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01 Oct
Share gains are being driven by annual results, and these continue to be good with several companies beating the analysts forecasts in the latest round.
Pumpkin Patch (PPL) has reported a net profit for the full year of $8.1m; just above the forecast upgrade guidance released to the market in July, but double the prospectus forecast of $4.03m. The strong result came on the back of revenue of $220m, up 3.2% on forecast. PPL is an international growth story, in the mould of Michael Hill. However, the share is being priced as such and is not cheap at the current level. The group had benefited from a buoyant trading period in Australia, New Zealand and Britain. The brand appears to be having some impact overseas, which is a highly effective way of retaining customers, holding margins and building growth.
Williams and Kettle (W&K) has reported an after tax profit of $14.4m for the year ended 31 July 2004, a record result for the rural trader, and more than double the $6.4m previously. The company was transformed during the year when it divested of Rural Equities, a rural property and management company, and distributed shares in Rural Equities to its own shareholders. After removing profit from the non-recurring sale of Rural Equities, the normalised operating profit was a less spectacular $5.86m, slightly higher than the range of $5.0m to $5.5m outlined at the half year. However, this was still a good performance from W&K, which is a relatively mature business paying a dependably high dividend.
Eftpos machine manufacturer and distributor Cadmus (CTL) has increased its market share by acquiring Wellington-based Efpos. Efpos, a dealership selling competitor Provenco's imported products, was a move to secure its local distribution network in advance of a technological switch in the market. Cadmus shares were unchanged at 14c, the same price it was twelve months ago. The company is struggling to gain traction, but it is financially secure following the equity injection in December 2003, and so has a reasonable amount of time left to develop its business base. The main risk is that CTL is a minor player in a field of payment technology dominated by much larger companies.
The plastics packaging company, Vertex (VTX), has a new cornerstone shareholder. The Stewart family, of Christchurch, paid $2.05 a share for Gould Holdings' near 20% stake in the Auckland plastics packaging company. Although the deal was struck at a 24% premium to the price before the deal, it failed to move VTX share price. This is surprising as one would think if anyone knows the value of VTX, it is the Stewart family whose own wealth comes from its business in the plastics industry. VTX lost some support when the company changed its dividend policy, limiting future dividends to only 25% of profit.
27 Sep
The NZ sharemarket has lifted strongly this week, partly due to good results from companies. There is also a fair amount of takeover activity to keep investors interested.
Retail group PostiePlus (PPG) saw its share price bounce up after reporting its first full year result as a listed company. The $4.02m net profit is in line with the prospectus projection before taking account of additional restructuring expenses of $574,000 - mainly redundancies - that were not foreseen in the prospectus. Revenue of $108.5m, compared with a previous five-month revenue of $32m. PostiePlus bought Rendells and Arbuckles last year and the company said Rendells had been more difficult than expected. However, it has a proven business model and experienced management and on its fully-imputed dividend stream alone, PPG looks like a modestly priced share at current prices.
The High Court in Auckland threw out an appeal against a block by the Commerce Commission on the deal that would bring together Air New Zealand (AIR) and Qantas. Both airlines indicated it is the end of their attempt to strike an alliance. The alliance was prevented because consumers might have to pay higher prices for airfares. However, one wonders whether the authorities considered how vulnerable this makes Air New Zealand, which could now face the full competitive power of Qantas on the Tasman route. This is just one of a string of potential problems, which include competition from new budget airlines, high debt levels, rising fuel costs and volatile passenger numbers, faced by Air New Zealand.
Software of Excellence (SOE) expects to produce a good result in the current year. In the current half-year, shareholders were told the company was producing EBITDA growth ahead of forecast at 10% of sales and a small profit before tax was predicted, compared with last year's half-year loss of $1.05m. The company reports a steady rise in its UK recurring income. Successes internationally, ranging from product sales to dental school and chains adoption of its software, are building. However, future earnings are likely to be volatile for some time as the contracts it is chasing can be worth $1m at a time - and winning or losing an individual contract can have a dramatic effect on net profit.
Tower (TWR) is to merge its New Zealand operations into a single organisation under one chief executive. Tower New Zealand Insurance & Operations, run by chief executive Paul Hunt, and Tower New Zealand Investment Businesses, run by chief executive Paul Bevin, will merge. Neither of these managers are interested in the new chief executive role, which means TWR is beginning is looking to recruit a high powered leader for the vital NZ operation. Tower is a strong performer in both the wholesale funds and insurance markets, and it is unclear why another layer of management was needed in New Zealand. The company has said the appointment comes ahead of a drive for growth.
20 Sep
Retailing remains one sector of the economy that continues to put out weak results despite a booming economy. Their performance is mirrored in the low level of most retailing shares.
Restaurant Brands (RBD) has reported flat sales of $95.3m in the quarter to 6 September, down 0.5% on the previous year. On a same store basis sales were down 1.4% for the quarter and 0.6% on a year to date basis over prior year. There was some growth in Pizza Hut New Zealand, Starbucks Coffee and the Pizza Hut Victoria, but this was offset by lower sales in KFC. There is a big question mark over KFC because of the move away from fried food. The market needs to be convinced that Restaurant Brands' talented newly appointed CEO, Vicki Salmon, can develop a strategy to get RBD out of its low growth bind.
Insurance group, Tower (TWR) has revealed plans to spin off its Bridges and Tower Trust wealth-management businesses on to the Australian Stock Exchange. Investors are likely to be given shares in a separate Australian wealth-management company listed in Australia. This appears to be the work of shareholder Guinness Peat Group (GPG), which must see an opportunity in the fact that the assets for sale are being undervalued while they are within TWR itself. The spin-off, and listing of these assets in what is still a very strong share market, should add wealth for TWR shareholders. And predictably, TWR shares responded by lifting over the week.
Fisher & Paykel Healthcare (FPH) has recorded firm gains on the share market this week, after announcing details of a share split. The company announced a five-for-one share split, occurring on 1 October and also indicated it was extending by six months its share buyback programme that was due to expire at the end of the month. Shares usually move up on news of a split, particularly when the split allows the price to fall below the $10 mark that's seen as a psychological barrier to New Zealand investors. FPH is no exception particularly as the $2 shares emerging from the split could draw in a new crowd of mom and pop investors.
Briscoes (BGR) shares have been drifting downwards over the past week, as the market absorbs the implications of its six months results ending 31 July 2004. Over the six month period, net profit after tax fell to $6.72m compared with $9.86m for the corresponding period a year ago. However, we note that gross margin percentage rose from 31.34% to 33.20%, which is a good indicator that the group's new strategies are working. The margin benefited from the cut-back in discount events, as well as more effective management of stock levels and product ranging. Management says it expects to recover most of the profit shortfall experienced in the first half by the end of the year.
13 Sep
Retail is never an easy sector to invest in. But in New Zealand, it's particularly hard as most retail chains cannot achieve the size and scale needed to generate abnormal wealth over a long period.
The market took badly to the results emanating from The Warehouse (WHS) this week, with the shares dipping sharply. The tax-paid profit of $61.2m for the year ended 1 August 2004 was 18.9% below the profit for the previous year, but in line with its own forecast for the current year. The lower operating result reflects weak trading from The Warehouse Australia, which reported a loss of A$32.2m versus a loss of A$11.9m in 2003. That too had been signaled to the market. But what was perhaps more disturbing was weaknesses in the Red Sheds, where same store sales rose only 5.7%, while the operating margin slipped to 10.2% from 11.2% due to increased overheads and inflationary pressures.
Allied Farmers (ALF) has announced an excellent result, reflecting the benign rural environment, with only the high NZ dollar emerging as a cloud on the horizon. The company reported a pre-tax profit for the year ended 30 June 2004 of $4.48m, an increase of 40% above the previous period. Despite a sharp increase in earnings, the net operating cash flows fell from $4.39m the previous year to $3.16m. The funds were directed towards working capital requirements of Allied Pine, a newly established division. Every other part of ALF performed well over the past year. ALF is a financially sound company with the capacity to ride out cyclical lows and highs, paying an excellent dividend.
This week saw the start of a four-day strike at Ports of Auckland's (POA) container terminals. This hasn't done the share price much good, which has been on a slide all year as competitive pressure increased from Ports of Tauranga (POT). Four ships due to arrive during the strike have cancelled their Auckland stop, with two opting to unload in Wellington instead. The watersiders say POA is using too many casual and part-time staff on a permanent basis. The company said the flexibility of a casual workforce was needed because of the global shipping trend. POA will weather this storm but must then still deal with rising competition from down south.
Infratil (IFT) has reported on its investment in Glasgow Prestwick International Airport for August, which confirms the downturn in freight volumes that has puzzled IFT managers. Freight was down by 15% to 2,803 tonnes, although passenger numbers continue to grow, increasing by 15% for the August. However, there was also good news in the report, as Ryanair announced its new services through Glasgow Prestwick Airport, which means that by early 2005 Ryanair, Aer Arann and bmibaby will be providing the Airport with 192 weekly services to 19 destinations. In 2001, when Infratil initially invested in Glasgow Prestwick, it had 77 weekly services to 4 destinations.
06 Sep
The reporting season continues with many good results being delivered. However, many shares are now so expensive that the price often fails to respond to good news, or even heads down.
It's been another record year for Auckland International Airport (AIA) as the company reported a net profit after tax of $94.3m for the year ended June 2004, up 22.8% on the previous year. AIA's latest result is strong as the company continues to benefit from escalating visitor numbers. These are set to continue, and the outlook for its burgeoning property portfolio looks equally good. But AIA shares trade at a high earnings multiple that appears to price in only the good news. The projected p:e ratio of 22 times implies an earnings growth rate of at least 15% per year, which even a great company like AIA might have difficulty sustaining.
Sky City (SKC) reported a $121.1m profit before non-recurring item for the year ended 30 June 2004, up 13% on the previous year. After accounting for the non-recurring item of $20.9m, represented by the Canbet write-off, SKC's net profit was down on the previous year. This is not a great growth rate for a company like SKC, but it does come at a time of acquisition and development, which tends to drain earnings. The market has come down harshly on these results, with Sky shares falling all week. However, as a long-term investment, SKC stacks up well, offering a good dividend payout and the capital growth that comes with being a monopoly.
Cavalier (CAV) is expanding into the South Island, buying a 50% stake in Canterbury Woolscourer. Cavalier expects Canterbury Woolscourers to have total assets employed of around $13m after the restructuring and plant upgrades which will take place over the next none months. CAV recently reported a strong full year result, surpassing its own predictions, thanks to robust carpet exports. The main risk factor remains the long awaited cooling in the property market on both sides of the Tasman. However, CAV is very well managed, with a strong balance sheet. The shares remain attractive on a yield basis, although they are slightly overheated at the moment given the cyclical risk.
