Smartpay's leader? - Stuff

OPINION: From time to time you hear of companies complaining they cannot raise capital in New Zealand.

Kiwi investors are too conservative, too dim, too poor, too insular, too blinkered, too demanding, too risk averse and too blind to opportunity, they say, before flouncing across the Ditch to try their luck in Australia.

They may be right. On the other hand, they may just need to look in the mirror to find the cause of their troubles.

To date, Chalkie has placed Smartpay in the latter category. The eftpos systems company is involved in some clever technology most of us use every day, but since arriving on the NZX through the back door in May 2006 its performance has been, to put it politely, mercurial.

Indeed, in the last couple of years it has been more quicksand than quicksilver as the business thrashed itself ever more deeply into a quagmire of debt.

This time last year managing director Ian Bailey was trumpeting a "remarkable turnaround" as earnings before interest, tax, depreciation and amortisation hit a record $7.2 million, a 252 per cent improvement on the previous year.

Revenue, meanwhile, was apparently a respectable $47m.

The shares, then trading at about 21c, steadied briefly before resuming their downward slide the following month. Already a minnow, Smartpay was turning into a penny dreadful.

A big part of the problem involved its business model. Smartpay provides eftpos payments systems – the hardware, the software, the connection and ongoing service – for retailers who pay fees over the term of a contract of, say, three years.

But instead of doing the deal and waiting for the cash to come in, Smartpay typically sold 80 per cent of the future cashflows to third-party financiers. This allowed it to book most of the contract value as immediate revenue.

Except it was not really revenue, it was debt – and costly debt at that.

Adding to the burden was its $6m acquisition in 2009 of the payments unit of ProvencoCadmus, a business well-known to Bailey who had co-founded the Cadmus part in the 1990s.

But back to the debt.

In the year to March 2011, when revenue was $47m, the cash-flow statement said actual receipts from customers were $33.6m.

Payments to suppliers and employees, meanwhile, were $42m, and operating cash was negative $11.8m.

The gap was bridged with borrowing of $13m.

Same thing happened the previous year.

To be fair, there was logic behind the idea, which was to ensure growth was not limited by cashflow. Signing up customers entailed up-front costs, such as buying the eftpos swipecard hardware from a contract manufacturer in China, and those costs had to be financed somehow.

Unfortunately, Smartpay's solution was to borrow from a range of second-tier lenders such as FE Securities at rates as high as 18 per cent, which did not do much good for its profitability.

It also meant if the rate of signing new sales contracts slowed down, revenue would fall off a cliff.

This is exactly what happened.

Smartpay had been benefiting from rules obliging New Zealand retailers to upgrade their terminals, but by June last year the job was done and sign-ups plummeted.

Hence, the latest full year result reported last week revealed revenue down from $47m to $29m.

Indeed the result was chocker with ugly numbers.

The bottom line was a $12.7m loss and liquidity was critically low – those borrowings had driven current liabilities to $26m, well in excess of current assets of $17.6m.

Normally, we might associate these figures with the beginnings of a death spiral, but Chalkie has been intrigued to see a very different scenario emerging under the leadership of Bradley Gerdis, Smartpay CEO since December.

South African-born Gerdis, based in Sydney, has a useful track record for the job, having been a founding executive in 2004 with ASX-listed Customers Ltd, which built a network of independent cash machines in Australia.

Since leaving Customers in 2008 he has been busying himself with a few jobs at his own firm Active Capital Partners, but obviously saw an opportunity to make a difference at Smartpay.

We got a picture of the difference last week when Smartpay announced a major restructuring along with its dreadful result.

The main change involved a $13m influx of equity capital and a new $25m bank debt facility with ASB – $20m of it to revamp the balance sheet, and $5m headroom for capital expenditure.

The money allows Smartpay to buy back its contract cashflows from the second-tier financiers at a much cheaper rate, thus ensuring revenue stability in years ahead.

Gerdis describes it as "the flicking of a switch".

At balance date Smartpay had borrowings of $29.4m, most of it high cost and two-thirds of it due within a year.

The refinancing deals with that immediately and sets up the business to get $17.5m of recurring revenue a year from now on, producing earnings before interest, tax, depreciation and amortisation of about $7.5m.

At that level profitability looks within reach as interest costs on $20m will likely be below $1.5m.

"Because the previous management never really had access to the right type of capital, both debt and equity, it's been funded by very high-cost mezzanine debt and it's bled the business of the cashflow that should rightly have belonged to shareholders," Gerdis told Chalkie.

"The immediate release of equity value by making this thing cash-flow positive and self-sustaining is just tremendous. That's why we were able to raise the money at a significant premium to the market because investors understood that."

It is a fair comment. The new equity was raised at 11.5c a share. Before the announcement the shares were trading at 8-9c.

So why was Smartpay able to raise a decent chunk of money at a premium now, when it struggled to do so before?

