Short-selling should be welcomed if no laws are broken

WiseTech chief Richard White Illustration: Johannes Leak

The Australian stockmarket is selling at a 15 per cent valuation premium and within striking distance or 202 points from the July 30 all-time highs at 6875 points, yet private equity is finding it tough to sell companies to the market.

This is the dichotomy facing the market with the failed floats showing the market is cautious, but the bourse is trading at 16.5 times forecast earnings and industrial stocks at 24 times or 30 per cent above all-time averages.

Each failed float has its own story but the thematic is simply that fund managers are not accepting the valuations at which private equity is trying to dump its properties.

Retail Zoo, which owns the popular Boost Juice franchise, was considered poor quality and PropertyGuru was regarded overpriced and, being a Singapore-based company, a tough story to sell to cautious buyers.

The bulk of the new floats are in the $400m range, which are not must-have stocks so the story has to be good — like the KKR credit fund, to list in November, which is providing access to the private equity funds’ $US100bn debt portfolio and a yield of 5 per cent plus.

Tyro, the payments system vehicle run by Robbie Cooke, is another fancied vehicle that may buck the trend of cancellations.

Against the mixed market messages, short-selling has emerged as a new perceived threat, although WiseTech’s Richard White’s detailed rebuttal of the hedge fund claims helped his stock finish up 8.7 per cent at $28.59, or 106 times forecast earnings.

The stock is still way overvalued at 6.4 times the market average, but in the short term White has shown that where there is some value the market will back it.

Short-selling is a valuable tool for the Australian equities market and the emergence of offshore hedge funds “raiding” Australian companies should be welcomed by investors.

Only 1 per cent of WiseTech is sold short at 3.6 million shares from a float of 318 million shares compared to the market average of about 5 per cent.

Shares are sold short using stock loans, which are still a misunderstood vehicle because punters wonder how anyone long on stock could lend stock to short-sellers.

The answer is to make money and in reality just 10 per cent of the market is available to stock loans.

Markets work best with conflicting views and two-way trade is certainly better than one-way.

What frightens many is that hedge funds exploit valuation gaps with startling speed and precision so what might have taken six months to unwind can happen in a day.

That explains why Richard White suspended his stock when the JCap report was released in the middle of trading on Monday.

There is something not quite right with the concept of an investor getting set in a stock either short or long, spruiking the position and benefiting as it either falls or rises. But no one worries about the latter.

The point is both sides are as guilty as each other in this attempted manipulation and in fact, they are just contributing to a debate on value that is in everyone’s interests.

Sell-side research in this market is dominated by investment banks who make most of their money either raising funds for listed companies or helping them with acquisitions or divestments.

The last thing these people want is for the truth to be told if it conflicts with their deal. This results in a fundamental bias to the buy side and an institutional distaste for negative views being published about a stock.

If it wasn’t for some canny active fund managers who said no when KKR et al went around trying to offload Latitude, the market would be stuck with an overpriced old-school finance company.

The extraordinary WiseTech valuations raise doubts because, even at half its present multiple at 50 times earnings it would look expensive.

Some may say that indicates it is overpriced and the fact it has made 33 acquisitions in five years worth over $400m also invites suspicion.

White also makes a legitimate complaint about the fact the report is released in the middle of the trading day, which can have an impact on price before the market is fully informed.

ASIC needs to know if trading around the report’s release on Monday was legitimate.

White affirmed guidance and issued a strong defence on Wednesday. He wouldn’t agree quite yet, but the debate is the best thing for the company going forward — if it is as good as he thinks it is.

If, as he claims, the J Capital report is nonsense then next time the hedge fund releases a report on a stock it will be ignored.

Some argue hedge funds should bounce their ideas off the company before disclosing, which is total nonsense when, if the game is fair, companies have already disclosed the relevant information.

It is good journalism to check both sides of a story before publishing — that helps credibility. If J Capital is proved to be wrong, then its credibility and that of other short-sellers takes a dive and it won’t be such a lucrative model going forward.

The news media, which happily talks up short-sellers’ reports without considering the motive of the short-sellers to balance their articles, equally suffer credibility gaps.

Not every short-seller will play by the rules, but provided no laws are being broken then the market is a net beneficiary of short-selling to provide some balance and help in accurate price discovery.

Asahi-CUB deal

The ACCC has moved a step closer to clearing the $16bn Asahi takeover of Carlton & United Breweries with the merger process restarting and a decision due on December 5.

But the time the process is taking suggests it is not a walk in the park for Asahi and the ACCC is taking a close look at the deal.

One issue will be market definition, with the ACCC in the past looking at the beer market, but this time it will likely split up the market to consider separately the fast-growing boutique sector.

The deal was first put to the ACCC back in August and was put on hold until this week pending receipt of more information from Asahi.

Asahi has 3.5 per cent of the Australian market with brands like Peroni, Mountain Goat and Asahi and the deal will mean it will have just over 50 per cent of the market with the next nearest competitor, Lion at 37 per cent.

The ACCC’s main concern with the deal is its impact in creating barriers to entry of new boutique breweries.

So-called tied hotels, with links to the major brewers, are the main concern.

The deal will be subject to FIRB approval once cleared by the ACCC.

Separately, the ACCC on Wednesday cleared the combination of Australia-based Emergent Cold with family-owned Oxford, which will have around 40 per cent of the Victorian cold storage market.

There are other competitors like US-based Newcold and Amercold and the role of logistics groups like Linfox and Toll.