BIL International (BRY) reported a net profit for the year to 30 June 2004 of US$62.6m compared to a net loss of US$60.3m previously. But the company is so radically changed it is hard to make comparisons. Before May 2003, BIL owned 45.9% of Thistle, the UK hotel group, and equity accounted its share of net income. As BIL now owns 100% of Thistle, the results are consolidated (showing a totally different financial picture). A positive feature of the last year is that the group was able to reduce loans and borrowings by US$674m. BIL is an unpredictable earner, but at least it has a clearer direction now, something that was missing for years.
30 Aug
Mergers, takeovers and good reported profits across several sectors have combined to give the market a good deal of momentum, indicating that there are still good gains to be made if you know where to look.
Dorchester Pacific (DPC) managing director, Brent King, has sold most of his shares, equivalent to a 14.9% stake, to Bridgecorp Capital, a competitor of DPC. Other shareholders have also sold to Bridgecorp, bringing its total shareholding to 19.9%, just short of triggering an offer to all shareholders. The offer of $4.04 a share was well above the share price of about $2.87. An offer so far above DPC's trading price could indicate there is more value in that company than the market has assumed. However, Bridgecorp is a controversial company and it is by no means sure what value it intends to bring to DPC.
Michael Hill International (MHI) has produced a strong profit for the 12 months to 30 June 2004, up 30% to $15.1m. While the New Zealand operation has clearly reached an advanced stage of maturity, and this is reflected in low earnings growth, the Australian operation is rocketing ahead, and even the fledgling Canadian operation is showing some promise. MHI has a true geographic spread, succeeding where others have failed. This and the fact that jewellery is relative resistant to recession, reduces the overall risk profile of the group and makes MHI a sound investment. The share is very hot at the moment, however, and relatively expensive.
Recently relisted carpet maker Feltex (FTX) has topped its full-year forecast, posting an $11.2m profit for the year to June, which it expects to double this financial year. The company foresees no real problems from the slowdown in residential building. Any slack on the residential side, it says, is being taken up by strong activity in commercial building. FTX had a weak listing, with the share priced by tender at $1.70, the bottom of the expected range, and then opening below that level. While the company is engaged in a cyclical industry that could turn soft, this is compensated for in a very healthy dividend yield.
Sky Network Television (SKY) and Independent Newspapers (INL), owner of SKY, have announced their intention to merge the two companies. Details are sketchy at this stage, but what we know is that shareholders in both INL and SKY will be offered a combination of shares in the new entity (Newco) as well as cash, in a ratio that assures all shareholders receive fair value. The merger certainly makes sense, given that INL is virtually a cash box, and SKY is a growing company in need of a strong balance sheet. Meanwhile, SKY has just reported a net profit after tax of $35.3m, taking the company firmly beyond breakeven level it had so struggled to reach.
23 Aug
It is the start of the reporting season, and we seem to be seeing the end of the bullish run when the big companies could do no wrong. Several of the reporting companies are feeling some economic strain.
Commercial drycleaner, Taylors (TAY) is slowing down after showing strong growth in recent years. For the twelve months to 30 June 2004, the operating profit before tax increased by 3% to $6.6m, while net profit after tax is unchanged at $4.3m. TAY is an excellent company with a predictably high pay-out of dividend. However, it is also quite vulnerable to factors outside its control, such as the flow of tourism, energy costs and wage pressures. Wage pressure and rising energy cost are causing the damage. The share price has fallen in the wake of flat profits. It is a share worth accumulating at times of weakness, however.
Ports of Auckland (POA) reported a 20% rise in annual profit to $57.2m this week. The figure included a $15m gain from the sale of its marinas, with-out which the port's earnings rose only 4% to $44.3m.Operating earnings were down 1% at $75m, reflecting the loss of an Asian service to Port of Tauranga (POT) and a smaller marina berth sale programme this year. Clearly, POA is not looking as unassailable as we had supposed, given the competition from POT. However, POA has a powerful competitive position and one cannot underestimate its ability to crush the competition. With its high dividend payouts and low volatility, it remains an attractive investment for income seekers.
Strong economies on both sides of the Tasman, and a robust advertising market, have helped APN News &Media (APN) to record levels of profitability. The pretax profit of $A94.5m for the 6 months ended June 30 2004 was up 36% on the prior year. Key to the result was the improved margins in its Newspaper and Radio divisions, and a sharp lift in operating profits at the New Zealand national publishing arm, in particular. APN has some of the best media titles in NZ, but the launch of a new Sunday edition of NZ Herald is likely to be a drag on profits for some years.
Biotech company Genesis (GEN) continues to struggle on, despite much of its earlier promise not coming to fruition. For the six months ended 30 June 2004,revenue was $2.8m (2003: $5.8m).The decline was due to the completion of certain research collaborations and a fall in licence fees as a result of completed programmes. The net deficit for the period of $7.1m reflects a continuing investment in product development. GEN ended with a cash balance of $16.5m, compared to $28.6m a year ago. This is expected to be sufficient to fund current and planned research and development programmes for a number of years. Nevertheless, the company is burning cash at a high rate, making any investment highly speculative.
16 Aug
The reporting season is producing a slew of great results, indicating the economy is not slowing as many had predicted. The old adage applies, invest in good companies and forget about economic cycles.
The courier company, Freightways (FRE) has reported $16.1m net profit after
tax and before one-off items, up from the $13.5m it anticipated in the prospectus before floating last September. FRE continues to exceed performance expectations. The business model is a simple one generating excellent cash flow from couriers that operate as individual franchise owners. This limits operating expenses to FRE and gives it some flexibility in the event of economic downturn. The policy of paying out most of that cash in the form of dividends, make FRE a good investment combining growth with yield. The one downside is its heavy debt burden. But cash flow seems more than ample to handle this and still pay a dividend.
Fletcher Building (FBU) announced record results for the year ended 30 June 2004. Net profit after tax and minority interests was $240m, compared to $168m in the previous year. All divisions lifted their operating earnings for the third successive year. But while the strong performance from FBU owes much to the rocketing building market, it is also reaping the benefit of good management and sound business principles. The company underperformed until 2001, when new management helped get it ready for the building boom that pushed the shares to record levels. The return for shareholders since 2001 exceeds 135%. A slowdown in residential building next year is expected to be offset by commercial building.
Waste management (WAM) achieved 15.7% growth in revenue and a 49% increase in net surplus for the six months to June 2004. This follows a sustained period of strong economic activity in New Zealand. The result was also boosted by the contribution from Remove All, the dry waste collection business acquired in March 2004. Operating cash flows increased from $23.1m to $26.3m during the period. WAM is a solid investment thanks to the defensive nature of waste collection. WAM is also succeeding in Australia where so many NZ companies falter. Directors expect the full year net surplus for 2004 will be in the order of $24m, up 30% on 2003.
PricewaterhouseCoopers has assessed the merits of the offer for DB Breweries (DBB) and advised that the bid price of $9.50 per share provides shareholders with full and fair value for their shares. This is not surprising given that the bid was well above the trading price for DBB before the offer was made. Set to disappear from the stock exchange, DB is a good example of how a conservative company in a no growth industry like beer can still deliver outstanding returns to shareholders. Not only have the shares done very well in recent years, but healthy dividends were cashed over a long period. DB has concentrated on building brands which helped it counter the falling consumption of beer.
09 Aug
The strong profit from Telecom this week underscored the fact that our share market has much good news still to deliver, even as it reaches the peak of a long surge in values.
The long-awaited increase in Telecom's (TEL) dividend policy to 75% of net earnings was confirmed in the latest results. This completes the transition of the company from a growth-oriented company to a yield-oriented one. The telecommunications sector remains highly competitive. But that said, TEL's superb cash flows and lower capital expenditure needs make it a good investment for yield-dependent investors. The company says it is seeing a continuing trend as its business moves away from traditional areas such as voice calling towards data and IT. Its growth is expected to come from increased investment in key areas that captures this trend, and the latest results give some indication it is succeeding.
City Forests, a wholly owned trading company of the Dunedin City Council, has made a full takeover offer for the Opio Forestry Fund (OPI) at 85c per unit- a 52.9% premium to its price in the weeks preceding the offer. This sent the share price rocketing in a repeat seen with other forestry companies. Forestry shares tend to be poor performers over a long period. However, bidders for these assets are usually prepared to pay a lot more than the market value of the company. The surprise bid for Opio is well above market prices but below the company's NTA. This leaves the way open for an increase in the current bid.
Surging demand for Apple's iPod has helped local distributor Renaissance (RNS) to a strong six- month result. Total operating revenue for the six months to the end of June was $51.1m with an after-tax profit of $777,000, an increase of 14.4% over the previous corresponding half year. The mini iPod, which is a music playing device, has been taken up in New Zealand at the same staggering rate as oversees. In 2002, Renaissance restructured, dumping several of its high-profile but low-margin contracts in favour of a smaller stable of exclusive distribution rights. Those include Apple, PalmOne, FileMaker and US Robotics. The move has clearly paid off for the company.
Calan Healthcare Properties (CHP) has completed the sale of some Australian assets so it could concentrate on its Epworth Eastern project in Melbourne. The company said the sale was a milestone in the process of converting non yielding assets into yielding assets and the disposal of non strategic assets to fund the $50m Epworth project. The $5.66m proceeds were used to cut debt. Having disposed of non-core properties, the trust is now looking for growth opportunities. It has a conservatively geared balance sheet and an attractive dividend yield and, with its exposure to the growing healthcare sector, Calan should be a sound performer in the long term.
02 Aug
Many New Zealand companies continue to report strong earnings. Yet by and large the prices are not exactly leaping upwards. This might be a sign of exhaustion, indicating that the market might have peaked. Nevertheless, there are still are many good investments on our market.
Stock exchange operator New Zealand Exchange (NZX) has posted a half-year net profit after tax of $2.03m, compared to $0.58m for the six months ended June 30 last year. Earnings per share for the period were 16.6c. Total revenue rose 52.4% compared to the first half of last year to $8.3m. NZX's latest result shows strong earnings growth, reflecting a more buoyant share market. There is a lot to like about NZX, which has the status of being a well-managed monopoly. However, it is highly leveraged to trading volumes, which means it could suffer badly in a market downturn. Its share price remains at a high level relative to underlying earnings.
Power company, Powerco (PWC) has reported a net profit after tax for the three months to June of $14.4m, up from $13.1m for the same period last year. The favourable result for the June quarter indicated this year's earnings would outstrip last year's, the director said. The boost in the latest quarter was due to a slightly colder winter, coupled with strong economic growth conditions in the Bay of Plenty, The company continues to trade on a relatively low multiple to likely dividends, making it an attractive investment for those wanting yield. PWC is starting to pay tax, which will reduce earnings and dividends. But it remains on a healthy dividend yield.
