Understanding dual-listed stocks: 3 Aussie examples
As the dual-listed tech giants Alphabet and Facebook have drawn investor ire, these Australian-domiciled companies have also faced challenges.
Some of the world's largest fund managers have criticised the dual share market listings of global technology companies, including Alphabet and Facebook.
Most recently, BlackRock, Legal and General Investment Management and Norway's Norges Bank have called on index manager MSCI to restrict the large multi-national technology companies.
"The focus on unequal voting rights comes after a host of technology companies listed in recent years with multi-class shares that offer some investors more power, prompting concern that a core principle of corporate governance was being eroded," the Financial Times wrote last week.
Outside the tech space, several of Australia's large-cap companies are also listed in different countries. One of the best-known is BHP Billiton Limited (ASX: BHP). Over the last few years, one of its largest shareholders, activist investor Elliott Management, has called for an end to its dual-listed structure.
Morningstar senior equity analyst, Mat Hodge, said in a note last year that collapsing this structure "would inevitably disadvantage one shareholder class, the ASX-listed BHP Billiton Limited shares". He thinks it unlikely such a change would ever occur, as it would add no value to the business.
"Distributing franked dividends to all shareholders, rather than just the ASX-listed shareholders, would likely waste the value of franking credits. In addition, it's unlikely the Foreign Investment Review Board would agree to a new UK-incorporated holding company as the assets and the company are strategic," Hodge said last year.
Such a structural change would cost BHP about US$1.3 billion ($1.72 billion), with a further US$1.7 billion of tax-related costs. BHP estimates US$2.4 million is the annual price-tag of maintaining the dual listing.
BHP estimates US$2.4m is the annual price-tag of maintaining the dual listing
While Hodge recently increased his fair value estimate for BHP in response to stronger near-term commodity prices, he still views the company as over-valued - currently holding a two-star rating. BHP on the ASX is trading at $30.92 per share at the time of publication - versus a $23 FVE. "We think the attractive forecast 2018 earnings and returns are fuelled by favourable commodity prices, underpinned by unsustainable growth in China's debt, and more recently trade unrest.
"While trade sanctions may restrict global commodity supply in the near-term, longer-term those assets are productive and likely to continue to contribute," Hodge says.
Financial spin-off
UK bank Clydesdale (ASX: CYB) – the largest mid-size bank in the UK – is a lesser-known dual-listed company, with both Australian and UK-domiciles. Its Australian IPO occurred when it was spun out of National Australia Bank (ASX: NAB) in early 2016.
According to Morningstar senior banks analyst, David Ellis, the distribution to NAB shareholders was based on a ratio of one Clydesdale security for every four NAB shares held. NAB sold the remaining 25 per cent of Clydesdale by IPO to institutional investors. "The stand-alone, and independent, Clydesdale group is in a good position following the restructuring, remediation, and recapitalisation.
"In the years leading up to the demerger, Clydesdale wound down its troublesome commercial real estate loan portfolio, resulting in a much higher-quality loan book," Ellis says.
With a share price of $5.84, it is trading moderately above Morningstar's $5.50 FVE.
Pharma conglomerate
An entirely different type of company again, EBOS Group is a pharmaceutical conglomerate, listed on the ASX and in New Zealand.
Ebos operates in the heathcare and animal care segments, and also provides product management solutions to pharmaceutical companies. Its businesses span the distributions systems for electronic ordering by healthcare providers, wholesaling and distributionof consumer produdts to pharmacies and hospitals, and retail pharmacy brand ownership.
Though it holds a narrow moat, Morningstar equity analyst Chris Kallos notes this comes with a high degree of uncertainty. "This reflects the diversification benefits of the various underlying services and products, which gives rise to a portfolio effect and offsets individual risks on a stand-alone basis," he says.
Kallos highlights the diverse nature of its business, which has grown from a small New Zealand-based logistics business.
Though it has only about 4 per cent of its shareholders are in Australia, he believes it is only a matter of time until it is re-domiciled in Australia. Ebos's narrow economic moat is "predicated on the efficient scale association with its Australian pharmaceutical wholesaler business", Kallos says.
Despite quite low margins, "increasing throughput, additional hospital contracts and community pharmacy client wins should improve operating leverage over time, thus increasing excess return on capital".
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Glenn Freeman is senior editor at Morningstar Australia.
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