May Newsletter
Company Profile, The importance of good management, Inside Investify...

Company Profile: NZX Limited
Source: Investify financial insights dashboard (as at 28/05/21)
Investment Merits
  • NZX is a monopoly in its own domestic market with strong barrier to entry for others due to regulatory requirement
  • The company is investing in long term growth opportunities and putting strategic partnership in place such as with Singapore Stock exchange for NZX dairy derivatives and BNP Paribas as general clearing participant
  • Better Return on Equity of 26.74% compared to 13.06% of ASX
  • NZX reported strong growth for FY20 in Wealth Technology and Funds (Smartshares) and the company is allocating capital expenditure to meet the growing demand
  • NZX has been paying steady dividends over the years with strong shareholders return in the last five years. However, it does pay out most of its income as dividend which may not be sustainable in the future unless the net income is increased
Investment Risks
  • NZX has got strong competition from ASX with reference to issuer relationship with many local companies deciding to list in Australia due to better liquidity
  • There is limited short term growth opportunity for the company with forecasted operating earnings for FY21 pretty much in same line with the FY20 results
  • Compared to ASX which reported a Net margin of 45.31%, NZX with only 22.42% will need to work on strategies to improve its bottom line
Based on the above merits and risks, NZX is rated as a HOLD by the 2 Analysts that are following the stock.
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The importance of a good management
A strong management is the backbone of any successful company. This is not to say that employees are not equally important, but it is the management that ultimately makes strategic decisions. Warren Buffett has also talked about Berkshire Hathaway’s superb record of management retention. One of Buffett’s investment criteria is to look for solid stable managements that stick with their companies for the long term.
Theoretically, the management of a publicly traded company oversees creating value for shareholders. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are people too and are, like anybody else, looking for personal gain. Problems arise when the interests of the managers are different from the interests of the shareholders.
Things to consider analysing a company with strong management

- One good indicator is how long the CEO and top management has been serving the company. A great example is General Electric whose former CEO, Jack Welch, was with the company for around 20 years before he retired. Many heralds him as being one of the best managers of all time

- There are management effectiveness ratios such as Return on Equity (ROE), Return on Assets (ROA) and Return on Capital (ROC). If these ratios shows that the company is doing poorly compared to its industry peers, there would be questions asked about the management ability

- Many companies now report staff retention or staff turnover in their annual report. A good staff retention ratio could be an indicator for people being happy in their job in the company and can be attributed to good management

There is no single template for evaluating a company’s management. Looking at the financial results each quarter is important, but it doesn’t tell the whole story. Spend a little time investigating the people who fill those financial statements with numbers.

Inside Investify...

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