ING Property Trust (ING) has acquired from Trans Tasman Properties (TTP) its partly empty 15-level Citibank Centre office block in Auckland for $30.5m. The sale, on a 9.02% yield, will take ING's portfolio value up to $335m and leaves the trust with 21% of its portfolio in industrial property, 66% in commercial buildings and 13% in retail. Although property trusts are vulnerable to rising interest rates, ING is underpinned by a very respectable dividend yield, and should appeal to income investors. Following the change in ownership and management to ING, the Trust has rapidly increased its scale, thereby reducing risk.
Trans Tasman Properties (TTP) is another story entirely. In theory, TTP is a classic value investment as the shares trade at less than 50% the value of the underlying properties. However, the company appears unable to unlock this hidden wealth, even though it has had years to try. Although the success of recent projects and a rapidly diminishing debt burden are positive signs for TTP. Yet this company is struggling to gain credibility. Investors were again taken by surprise when TTP announced it is splashing out $112m on a building site in Hong Kong recently. Many question TTP's expertise to deal in the cutthroat Hong Kong market.
26 Jul
The season of reporting has started with several good results, indicating that the NZ economy remains in good health. There are still good results to come, and those who can spot them can get ahead of the investment game.
Steel & Tube (STU) has upgraded its profit forecast for the full year to between $27m to $28m, up from $24m. The manufacturing company relies on cyclical industries to sell its products, but these are holding up. The expected slowdown in rural demand has not happened, and the property sector remains strong, albeit overheated. STU has been an excellent performer for many years, rewarding shareholders with very steep gains in its share price. However, there is a good chance of revenue declining over the next year or two as the company is heavily exposed to the cyclical sectors near their peaks, even while they are proving resilient for now.
Pacific Retail Group (PRG) is selling the Bond & Bond and Noel Leeming retail chains to an Australian private equity investor, Gresham Private Equity for $138.5m. The price is said to be a good one for PRG and the money will be put to cutting debt and funding the multi million dollar losses at PowerHouse, the UK chain acquired by PRG. PRG retains a consumer finance group, the smaller homeware business Living and Giving, and lingerie manufacturer Bendon as well as its investment in PowerHouse. However, the record for NZ companies turning around ailing overseas acquisitions is poor and PRG has left itself in a risky situation.
Pumpkin Patch (PPL) has almost doubled its forecast for this year's profit, just seven weeks after listing on the sharemarket. It now expects after-tax profit for the year to July 31 of $7.5m to $8m, compared with its April forecast of $4.03m. The group had benefited from a buoyant three months in Australia, New Zealand and Britain. The sudden restating of its profits has resolved some of the doubt about the pricing of the shares, which were pitched on a high historic p:e ratio of 17. The issue price was set at $1.25 and the share has traded some 12% above that, a premium that now seems too modest.
Shares in Telecom (TEL) have breached the $6 mark for the first time since January 2000. There seems to be several reasons for its steady rise in recent months, including the easing in the Kiwi dollar. This has attracted overseas investors who tend to move first into TEL. Apart from that, investors are being drawn by its changed dividend policy which will see increased dividends paid in future as it scales back on previous capital expenditure. The long-awaited increase in TEL's dividend policy to 75% of net earnings completes the transition of the company from a growth-oriented company to a yield-oriented one appealing to income seekers.
19 Jul
The retail sector of the share market is a dangerous swamp to most investors, who tend to lose money there, rather than make it. But this week we turn the spotlight on three who are making good for investors, and one that is struggling.
Christchurch retailer Smith City (SCY) is about to move onto the New Zealand Exchange's NZSX main board next Monday. It is presently listed on the NZAX alternative market. Last month the company announced a $4.33m net profit for the year to April, up 7.1% on the April 2003 result. Operating profit from trading activities increased by 19.8% to $6.1m, while sales increased from $187.5m to $200m - an increase of only 6.7%. This shows the company is becoming smarter at managing internal efficiencies. Smiths City has done well since focusing on the South Island and is a conservatively run business that has shown consistent growth over several years.
Clothing retailer Hallenstein Glasson (HLG) has advised that the favourable trading conditions experienced during the first half of the year have continued throughout the winter season. That means the full year profit to 1 August 2004, together with a net realised gain on the sale of Nelson and Christchurch properties is expected to significantly exceed the 2003 earnings. HLG is among the most consistent performers, and this latest upgrade shows it can keep delivering the results in a very competitive industry. Its gross margins are strong, cash management excellent, and dividend payout consistently generous. It is a share that appeals to income investors seeking a stable dividend.
Jewellery retailer Michael Hill International (MHI) reported a 7.2% increase in same-store sales, with New Zealand producing $83m same-store sales, up 1.2%, while Australia offered $146m in same-store sales, an increase of 11%. With investors particularly interested in the fledgling operation in Canada, where the company set up shop in 2003, MHI had some positive news with sales of $5.9m up 154% over the previous eight months. MHI has proved that its formula for retailing can work in other countries. It is a strong retail investment, helped by the fact that it carries an element of currency hedge given that trading takes place in two countries, possibly three if Canada continues to expand.
Shares in the Warehouse (WHS) took a beating this week after analysts started speculating at the write off needed for it to withdraw from Australia. The Warehouse would face a bill of around $200m if it decided to quit its troubled Australian operation. But the retailer remained defiant, committing itself to Australia until 2006, when it will reassess its viability in the highly competitive market. Sooner or later, WHS will either divest its Australian assets or turn them around and either result should be good for the company's future earnings and share price. However, it worries us that WHS cannot come right in a booming Australian economy. What would happen when that economy turns downwards?
12 Jul
In the words one sharemarket commentator this week, interest in energy shares is "white hot". There certainly is a lot happening in the sector with proposed mergers, looming ownership changes and the government cracking down on overcharging.
The New Plymouth District Council recently announced it has drawn up a short-list of bidders for its 38.2% stake in Powerco and is "confident" of finding a buyer at a satisfactory price. Two trusts are also selling their stakes, making 53.6% up for grabs. Takeover rules will force the buyer to make a bid for the rest of the company, probably at a premium to recent prices. Powerco has already restated its accounts to reflect the removal of tax losses following a change in ownership. Although PWC will in future have to pay tax it will be able to pass imputation credits on to shareholders. Therefore, there should be little impact on investors.
Contact Energy is another company likely to change hands soon. Edison Mission Energy, the US-based company that owns 51% of Contact, is selling all its non-US assets as a package. Whoever buys the Contact stake will have to make a bid for the rest of the company and, to win over a large number of small investors, such a bid is likely to be above its current market price. A development this week that could further fire investors' enthusiasm is the opening of Contact's first offshore power retail operation. A new subsidiary, Red Energy, has just opened its doors in Melbourne with 50 staff and plans to double in size within a year.
Third on the list of energy companies that may come into play is NGC Holdings. A potential buyer for Contact is Australian energy company AGL, which may have to sell its 66% share of NGC to raise funds. While NGC has had its share of ups and downs in recent years but following asset sales and a return of capital to shareholders, it is now a low-growth, stable wholesale gas supplier with a strong balance sheet. While concerns have been raised about gas supplies as the huge Maui field comes closer to the end of its natural life, NGC has arranged for large gas supplies from other fields that will keep it going for some time.
Clothing retailer Hallenstein Glasson this week came out with an upgrade to its forecast profit for the year to August. This came as a surprise to many investors as the company has struggled to lift profits for some years. Fortunately for shareholders, even though profits were stagnant, resulting dividends have been very reliable. Now that business is improving, profit margins should also pick up and asset sales will further boost the bottom line in the current financial year. Given the depth of experience within the company and its impressive track record of maintaining earnings in a volatile market, there is no reason to think it cannot continue paying generous imputed dividends.
05 Jul
Rural stocks are back in favour after a period of neglect. Part of the reason is takeover activity in the industry, but also because the expected rural downturn is looking like it is not going to happen soon.
Share in meat producer Richmond (RHD) have spiked to their highest level in almost four years, driven by news of a sharp profit recovery this year, combined with a takeover bid. Last week an offer of $3.11 per share went out to Richmond shareholders from PPCS, who made it conditional on receiving acceptances to reach the 90% shareholding level. RHD responded with the profit update, which is forecasting a profit before tax in the region of $39m for the year ending 30 September 2004, comfortably exceeding its prior year profit before tax of $20m. The share immediately rose to beyond the offer price which means to offer could fail or be revised.
Pyne Gould Corporation (PGC) says its subsidiary, MARAC Finance, continues to trade strongly and is now forecast to contribute a profit 10% ahead of the $17.0m forecast for MARAC in PGC's recent listing. As a result, and given the likely improved surplus from Pyne Gould Guinness (PGG) at year's end, PGC directors expect to report an end of year result which significantly exceeds the listing profile forecast net surplus of $21.1m. It is remarkable that a company the size and profitability of PGC should only now be coming to the main board to the Stock Exchange. Even with the move, it hasn't raised any additional capital, an indication of how prudently managed and successful it is.
Meanwhile, Pyne Gould Guinness (PGG) this week advised that because of its improving operating performance together with realised gains on the sale of certain surplus properties, that its reported tax paid earnings for the year ended 30 June 2004 is likely to significantly exceed that reported for the 2003 year. PGG has done well in recent years to turn in a reasonable result considering impact of drought and a high NZ$. It is a very well managed company with a well-proven ability to make value-enhancing acquisitions while squeezing good returns from existing assets. The share price has had an astonishing run since July 2002.
Certified Organics (CER) plans to raise $2.5m in capital by 2006 to fund expansion. Speaking at the company's annual meeting, chairman Earl Stevens said the additional capital will be raised via a private placement of 8.85m shares and options with Auckland investment and broking company Ellis Capital at 10c a share, and a one for seven rights issue at 7.5c a share, with attached options. The share price, which reflects a disastrous profile on any long-term chart, lifted 15% on news of the rights issue and capital raising. Part of the reason is that at 10c, brokers Ellis Capital were prepared to pay a substantial premium over the trading price.
28 Jun
Buying the cheap, "penny dreadful" shares in New Zealand is a mug's game. They seldom go anywhere. Yet, if you get it right with a penny dreadful, you can make a lot of money.