Chalkie recalls considerable bleating from Smartpay about lack of interest from Kiwi investors and its desire to shift to Australia.

The main reason, Chalkie suspects, is that investors were not comfortable with the previous plan or the previous leadership.

For example, in 2011, the year Bailey described Smartpay as a "changed company", it still appeared to be persisting with the debt-funded model.

The annual report said: "Providing we continue to to expand the rental base, and ensure funding is in place to support the growth of the rental book, then the company will rapidly reach the point whereby the ongoing monthly cashflows will exceed all costs and overheads, leaving a residual cash component available to repay corporate debt."

This sounds like more of the same, and although there was acknowledgement of high-interest costs as the company expected to "work directly with banks as opposed to mezzanine funders as we have now", Chalkie reckons it was about as encouraging to investors as a half-time team-talk from Eeyore.

The idea now is to pick up business in Australia, where the eftpos trade has hitherto been dominated by the big banks.

Smartpay's announcement in February of a deal to provide 4000 terminals to customers of Bendigo & Adelaide Bank indicated the way forward.

Gerdis, gung ho, describes the Australian business opportunity as "real, sizeable and immediate".

"This is expected to include strong organic growth which will in all likelihood be accelerated through strategic acquisitions," he says.

He's talking a good game, clearly, but Gerdis has his money where his mouth is, having invested $1m at 10c a share in December. He also has some hefty options to subscribe for shares in future at prices starting at 15c.

Adding to the picture of a company on the move is the awarding of options on similar terms to new Australian chairman Ivan Hammerschlag, executive chairman of Athlete's Foot owner RCG.

It will be interesting to see whether the incentives produce a higher share price for investors. If it does – and after previous underperformance, let us hope so – it will be quite a turnaround story, although not a particularly New Zealand one.

- Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.

- © Fairfax NZ News


Asia stocks regain their footing after big losses - Boston Herald

BANGKOK — Asian stock markets rose modestly Tuesday as a respite from major bad news gave investors the pluck to get back into riskier assets.

Traders brushed aside disappointing U.S. factory orders as falling bond yields for Spain and Italy boosted confidence that Europe can avoid a messy breakup of its currency union.

Japan’s Nikkei 225 index rose 0.9 percent to 8,366.58. Hong Kong’s Hang Seng added 0.5 percent to 18,310.47 and South Korea’s Kospi gained 1.1 percent to 1,802.80.

Benchmarks in Singapore, Taiwan, and Indonesia also rose. Australia’s S&P/ASX 200 rose 1.3 percent to 4,033.80. Benchmarks in mainland China, Thailand and New Zealand fell.

Andrew Sullivan, principal sales trader at Piper Jaffray, said short covering — the purchase of securities by a short seller to return those that they borrowed from a broker and sold — could explain some of the gains in Hong Kong. Short selling is profitable if the price continues to fall because the securities can be bought back at a lower price.

"A lot of people were shorting the market yesterday," he said. "If you sold yesterday when the market was trading at 18,100 and it opened at 18,300, you are losing money. So a lot of people will go into the market to cover their shorts."

One positive sign, according to analysts at Credit Agricole CIB in Hong Kong, was China’s announcement of new subsidies for energy-saving white goods, which suggests "the government is rolling out more targeted measures to implement its stimulus program."

In individual stock trading, tech stocks across Asia clawed back gains. South Korea’s LG Electronics Inc. jumped 4.4 percent. Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip-maker, rose 2.1 percent.

Honda Motor Co. rose 1 percent. Japan’s No. 2 vehicle maker broke ground Monday for a new automobile plant in Indonesia, Kyodo News Agency said.

But Qantas Airways plummeted 18.9 percent, hitting historic lows after the Australian flagship carrier forecast a drop of up to 91 percent in full year earnings.

Global markets plunged Monday amid fears of a recession after a disappointing report on U.S. hiring and employment in May.

American employers added just 69,000 jobs in May, the fewest in a year, and the unemployment rate increased to 8.2 percent from 8.1 percent. Economists had forecast a gain of 158,000 jobs. The report is considered the most important economic indicator each month.

Adding to the evidence of a slowdown, new figures released Monday showed companies placed fewer orders to U.S. factories for the second straight month.

In Spain, investors are waiting for what the government intends to do to boost the finances of some of its ailing banks. The worry is that the government is already strapped for cash and might be overwhelmed by the costs of rescuing its own banks. It might have to tap European Union rescue funds, but it is reluctant to do so because such aid would come with conditions on the government’s policies.

Meanwhile in Cyprus, the central bank governor said the country is struggling to find €1.8 billion to inject into its second-largest lender, Cyprus Popular Bank, by a June 30 deadline. That means it is increasingly likely to have to accept EU rescue funds. The chairman of Cyprus Popular Bank also suggested an EU loan now seemed more likely.

Benchmark oil for July delivery was up 85 cents to $84.81 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 75 cents to settle at $83.98 in New York on Monday.

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