Tech Stock Up 3,000% Explains Why It's Jumping Ship to Sydney

(Bloomberg) -- New Zealand’s stock market has become too small for Xero Ltd., whose market value has soared about 70-fold to NZ$4.28 billion ($2.98 billion) since its debut a decade ago.

The maker of cloud-based accounting software last month said it was leaving for a sole listing in Sydney, where the shares have traded since 2012. Xero, which is keeping its headquarters in Wellington, billed the move as a graduation of sorts, saying the move would improve trading in the stock, increase analyst coverage and draw bigger investors.

Losing the listing of its biggest technology company is another blow for Asia’s smallest developed market, which is already plagued by low liquidity and transparency. Off-market transactions, when brokers make deals directly with each other rather than putting in orders publicly, dominate trading.

“It’s difficult for investors to place a big bid, it’s difficult for them to get the stock and it’s difficult for them to exit the stock,” Xero founder and Chief Executive Officer Rod Drury said, citing the company’s liquidity across multiple markets. One big fund, he said, took almost a year to sell a stake in Xero.

The departure of Xero, which accounts for 3.8 percent of exchange operator NZX Ltd.’s equity turnover as its 10th largest company, may hurt trading volume. The exchange operator posted an 8.2 percent drop in securities trading revenue for the six months through June. Xero’s decision follows jeweler Michael Hill International Ltd.’s move last year to transfer its primary listing to Sydney from Wellington.

On-market trades represent only about two-fifths of the total value traded this year through November, according to NZX data. “You really don’t get a good grasp about the depth of the market, because a lot of major buy and sell orders are not put on the market and are not visible to people,” said Brian Gaynor, an executive director at Milford Asset Management Ltd. in Auckland. “A lot of overseas big funds don’t like that.”

NZX is responding to investor concerns. After a five-month review, the company last month announced a slew of initiatives to boost growth and on Wednesday said it will change trading and pricing rules in the second half of 2018 to increase on-market trading. A trial running since July has helped increase average daily on-market value by 13 percent, it said.

The company has the lowest annual operating margin after BSE Ltd. among the 25 listed security and commodity exchanges across the world that are tracked by at least three analysts, data compiled by Bloomberg show.

One selling point for New Zealand’s stock market is its performance. The benchmark S&P/NZX 50 Gross Index is trading near a record and has climbed 22 percent in 2017 in U.S. dollar terms, outperforming the S&P 500.

Companies such as A2 Milk Co., Fisher & Paykel Healthcare Corp. and casino company SkyCity Entertainment Group Ltd. are fulfilling global ambitions with a listing in Wellington, NZX said. Still, each of those also trade in Sydney, where ASX Ltd. has processed more than $975 billion in trades this year, compared with NZX’s $29 billion, data compiled by Bloomberg show.

‘Well Placed’

Xero shareholders who own the Wellington stock will get an equal number of shares in Sydney in February. The sole listing is effective Feb. 5. The shift makes Xero “well placed” to be a potential addition to the benchmark S&P/ASX 200, Morgan Stanley analysts wrote in a note last month, saying liquidity in the stock will need to increase to win inclusion. The company’s share price has risen almost 3000 percent since it went public.

That could lead to the “bigger pool” Drury wants to get into and attract investors backing the likes of Amazon.com Inc. and Alibaba Group Holding Ltd., stocks that trade in New York. The biggest technology company based in the antipodes, Atlassian Corp., is also listed in New York, debuting on the Nasdaq Global Market in 2015. Xero also trades in the U.S. but only over the counter. For now, the company said, the focus is on the Sydney listing.

To contact the reporter on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Vivek Shankar

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