Investors were taken by surprise when Trans Tasman Properties (TTP) announced it is splashing out $112m on a building site in Hong Kong, comprising of 2ha of bare land in Sha Tin Town in the New Territories. Many question TTP's expertise to deal in the cutthroat Hong Kong market. The company is placing bets on large-scale developments that offer increased risks as well as rewards. TTP has a lot of value to unlock, as the share trades perpetually below the asset value of the company. Ferrier Hodgson's independent report on SEA Holdings takeover offer concluded valued TTP at between 50c and 57c. But whether that value will ever be unlocked is a moot point, given its management's recent track record.
Vodka producer, 42 Below (FTB) has gained some support since announcing it expects to exceed its revenue forecasts by about 40% for the March 2006 year and post a profit for the period. The shares have performed relatively weakly since listing in September 2003, only once exceeded the 50c-listing price. The company was very young when listed, virtually still at the venture capital stage. But the company and its shares are steadily recovering. FTB's products (42 Below Vodka and South Gin) are sold through some 1200 bars and liquor stores with approximately 400 of these being located in the USA. This is a risky investment, however, because FTB is still bleeding cash.
Shares in childcare company KidiCorp (KID) lifted out of a long stagnation after it announced KidiCorp had entered into an agreement with Peppercorn Management Group, an Australian listed company that specialises in the management of over 400 childcare centres in Australia. Under the agreement Peppercorn will assist the team at KidiCorp to manage the anticipated growth over the next 18 months and thereafter to improve performance and add value to the company. Kidicorp has not lived up to expectations. The move into childcare follows the successful share market launch of similar companies in Australia. Recent acquisitions have increased the company's scale but the start up costs and subsequent write downs have seriously weakened the balance sheet.
Fisher & Paykel Healthcare (FPH) is expanding its Asian operations to capitalise on its fastest growing markets. The specialised medical product manufacturer has opened a sales and marketing office in Tokyo, handling sales in that country. Japan is the largest market in the Asia Pacific region for respiratory humidifier systems, which FPH sells. The Asia Pacific region generated $49m of FPH's worldwide $215m revenue. Since being separated from Fisher & Paykel Appliances (FPA), FPH has turned out to be an outstanding success, combining proprietary technology with marketing nous. But the share is expensive on a p:e basis and should be accumulated mainly on weakness.
21 Jun
Takeover activity and IPOs continue to dominate the market. However, while there is usually money to be made in a takeover, the IPOs are proving top be a mixed bag. Overpriced, average quality listing are being rejected.
A2 Corporation (ATM) has posted a pre-tax loss of $2.15m for the year ended March 2004, flat on the year-earlier loss of $2.15m. The company said the loss reflected significant investments in protecting and expanding its intellectual property. Last year A2 signed a multi-million dollar partnership deal with a large United States corporation, IdeaSphere, to sell A2 milk in over 5000 US retail health food outlets, generating minimum royalty payments in the first year of $1m and $4m in the second year. Having secured patents internationally, A2 certainly has the potential to deliver. For the time being, however, it remains a small, loss-making biotechnology company with a regular need for more funds from its shareholders.
The potential change in the shareholding of Powerco (PWC) could cost the company dearly. News that the company's three major shareholders are considering selling their Powerco shares could see it lose the benefit of tax losses accumulated over the years and ready to be used to reduce tax. It will also require PWC to restate previous accounts, with the write-down of its tax benefits by $27.6m in the balance sheet impacting the reported profit of $55.1 million announced in April 2004, down to a revised profit of $27.6m. The share price has not reacted harshly to this event because the company's ability to pay high dividends is in tact.
Technology distributor, Renaissance Corporation (RNS) has landed a new product line. The company will spearhead the launch of the Gizmondo device into the New Zealand and Australian markets in 2005. The Gizmondo is a handheld gaming devices, which is expected to reach a targeted volume of 150,000 units per annum in New Zealand and Australia. Renaissance currently distributes technology products through a nationwide reseller channel and e-tailing, including the marketing of Apple, FileMaker and palmOne. RNS share price reacted with a small rise, adding to an upwards trend over the past 12 months on perception that RNS had got rid of the weaker parts of the business and is now becoming profitable in core business.
Rural Portfolio Investments (RPI), which is half-owned by Craig Norgate's family and half-owned by the McConnon family's investment company, has reached within striking distance of the 50% mark it is seeking in its takeover attempt of Wrightsons (WRI). British fund manager Marathon Asset Management has apparently agreed to sell its 7.9% stake in Wrightson, taking RPI's holding in Wrightson to around 40%. RPI increased its bid from $1.50 to $1.65 per share in the face of fierce resistance by the WRI board, which claim the company is being undervalued. Wrightson shares have remained stubbornly below the bid price, as the market has remained unconvinced a deal will happen, but are now rising.
14 Jun
This was a week that saw the canning of the Colville float, bringing to an end the short time in the sun enjoyed by closed end investment funds. In fact, investment funds are unsuited to the New Zealand market given their cost and tax disadvantages.
Sky City Entertainment (SKC) has acquired a 95.75% stake in Sky City Leisure (SLL) sparking a compulsory acquisition of the remaining shares. SKC launched an offer at 82c per share last month, which was assessed by independent valuers to be fair. This was the inevitable mopping up exercise for what had been a troubled subsidiary. More important is the fact that SKC remains an excellent investment with growth as well as defensive characteristics. As one of few companies that can claim to hold a legislated monopoly in a defensive industry, SKC earnings are more predictable than most. In the meantime, SKC continues to increase its dividend payout in line with earnings, making the shares worth having for yield.
Selector Group (SEL) annual sales revenue only rose slightly from $415,000 to $417,000 in the year to end March 2004, but the net operating cash outflow for the period was substantially reduced from $247,000 to a net $8,000 outflow. Directors intend preserving the ongoing viability of the business as it explores alternative business options. Like so many companies emerging out of the dotcom boom, Selector had high hopes as a developer of innovative human resources software with a suite of products (including SelectorPA, e-Profiler, e-Search, ePlus, CareerStep and a psychometric analysis tool developed with Australasia's leading Internet-based employment website. However, the web based business model is proving hard to crack, and SEL is searching for a new business venture.
Finance company, Dorchester Pacific (DPC) has placed 104,005 shares at $2.80 in settlement of the purchase price for MoneyOnLine, a web based investment service. This is yet another extension of the Dorchester brand, which has in recent years added several complementary businesses, and sold several that did not fit the bill. Currently, DPC owns Direct Broking - an Internet broking service - and Equity Investment Advisers as well as its core business providing second tier finance. For a long time, the DPC share price went nowhere as the company was perceived to be not dominant in any particular area. However, it has consistently produced excellent earnings, which resulted in a sharp rating upwards since June 2003.
Genesis Research and Development (GEN) have elected Jim McLean as Chairman of the Board, following the retirement of the previous Chairman, David Irving. This was not totally surprising as the share price has been a disaster that had to be dealt with. Genesis's early promise in psoriasis treatments has not lived up to the hype and it has discontinued one of its headline products. However, it has a number of promising products in its pipeline and plenty of cash resources to weather the formidable hurdles it takes to commercialise even one of them. Profits are unlikely in the next few years while revenues and the share price are likely to be volatile, making any investment highly speculative.
07 Jun
There is a lot of market activity centred on new listings, and takeover bids for old companies. Judging by the lower quality of new listings, we would say that the market has peaked and investors should start to become fussier about what they subscribe for.
For the 12 months to 31 March 2004, stamp company Mowbray (MOW) reported a net profit of $394,000, compared with $25,000 the previous year. Revenue was flat at $4.1m. Mowbray's latest result has been boosted by the arrival of earnings from recently acquired Peter Webb galleries. The company's exposure to the stamp industry is underpinning earnings as demand is stable during good economic times, and tends to rise during periods of uncertainty. The depth of experience offered by founder John Mowbray and shareholder Sir Ronald Brierley (both as an investor and an avid stamp collector) offers considerable assurance that the company's prospects are sound.
Tenon (TEN) is fighting tooth and nail to ward off the takeover bid of Rubicon (RBC), which last week upped its offer to $1.95 a share from $1.85. With its near 20% shareholding, Rubicon is seeking to move to 50.01% and its major shareholder Guinness Peat Group (GPG) supports its bid. Tenon's independent directors last week recommended that shareholders do not accept it. The Rubicon offer is unfair, they claimed, and well below the independent adviser, Grant Samuel's, valuation range of $2.01 and $2.22. Having sold its forests, it's hard to know whether TEN will succeed in its new guise as wood products company. But the takeover battle suggests that anyone who has the shares should hold onto them.
Air New Zealand (AIR) is to acquire ten new Boeing aircraft. The aircraft will provide the airline with new capabilities for its long haul operations. These aircraft will allow it to develop new routes and increase frequency on existing routes. Although this will increase capacity and revenue, the deal did nothing for the share price as many problems remain for AIR. The airline industry is totally unpredictable, as many factors - tourism, oil prices etc - work simultaneously to stymie any attempt at a forecast. Because of this inherent instability, many serious investors will not touch airlines under any circumstances. The big investment in new aircraft underlines another problem in the extent of capital expenditure needed to run AIR.
Some recent floats have been a distinct disappointment. But not so the listing of TeamTalk (TTK) in May 2004, offering 4.6m ordinary shares at $1.75 per share. The share has remained well above that level since listing, and lifted further last week after the directors advised that for the year ended 30 June 2004, the company expects to exceed its profit forecast by over $400,000 with net surplus for the year now expected to be in excess of $2.5m. The listing was relatively attractively priced, on a net forecast dividend yield of 8.5%. This, and its relatively reliable cash flow, has been a major factor in its good showing.
31 May
The aggressive pricing of new listings has seen investors get burnt in some IPOs. Investors are likely to become a lot more fussy about where they stick their money, and that means companies floating their shares also have to become more realistic on pricing.
Mike Pero Mortgages (MPM) failed to reach its $1 issue price when the shares hit the market this week. The listing price of $1 was relatively fully priced at 14 times earnings, which have been influenced by volumes achieved during an unprecedented property boom, which is not going to last. Certainly, MPM has proved to be a very successful operator in its industry. But many investors remain unconvinced about the role of mortgage brokers in the NZ context. Also, the only mortgage broker to have listed in Australia has not performed for investors. However, at below $1 MPM shares deliver an acceptable dividend yield, which yield investors might find attractive.
Restaurant Brands (RBD) reported flat sales for the first quarter of 2004/5 at $72.5m, up 1.6% on the same period last year. The Starbucks Coffee and Pizza Hut businesses in both Australia and New Zealand continued strong growth. But KFC New Zealand lost some of the previous quarter's momentum with sales totalling $40.0m for the quarter, slightly down on the prior year. RBD has been out of favour with investors for some time. They perceive that the most important part of the business, KFC, is struggling to overcome its "fried food" label in the move to healthier eating. However, the results have some positive aspects as Starbucks regains its growth trend and the Australian operation starts to recover.
Shares in the investment company, Kingfish (KFL) have failed to reach their $1 issue price ever since listing in March this year. They slipped even lower this week to around 11% below the issue price. This is not surprising based on experience overseas, where trusts have on average lagged 10% behind their net asset value. The reason for the discount relates to perceived costs, including taxes and management fees, as well as hidden costs that trusts are subject to. The discount tends only to disappear once the trust is wound up. At the current deep discount to asset value, KFL shares deliver fair value.
Financial services group Tower (TWR) has announced a profit of $20.5m for the six months to the end of March - reversing a net loss of $154.4m for the same period a year ago. Since last year's disastrous first half result, Tower has gone through a major reconstruction. This involved sacking directors, cutting expenses, selling and shutting businesses, and reviving the sick Australian operation, which had seemed dead in the water. There has been a significant improvement in Tower Australia, which made a profit of $10.5m against a slight loss in the previous year. Some had thought the brand was too tainted to recover in Australia. The share price had presaged a strong recovery in Tower.
24 May
New listings continue to flood the market, and the quality of many of the floats remain high. Investors should be wary, however. A plethora of listings usually signals that the market is at a peak. Beyond the peak is the pain.
Shares in The Warehouse Group (WHS) lifted noticeably this week on news that the discount chain had appointed Ian Morrice as Chief Executive Officer. Morrice is currently Managing Director, Commercial for United Kingdom-based B&Q Plc, the number one DIY retailer in Europe and number three DIY retailer worldwide. While the NZ and Australian retailing industries will be different to the UK, there is a good chance Morrice will be able to add value. In particular, he can make a dispassionate decision about whether to stick with the Australian expansion. The short-term outlook for retailing in this part of the world is not good, but WHS should continue to deliver excellent performance in the longer-term.
With all eyes on the looming Feltex float, its carpet-manufacturing rival (CAV) has fallen from favour. In the past six months, CAV shares have fallen by 15%. But CAV is a superior company to Feltex, which has had a considerably more volatile performance over the years. CAV's new MD Wayne Chung has had 30 years' experience in the sector and his outlook for the sector is bullish. The company may not be as vulnerable to a property downturn as many think as much of its business comes from people with existing homes upgrading their carpets as opposed to new buildings. Its price may also be correcting after having risen too high last year.
Infrastructure investor, Infratil (IFT) has reported mixed results for the year ended 31 March 2004.Consolidated earnings before interest, tax, depreciation and amortizations increased 16% to $62.5m from $54.0m. However, the net surplus for the year was lower at $22.4m, compared with $28.1m for the previous year because gains from asset realizations were low compared with last year. Infratil's key investments performed well, except for Glasgow Prestwick airport which hit a bad patch and has seen a change of management. While the bottom line is lower because of one off events, the part of IFT's business that supplies recurring revenue is doing well. The dividend yield alone makes for a share worth holding.
DB Breweries (DBB) will no longer produce Heineken keg beer for the Australian market. This follows a decision by Heineken International to centralise brewing of all Heineken beer for the Australian market with Lion Nathan. DB Breweries has been producing Heineken keg beer for Australia for five years as part of its ongoing relationship with Amsterdam-based Heineken International. The Heineken business contributed only $0.8m to EBIT and so is insignificant against group revenue. Export volumes of other DB brands continue to grow in Australia and other markets. DB is no longer a cheap share on a yield basis. But it is performing very well in a defensive industry, which makes it a worthwhile portfolio share.
17 May
It was a week dominated by takeover activity. What is noticeable, however, is that everybody wants a bargain and takeover bids are coming in at below the intrinsic values of the target companies.
Wrightson (WRI) chairman John Palmer is fighting hard to keep the rural services company out of the grasp of Craig Norgate, who has made a $1.50 per share bid for WRI. Palmer said the board's own valuation was $1.72 to $1.98. This is higher than the value calculated by independent valuers Grant Samuel, who say WRI is worth $1.61 to $1.86 and the offer was unfair to shareholders. What is strange in all this is that WRI shares have remained stuck at $1.40, well below the values being placed on the company. Usually, a takeover war would set off the shares. One explanation is that investors believe the takeover will not go through.
Tenon (TEN) shares rose slightly this week on speculation a mystery bidder was about to trump Rubicon's $1.85 share bid. The name of Norwegian company Norske Skog, which bought Fletcher Paper in 2000 for $5b, has been mentioned, but nothing has been confirmed. Tenon said its independent directors had unanimously recommended that shareholders reject the $1.85 offer for a number of reasons. It said the offer price was below the company's current share market valuation, and was well below independent adviser Grant Samuel's valuation range of $2.01 to $2.22. The company also said the offer did not include any control premium, and was highly conditional and there is no certainty that these conditions will be satisfied.
DB Breweries (DBB) has reported a 2.1% increase in half-year net profit and says it will increase beer prices to help reach its annual goal of 10% operating profit growth. It reported a net profit of $17.2m for the six months to March 31. Sales were up 7.3% to $182.9m over the half year and pretax profit rose 14.2% to $26.8m. DB management says said the company was well placed to achieve its previously stated annual growth target in earnings before interest and tax (ebit) of at least 10%, barring unforeseen circumstances. DB is an excellent defensive investment paying a healthy dividend. The shares got somewhat ahead of
At the preliminary half year result, Nuplex (NPX) chairman advised that the group now expects a full year result more than 30% higher than the 2002/03 year. Trading conditions in the period January to April 2004 have been better than expected, and it is estimated that the net surplus for the full year ended 30 June 2004 will be more than 40% up on the previous year. NPX's profit growth has been excellent on only slightly higher sales, indicating that economies of scale are kicking in. After a slow start, it is also proving to be one of the few New Zealand companies to make a success of Australian acquisitions. The company is, however, vulnerable to the economic and building cycles.
10 May
It's been another terrible week for our major retailers, with both The Warehouse and Briscoes punished by the market for not delivering in their latest quarterly results. Expect things to get worse before they get better for retailers.
Briscoes (BGR) sales have deteriorated in the three months ended 30 April 2004, dropping 1.90% to $67.3m. After adjusting for new stores opened since April 2003, on a same store basis the Group's sales for the quarter were 8.90% behind the first quarter for last year. While sales were lower, the gross margin generated for the first quarter is significantly ahead of the gross margin for the first quarter of last year. The company is well managed, has a debt-free balance sheet and is trading at less than four times net assets, much of which is cash. This makes it a worthwhile longer-term investment for those prepared to ignore shorter-term volatility.
The latest quarterly sales results from The Warehouse (WHS) were not bad at all, but apparently not good enough for the market, which forced down the price. Sales for the thirteen weeks ended 2 May 2004 were $493.5m an increase of 9.5% over the corresponding period last year. The Warehouse Australia achieved sales for the thirteen weeks ended 2 May 2004 of A$103.1m, up 3.6% over the corresponding period last year. In Australian dollar terms, same-store sales increased by 0.6 percent. Sooner or later, WHS will either divest its Australian assets or turn them around and either result should be good for the company's future earnings and share price.
For the six months to March 31, Westpac posted $310m earnings, up 1% on the previous year, while gaining market share in housing loans and growth in business banking. Westpac (WPT) is not an operating company but a vehicle established to allow dividends to be paid to New Zealanders that carry imputation credits. This positions it strictly as a yield investment paying a healthy, dependable dividend. Dividends depend on the performance of its parent company, where growth has been exceptionally strong but can be expected to flatten out in line with a forecast softening of the property sector on both sides of the Tasman.
In its first full-year result as a listed company, for the twelve months to 31 March 2004, 42 Below (FTB) has reported a $1.125m loss - in line with expectations - on sales that were substantially higher at $4.4m. The latest results show sales growth on target and investors seem to be taking more notice, with the share having lifted above its issue price for the first time. This is a risky investment because FTB has yet to break even, and it might take substantial sales growth to achieve that. However, the company has clearly cracked a marketing formula that works.
03 May
The increase in the OCR interest rate has clearly had an impact on our share market, with daily falls outnumbering rises. Nevertheless, the rise in rates was relatively minor and we anticipate current falls will quickly be reclaimed in the days ahead.
Shares in New Zealand Refining Company (NZR) shot up this week after it announced it had received an allocation of carbon credits under the Government's Projects to Reduce Emissions programme. This has boosted NZR's plans for a new electricity generation plant at the Marsden Point Refinery. The company has said if the new plant proved to be viable it would provide an efficient, independent and more environmentally sustainable source of energy to Northland from 2007 onwards. Nevertheless, NZR continues to face a number of challenges to growth. Continuing pricing volatility and competition from refineries in Australia and Asia, coupled with high capital expenditure requirements over the next few years are expected to put pressure on profits.
Shares in Lyttelton Port (LPC) are under pressure following news of a potential strike action that will commence on 29 April through to 5 May. The port could be crippled over this period, the last thing it needs when its profits are already under pressure this year. LPC has picked up a couple of new contracts to replace lost ones and overall volumes handled by the port have been growing. However, with no growth in earnings expected, the company may well need to review its high dividend policy. This would see support for the share fall further as most of its investors would be in for the income.
After a poor first quarter, meat exporter Affco (AFF) has recovered to make a profit of $11.2m for the six months to March 31 - up 4% on the same period the year before. Revenue for the period was $405.9m, down from $447.0m. In December the company warned that tougher trading conditions were likely to cause half-year profits to fall. At that time North Island meat processors were struggling with poor spring conditions and low lamb numbers. AFF's current performance is against the background of substantial restructuring over the past two seasons that has seen a more focused, cost efficient, and profitable operation emerge. Initiatives in the key areas of procurement, processing, and marketing are now bearing fruit.
Powerco (PWC) has reported a $55m profit for the year ended March, up 45% from 2003. The share has been superb performer, based on sustainable earnings and high dividends. But with the company in the midst of merger talks with gas network company NGC, the prospect of a deal is now the major issue driving the shares. PWC is on track to deliver a robust full-year result in line with expectations, but is expected to produce a flat result at best in 2004-5. Despite this it is trading a low multiple to likely dividends, making an attractive investment for those wanting yield.
26 April
The bull still has a lot of energy left, if recent new highs on the NZ share market are to be believed. The main risk facing this market is the US, because many believe the real shake out on Wall Street has yet to emerge.
This week the packaging manufacturer, Vertex (VTX) advised the New Zealand Exchange that it anticipates a net surplus after tax for the 12 months to 31 March 2004 in the range of $4.8m to $5.0m, higher than previously expected. Vertex also advised that it is considering an on-market share buyback of up to 4.9% of the company's shares. This it said would result in a more efficient capital structure for the company. The share price jumped in the wake of this week's announcement. But based on the new forecast provided by its managers, Vertex still does not look too expensive. Having cut its dividend, VTX is not suitable for income seekers but could appeal to growth investors.
Craig Norgate's Rural Portfolio Investments (RPI) has delivered a prospectus containing his reasons for wanting to acquire a controlling stake of Wrightson (WRI). RPI already owns nearly 13 per cent of Wrightson. Norgate and RPI chairman Baird McConnon hope to buy a further 37 per cent at $1.50 a share - taking RPI to a controlling stake of 50.1%. Norgate has said he is disappointed in WRI's recent performance and intends conducting a review of all of Wrightson. What's notable is that WRI shares have remained at $1.40, well below the offer price. This seems to indicate that investors think the bid might fail, forcing the share down to its previous level well below $1.40.
Waste Management (WAM) is forecasting profit growth similar to last year's 23% rise for the current financial year and also expects to maintain its high dividend payout. The company made a net $18.5m profit last year and a 23% lift would take it to $22.8m profit in the current financial year. Strong trading in its waste collection and treatment business on both sides of the Tasman is fuelling its growth. WAM has had none of the problems experienced by other New Zealand companies attempting to expand to Australia. The reason is probably that Australians who don's want to buy insurance from New Zealanders (Tower) or shop at an unknown brand (The Warehouse), don't care who collects their waste.
Botry-Zen (BOZ) has developed a biological control for the grape-rotting disease botrytis. After months of research and testing, its new granulated version was said to be commercially viable and its shares rose sharply on the news. Plans were now under way to expand the company's production plant in Dunedin in order to have the granulated product available for the local market in September and for the Italian market by May next year. BOZ has a promising technology but, as a small biotechnology business, the risks are high. However, the company has the backing of some prominent businesspeople and has as good a chance of success as any company in this field.
19 April
The NZ Stock Exchange's own shares (NZX) are a good barometer of how well the market is faring. Based on the NZX's rocketing share price, the answer has to be: "Seldom been better."
Turners Auctions (TUA) shares lifted this week on the back of the positive noises heard at the annual meeting. Shareholders who might have expected more bad news about the fledgling Canadian operation were told that TUA had just been awarded a Canadian Government contract to handle all its vehicle sales for British Columbia until 2009. The share has had a stunning run since its listing at $1.50 in late 2002. That the company has a very strong hold on the local car auction market had always been recognized. But many were skeptical the formula could be repeated in Canada. There now seems a chance that expanding overseas is a real option for TUA.
Michael Hill International (MHI) has produced a solid result in its nine month sales report to end of March. Sales totalled $192.6m, up from $167.3m, with all the growth coming from Australia, which was up 20.7%. While MHI's New Zealand chain has clearly matured to the point of stagnation, Australia is rocketing ahead. MHI has expanded successfully across the Tasman where others have failed because it did so organically, opening one store every few months, thereby paying a small price for its initial mistakes. The does seem fully valued, however, trading as it does on a price:earnings ratio that is higher than its historic average.
NZX shares hit record highs the day after it reported a bottom line profit of $869,000 for the quarter to March 31. The share has outperformed even the bullish predictions of some analysts since the New Zealand Stock Exchange demutualised on 31 December 2002 and issued 3.31m shares to NZSE firms and brokers. The price is driven partly by performance but also by a lack of liquidity. The brokers who received the initial shares simply won't let go of them in big numbers, forcing buyers to bid them up repeatedly. NZX is certainly not cheap based on price:earnings ratio, but with the chronic lack of sellers its hard to say how high it could go.
Shares in wood processor Tenon (TEN), which is the subject of a takeover attempt by Rubicon (RBC), have spiraled in recent weeks. Rubicon has offered $1.85 a share to secure a 50.01% majority holding in Tenon, formerly known as Fletcher Challenge Forests, which is in the process of selling its 107,000ha forest estate. TEN is resisting the takeover bid and says the $1.85 offer is based on an old profit projection, which has since been lifted by 50%. TEN has been heavily backed by "smart money", with many of the countries best-known investors buying in since last year. This was in anticipation of a takeover battle such as we are now seeing.
12 April
With the New Zealand share market hitting record levels, there is a surge of interest from mom and pop investors as well as professionals. Hence the rush of companies lining up to be listed in what is a receptive environment.
Sky City Entertainment (SKC) has extended its monopoly over the gaming market in New Zealand with the purchase for $93.7m of the shares in Aspinall (NZ), which holds an effective 40.5% shareholding in Christchurch Casinos. Aspinall also holds an effective 32.2% interest in Victoria Hotels (Christchurch) Limited, the owner of the 296 room, 4 star, Christchurch Crowne Plaza Hotel, which is located adjacent to the Christchurch casino in central Christchurch. The news was well received by the market, which bid up SKC shares. These had been weak in the wake of a poorer than expected performance from Sky's Australian assets. With its legislated monopoly and strong cash generating assets, SKC is a first class investment.
Scott Technology (SCT) has reported an operating surplus before tax of $2.8m and a tax paid profit of $1.8m for the six months ended 28 February 2003. This was well down on $3.7m operating surplus and $2.5m after tax profit reported in the same period the previous year. The group sales for the six months were also down at $16.9m, compared to $23.4m in the previous half year. The company blames the strong dollar for the fall in profits. However, the poor result had the opposite effect, sending the share price upwards on successive days. The reason seems to be SCT's comments of major contracts coming on stream in China and the US.
Shares in rural services company Wrightson (WRI) jumped from $1.20 to $1.40 this week after Rural Portfolio Investments - the investment vehicle of former Fonterra boss Craig Norgate, announced that it intends to make a partial takeover offer at $1.50c. Rural Portfolio Investments currently holds 13% in Wrightson. But Norgate has warned that if the 50% threshold is not reached, then Rural Portfolio will sell its 13% stake. Wrightson share register is wide open, meaning there are no anchor shareholders, only small individual investors. If the deal fell through and Norgate's holding came onto the market it is likely to depress the share price below even the $1.20 it traded at before the offer.
Briscoe Group (BGR) is said to be bidding for the Whitcoulls book chain, currently owned by British retail and publishing giant WH Smith. The deal is said to include Angus & Robertson, owned by the same British parent. Whitcoulls Group last month reported a profit of $10.7m for the 13 months to August 31 last year, on revenue of $214m. BGR shares have lifted off their low point of $1.40 from early March, possibly in anticipation of this deal. Briscoes needs to find a home for the mountain of cash raised in its flotation that had been earmarked for an acquisition. While the cash is lying in the bank, BGR will struggle to produce the returns it is capable of.
05 April
The sign of a positive market is when new companies line up to be listed. While we are not exactly inundated with new listings, there is enough action to make us believe we are in a bull market.
The closed end equity fund, Kingfish (KFL), listed on the stock market this week, immediately falling to a 9% discount to the issue price of $1. Closed end funds like Kingfish tend to trade at a discount to net asset backing because fees, taxation and other costs are taken into account when the market sets the price. However, the free options that came with the KFL shares, and are trading at 15c, has ensured a profit on listing for investors in KFL. Long-term investors have to allow for the dilutionary effect of options that are likely to be exercised over the next few years, which will reduce long-term returns.
An unexpected sale of a 14.7% stake in Williams & Kettle (WKL) by an investment company owned by Sir Selwyn Cushing and David Cushing will have one positive spinoff for the rural services company. The sale of a large block should result in greater liquidity in WKL shares, making the shares far more tradeable. However, the sale by a controlling shareholder is hardly an endorsement of the company's prospects, which are likely to soften as spending power in the primary sector declines in response to a high $NZ. The company has signalled a reasonably good second half and pays a good dividend yield, but when major shareholders vote with their feet, other investors have to wonder why.
Postie Plus (PPG) has reported first half revenue and margins that were generally in line with prospectus forecasts but said that full year earnings will be affected by the performance of Rendells and costs associated with integration of the different computer systems and support functions. Managing director, Paul Young said that while higher costs will have an effect on after tax earnings for the full year, he expected that long-term benefits will flow and said that PPG intended to make dividend payments close to the prospectus forecast. We think that this level of dividend, which could be as much as 10% gross (pre-tax), more than compensates for a potential lacklustre performance this year.
Shares Trans Tasman Properties (TTP) spiked to a new high in the wake of an imminent takeover offer by its controlling share holder SEA Holdings. When the share was suspended on Tuesday, it had jumped from 35c to 45c on the back of the 40c offer. It has since settled back but could potentially go a lot higher depending on how hard SEA has to fight for the rest of the shares. What makes TTP interesting is its net tangible asset value of 64c, almost 50% higher than the current share price. However, if the offer falls through the share could fall back to its level before the takeover.
29 March
The NZ share market hit record levels this week thanks to the strong rise on Wall Street. Many remain unconvinced, however, that the US market can hold out forever against an inevitable correction.
Hallenstein Glasson (HLG) has produced an after tax profit for the latest half year of $6.99m, up 20.2% on the same period last year, and well ahead of market expectations. Profit was earned on sales revenue of $90.7m compared to $90.4m, indicating that it wasn't a sales drive, but a cost drive that contributed to better margins and higher profits. Despite pricing pressure in the marketplace, HLG's improved buying strategy and the stronger NZ dollar helped bring costs down. HLG is an extremely well managed company with proven ability to keep on an even keel in both good and bad times, despite the vagaries of the fashion world.
Shareholders in Independent Newspapers (INL) have approved the return of $340m in capital. This will be enacted by cancelling one in every six shares held by each shareholder and paying $4.66 for each share cancelled. Other than its 78.3% holding in Sky Network Television (SKY), INL will hold $300m in cash. The company therefore remains in a strong cash position to make further acquisitions. However, following the return of capital, long standing INL investors who had invested in a vast media empire will need to decide whether they really want to be left holding shares in only SKY, a rapidly recovering but still only marginally profitable satellite TV network.
Air New Zealand (AIR) is fighting back against increased competition in the air. It plans to boost capacity on its discount international carrier Freedom Air by 25%. Freedom Air, wholly owned by Air New Zealand, announced it would lease an additional Boeing 737-300 just as Air New Zealand increases its total number of flights to Australia to 125 per week from 116, making available an additional 100,000 seats a year. On the domestic front, Qantas announced it was slashing fares by almost half on flights within New Zealand for travel in May and June. Many smart investors won't go near airline shares, because it is an industry caught in a perpetual price war.
Retailer Briscoes (BGR) has produced a net profit after tax of $23.6m for the year ending 31 January 2004, virtually the same as the previous year. The result, however, was ahead of the revised profit estimate included in the directors' advice to the market on 4th February, when they advised of an expected profit decline of approximately 4% for the year. The result saw the shares pick up to claw back some of the losses of recent weeks, during which market perception of Briscoes soured badly. However, the company is well run and with the share well off its high point, it offers some value to shareholders at this level.
22 March
News that Infratil's airport in Europe has suffered a fall in profits due to lower tourism, serves to remind investors that it won't take much to bring to an end Auckland International Airport's (AIA) dream run on the market.
Fisher & Paykel Healthcare's (FPH) has launched a new nasal mask as it attempts to grab a larger slice of the $US800m ($NZ1.2bn) sleeping disorder market. Mask sales account form as much as half the sales of products linked to obstructive sleep apnea - a sleep disruption caused by temporary halts to breathing. News of this product breakthrough caused FPH shares to jump upwards, arresting a sharp slide that began in January. Its heavy spending on R&D is resulting in a series of new products that should deliver attractive earnings growth and its growth potential high. However, much of this growth is already priced into the shares.
Shares in infrastructure investment company Infratil (IFT) were hammered this week after it announced a profit downgrade at its 67 per cent-owned Glasgow airport. Infratil said the full year profit forecast for Glasgow Prestwick International Airport had been reduced 10% to $NZ12.6m as a result of lower freight volumes, lower passenger numbers which in turn had resulted in lower income from retailing. At first glance there does not appear to be any significant structural problems with the airport and the downturn in freight and visitor numbers may prove to be temporary. Until management reports back with more information, investors should sit tight. In the meantime, IFT is moving to acquire full control of the airport.
Metlifecare (MET) directors are working on changing the company's dividend policy in an attempt to increase its investor appeal. The company paid a rare 5c per share dividend last week, after a long spell of cash retention. Nevertheless, the share price has been slipping since January. MET now has a strong balance sheet, excellent cash flows and looks set to continue expanding and upgrading its facilities. It recently reported a 37% improvement in net surplus for the year ended December on revenue of $110.1m, up $10m on the previous year. Given the buoyant property market and ageing population, the company looks attractive as a long-term investment.
Provenco Group (PVO) appears to have turned the corner, at least in investor perception. The share price has spiked up sharply since early February although it remains volatile. A rerating was in the offing when it became evident some months ago that its own directors are increasing their shares in the company. The group recently announced a $21m contract for delivery of payment solutions to the retail oil industry in Malaysia. Then in late February PVO produced a turnaround in its fortunes when it reported a first half pretax surplus of $2.5m for the six months to December, a substantial increase on the previous year's corresponding result of $ 183,000. However, PVO remains a risky investment.
15 March
Retail sales leapt a seasonally adjusted 2.9% in January from December, according to Statistics New Zealand. The spending spree was unexpected, but the share market didn't buy into the good news and retail shares remain decidedly sick.
The reason for the relentless fall in Briscoes (BGR) share price became clear this week when the Commerce Commission announced it is scrutinising Briscoes for alleged breaches of the Fair Trading Act relating to prices and sales,as part of an ongoing investigation into retail advertising practices. The trouble,it seems,is that Briscoes' big advertised discounts aren't always the bargains they seem,according to the Consumers'Institute. This is hardly a crippling revelation. However,investors who are already negative about BGR prospects might feel that the articles now appearing could dent its image with price conscious consumers, resulting in a fall in sales. However, BGR remains a very well run company with a lot of cash in the bank.
Guinness Peat Group (GPG) shares have taken off as the group concludes an outstanding year. Earnings per share for the UK based company rose to 9.28p from 6.36p, partly due to one off gains from asset sales.These included the strategic stake in Turners Auctions (TUA), which GPG obviously felt had reached its peak.The acquisition of a 64%stake in the world's largest thread company, Coats, is already showing potential. GPG shares have spiked in recent weeks as the company approached the date for its one for 10 bonus issue of shares to existing shareholders. The share tends to fall immediately after the bonus issue to account for the dilution, but usually recovers lost ground quickly thereafter.
42 Below (FTB)has had a good week, first being taken on board Air New Zealand flights as a regular tipple for passengers, then receiving approval to distribute 42 Below Passionfruit Vodka and 42 Below Feijoa Vodka in the United States of America by the U.S.Alcohol and Tobacco Tax and Trade Bureau.This follows US approval of 42 BELOW Pure early in 2003 which allowed the company to enter the US export market in May 2003.The liquor marketing company has not had the most successful listing since reaching the market late last year. Its shares were deemed to have been over priced at 50c, and traded below that level ever since. However, FTB undoubtedly has speculative appeal.
Australasian insurer Promina (PMN) has reported an annual profit of A$298m ($336.5m), about A$100m more than predicted in its prospectus last year.Flood damage was thought to have dented the profitability,but PMN revealed it has received $12.7m of claims from the flood ravaged lower North Island, well within its capacity to carry. Despite the flood claims,PMN has operated in a relatively benign environment last year.Moreover,the pres- sure has come off margins as insurers associated with price cutting had collapsed in Australia. Promina does not release a New Zealand profit figure, but the company says its NZ business is not performing as it should and it is "moving to change this."
08 March
Results keep pouring in from the listed companies. While many reflect the continuing strong economy, others have provided nasty surprises. The car industry, however, continues to boom
Waste Management (WAM) has moved to extend its foothold in Australia with the acquisition of two properties for a new landfill and a transfer station in South Australia to open by January 1 next year. The total investment is expected to be $37.2m in the first year and will be funded through debt. But WAM says it is expected to generate returns in excess of the company's weighted average cost of capital. WAM has set itself a target to achieve earnings before interest and tax of 25% in Australia. This deal will help take it there. WAM is a solid share investment, currently riding at an all time high.
Guinness Peat Group (GPG) has lifted its December full year net profit by 45% to $182.4m from $125.7m the previous year. Sir Ron Brierley said the group's main achievement for the year was the takeover of the world's largest industrial thread company, the UK-based Coats for 80m pounds. GPG has also been busy in New Zealand, selling off its stake in Turners Auctions (TUA) and upping its holding in Tower (TWR). GPG is a company that defies the normal analysis, so that earnings are not necessarily the best way of gauging performance. Nevertheless, investors in GPG know what they are getting because Ron Brierley works slowly but surely in creating value for shareholders through his investment activity.
Colonial Motors (CMO) has reported an after tax profit of $4.1m, up 19% on the previous year's $3.5m. Operating revenue of $211m was up 11% on last year. The period has seen continued strong retail spending and 2003 saw the biggest new vehicle industry since 1990. The export sector, a key purchaser of heavy trucks, tractors and commercial vehicles, has been coming under increasing exchange rate pres- sure and the earnings that have under-pinned the total NZ economy for the last three years are diminishing. That said CMO remains a mature business with a good market share, is financially secure and conservatively managed, and it pays a steady dividend.
Freightways' (FRE) private equity shareholder ABN Amro Capital has sold part of its stake, five months after it promised to hold the shares for a year. Amro used an escape clause enabling it to dump the stake. We suggest investors ignore all the negative noise surrounding the Freightways issue and stick with the fundamentals of the company; in particular, the good level of dividends. FRE is a good cash flow business, with strong brands, operating in an industry that is resistant to recession. After listing very cheaply, on a 10% dividend yield, the share is now approaching full value, with not a great amount of upside.
01 March
With the reporting season well under way, the market is being hit with one surprise after another. The latest is The Warehouse (WHS), which proved the theory that expansion into Australia can come at enormous costs.
In what was the market's best-kept secret, the Warehouse (WHS) revealed a drop in its half-year result of 4.7%, to $55.5m. The reason for the flat result was poor trading from The Warehouse Australia. What took the market completely off guard was the extent of Australian losses, estimated to reach over A$30m by the end of the year. This will seriously dent WHS earnings, shaving as much as 20% off its projected year end profits. As The Warehouse's New Zealand operation remains rock solid, and Australia accounts for only 20% of group turnover, investors could use this minor crisis to invest long term in New Zealand's most powerful retailer.
Auckland International Airport (AIA) raised its interim dividend after posting a 14% rise in its December half-year net profit to $45.2m. The company said that with record passengers and aircraft using the airport in the first half and through January and February, AIA was heading for a surplus after tax result in excess of $90m. AIA's latest result is strong as the company continues to benefit from escalating visitor numbers. However, it appears to be assuming this trend will continue indefinitely and is planning a substantial capital spending programme. While the outlook is for continued growth, the company is trading at a high earnings multiple that appears to price in only the good news.
The Hellaby Group's (HBY) tax paid earnings for the six months to 31 December 2003 increased by 49% to $9.3m (last year $6.2m). This resulted in earnings per share increasing to 37.7c, from 25.2c. Hellaby's net trading surplus before tax and transactional profits increased by 35% to $11.4m. The result reflects higher earnings from the retail division in particular Rodd & Gunn and the Australian operation of Hannahs, and the impact of recent acquisitions. While the rest of the current year looks to be equally as attractive as the first half, the outlook further out is not so upbeat with economic growth forecast to slow. As a result, the shares do not appear cheap.
Tranz Rail (TRH) has reported a bottom line loss of $346m following a big clean out of the balance sheet under instruction by Toll Holdings (TOL), its new owners. The loss was due to a $322m drop in value of the country's rail track. TRH also took a $56m hit for one off costs of severance, asset write-offs, and provisions. At operating level, however, earnings continued to improve to $11.8m, compared with $11.2m in the year-ago. The radical write down of assets in TRH has resulted in a slide in the shares. As the operating assets are being strengthened under Toll Holdings, the current slide might present an opportunity to buy into our rail monopoly at a reasonable price.
23 February
Investors are looking ahead to a softer economy, and punishing shares even where the company delivers fairly good results. Retail shares are particularly vulnerable to investor sentiment.
The Warehouse (WHS) shares slumped after the company released a second quarter sales result that, on the face of it, was quire solid. Sales for the 13-week quarter ending on February of $741.2m, were 14.3% higher than the same quarter last year. But despite the solid sales figures, WHS warned of weak profit margins after a season of aggressive pricing and intense competition. The Warehouse's Australian arm continued to struggle, despite producing solid sales of A$168.7m ($188.4) translating into a 14.2% increase over the same period the previous year while same-store sales were up 3.5%. Gross margins deteriorated in Australia, which worried WHS management and its investors alike. Narrowing margins are the main problem the Warehouse faces right now.
Cinema operator SkyCity Leisure (SLL) has reported a sharp drop in half-year profit and warned that fine summer weather and fewer blockbuster releases will further impact its full-year result. The company posted a $200,000 net profit for the December half, down from $1m for the same period in 2002. While revenue from its New Zealand and Fiji cinema operations had increased 14% during the half year, profits were hurt by unusual items related to the closure of the Planet Hollywood restaurant at its SkyCity Metro complex. New Zealand cinema admissions increased by 10.4% to 2.83m, but unusually fine weather last month had resulted in significantly reduced attendance at the start of the second half year.
Riding a construction boom, Fletcher Building (FBU), has posted a December half-year net profit of $111m. The profit, up from $83m in the 2002 half year, was in line with forecast $100m. Total operating revenue rose 30% to $1.93bn, and earnings per share rose to 25.9c from 22.4c. Chief executive Ralph Waters said the outlook for the next six months remained positive. Beyond that directors expect some softening in both the New Zealand and Australian residential building markets, but offset by pent-up demand in alterations and additions, and stronger markets in non-residential and infrastructure construction. However, the outlook for the sector is less buoyant. Even if a hoped-for soft landing occurs in building, the shares look fully priced.
Lyttelton Port (LPC) announced a December half year net profit of $5.5m, up 25% on the same period a year ago. The company said container volumes rose 12% but total volume through the port was static because of lower volumes of logs shipped and coastal traffic. Log volumes fell 30% from 93,400 tonnes to 65,400 tonnes for the six months. Dry bulk imports were also down. The company expects full year revenues to be down $1m on last year. Apart from the expected fall in profitability, LPC has also hinted it will review its dividend policy as it needs to spend more on upgrading its infrastructure, which could remove a key reason for owning the shares.
16 February
Investors are looking ahead to a softer economy, and punishing shares even where the company delivers fairly good results. Retail shares are particularly vulnerable to investor sentiment.
The Warehouse (WHS) shares slumped after the company released a second quarter sales result that, on the face of it, was quire solid. Sales for the 13-week quarter ending on February of $741.2m, were 14.3% higher than the same quarter last year. But despite the solid sales figures, WHS warned of weak profit margins after a season of aggressive pricing and intense competition. The Warehouse's Australian arm continued to struggle, despite producing solid sales of A$168.7m ($188.4) translating into a 14.2% increase over the same period the previous year while same-store sales were up 3.5%. Gross margins deteriorated in Australia, which worried WHS management and its investors alike. Narrowing margins are the main problem the Warehouse faces right now.
Cinema operator SkyCity Leisure (SLL) has reported a sharp drop in half-year profit and warned that fine summer weather and fewer blockbuster releases will further impact its full-year result. The company posted a $200,000 net profit for the December half, down from $1m for the same period in 2002. While revenue from its New Zealand and Fiji cinema operations had increased 14% during the half year, profits were hurt by unusual items related to the closure of the Planet Hollywood restaurant at its SkyCity Metro complex. New Zealand cinema admissions increased by 10.4% to 2.83m, but unusually fine weather last month had resulted in significantly reduced attendance at the start of the second half year.
Riding a construction boom, Fletcher Building (FBU), has posted a December half-year net profit of $111m. The profit, up from $83m in the 2002 half year, was in line with forecast $100m. Total operating revenue rose 30% to $1.93bn, and earnings per share rose to 25.9c from 22.4c. Chief executive Ralph Waters said the outlook for the next six months remained positive. Beyond that directors expect some softening in both the New Zealand and Australian residential building markets, but offset by pent-up demand in alterations and additions, and stronger markets in non-residential and infrastructure construction. However, the outlook for the sector is less buoyant. Even if a hoped-for soft landing occurs in building, the shares look fully priced.
Lyttelton Port (LPC) announced a December half year net profit of $5.5m, up 25% on the same period a year ago. The company said container volumes rose 12% but total volume through the port was static because of lower volumes of logs shipped and coastal traffic. Log volumes fell 30% from 93,400 tonnes to 65,400 tonnes for the six months. Dry bulk imports were also down. The company expects full year revenues to be down $1m on last year. Apart from the expected fall in profitability, LPC has also hinted it will review its dividend policy as it needs to spend more on upgrading its infrastructure, which could remove a key reason for owning the shares.
09 February
The market has been in reverse for almost a week. Many perceive that there is now more downside than upside in buying shares, and the nervousness is having an impact.
Telecom has reported net earnings after tax for the half year to 31 December 2003 of $365m - an increase of 21.3 % on the corresponding half year. However, reported earnings included a $28m gain on the sale of its 12% stake in Sky Network Television. Adjusting for this one off item, net earnings increased by a still respectable 12%.The underlying performance has clearly improved with operating cash flow up 6.7% to $828m for the half year, reflecting operating income growth and lower interest payments. With good cash flows, a much stronger balance sheet, and the prospect of dividends being increased, TEL is looking like a good long-term bet.
BIL International (BRY) has sold all of its 229.4m shares in Air New Zealand (AIR) for cash proceeds of NZ$96.4m. The shares were sold at well below their market value. The sale is probably a tidying up exercise by BIL's Asian-based owners, especially since the government bailout means BIL's stake was very small. A question mark remains about why it sold so cheaply relative to market value and performance of the airline needs to be monitored closely. Air NZ has recovered from near disaster but continues to face a number of challenges, including competition from new budget airlines, high debt levels and variable passenger numbers. However, it has a very competent manager and this is aiding the company's recovery.
Over the nine months to 31 December 2003, Infratil's (IFT) earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 25.5% to $48.6m from $38.7m previously. Each of Infratil's main investments performed well with the improved earnings particularly from Trustpower (TPW) and Wellington International Airport. New investment initiatives are largely focussed on low-cost airports and renewable energy. IFT's nine-month result shows good growth with all its core investments performing well. Its move late last year to increase its holding in Glasgow Prestwick Airport should boost earnings as it is a very strong operator. Meanwhile, its move towards playing a more active role in the management of assets it holds could see more volatility in results but potentially greater returns.
Sealegs Corporation (SLG) has struck an agreement to form a joint venture company to manufacture and sell its amphibious boats in the Middle East. The Dubai based joint venture company will be called Sealegs Dubai LLC and will be 48% owned by Sealegs Corporation. The other 52% will be owned by Albwardy Investment, which has interests in a range of companies including those in the construction, manufacturing, logistics and marine. The share price has spiked in recent days driven by speculators. It's early days for Sealegs, but the latest progress makes it of speculative interest. Risks remain high, however, and there are many dangers in overseas joint ventures.
02 February
The sharemarket hardly reacted to news of an interest rate rise this week, with the main indices slipping only marginally. It will take another rate increase to really impact the market. The only problem is that a further rate rise is quite likely.
Carter Holt Harvey (CAH) yesterday reported a $656m annual loss after writing $822m off the value of its forest estate. The market had expected the extent of the loss. But the share fell anyway after its management squashed rumours that CAH was preparing to sell off its forests and return capital to shareholders. This prospect of a big capital return had been responsible for a sharp rise in CAH shares in recent weeks. The company says it is highly unlikely to sell all of its forests because up to half their output fed its own mills. CAH is in much better shape than previously, and this was recognized in a recent rerating from Moody's Investors Service.
Northland Port (NTH) is predicting that as a result of the shortfall under the guaranteed minimum throughput agreement with Carter Holt Harvey (CAH), Northland's projected profit for the year to June 2004 would be approximately $500,000 less than the previously indicated level of $4m. However, even with the reduction in profit management remains confident of maintaining a dividend payment of approximately 8c a share in the current year. The port is generating earnings growth from new activities such as its Marsden Point joint venture and this is expected to continue as it expands the facility and develops its land bank. However, it has to spend money before it can make more, meaning earnings could be depressed for a while.
In November, Vertex Group Holdings (VTX) announced it would slash its dividend payout to no more than 25% of net profit as a way of financing further growth. This was not what many investors wanted to hear, many of whom had taken up the shares when it first floated because of its dazzling double-digit dividend yield. Since that announcement, VTX's share price has steadily declined reaching a low of $1.31 in December. It seems likely that yield-oriented investors were selling out in a wave and volumes had temporarily inundated growth-oriented ones. The wave now appears to have subsided and the share price is beginning to track up again.
Abano Healthcare Group (ABA), formerly Eldercare, said its six month profit to November 30 had halved to $312,000 from $671,000 a year earlier. The company now forecasts its full year net profit will be below last year's. A drop in occupancy rates in the aged care sector has continued into January, and although improvements are expected in the second half, the full year performance for the sector will be down on its plan and on last year's result. The company said that rehabilitation referrals had also dropped in recent months although Ranworth Healthcare has renegotiated a new in-patient contract with ACC. Despite the problems, ABA is moving in the right direction with value adding acquisitions.
26 January
There has been some selling off of Telecom (TEL) late in the week, with the share down from a high earlier in the week. But the increased market appetite for second tier stocks like Carter Holt Harvey (CAH) and Contact Energy (CEN), the market index is holding firm.
Michael Hill International (MHI) has returned a creditable result for the six months ended 31 December 2003. Sales increased by 14.6% to $139.5. NZ sales recovered in the second quarter from being 9.9% behind at the end of the first quarter to being only 0.9% down at the half year. The Australian stores continued to perform strongly and in $A same stores sales were 10.1% up on last year. The overall same store increase of 5.1% was also good. The current results were presaged in the steady recent increase in the share price against the trend for retailers. MHI has demonstrated it's capable of sustained, profitable growth over long periods.
Blis Technologies (BLT) shares jumped up after the company reported on a successful trial of a product it developed for long term control of bad breath, called BLIS K12. Chief executive Kelvin Moffatt said the outcome was a significant milestone and the recent cash raised by the company would enable it to "commercialise this opportunity via distributors in the major international markets." The number of people affected by bad breath is apparently enormous, which opens a big door to Blis in overseas markets. However, the company is inherently risky given its reliance on a few products in development. But with a fair amount of cash in reserve, Blis could well prove to be a survivor in a tough industry.
As if waking from a dream, investors have suddenly discovered Taylors Group (TAY) is an attractive investment whose main strength is its reliability, and the share has risen sharply. The company is not analysed by mainstream brokers and so has remained undiscovered for a long time. It has many characteristics one expects to find in much bigger and more popular companies. Chief among these is its consistent performance. It has grown earnings by more than 20% per year for the past five years, partly through acquisition. It has a strong market share in laundry services to hospitals (delivering a very reliable income stream) and hotels (more volatile but offering growth when tourism numbers rise).
Sealegs (SLG) has done what many companies with innovative products fail to do and that is reach commercial viability. After years to development, the company has begun production of its amphibious craft and is reporting strong sales. The company has started production of its 5.6 metre amphibious boats, with an initial production schedule of 12 boats for staggered delivery. Despite this, the company is still in its early development and plenty of pitfalls remain. For the six months to 30 September 2003, it announced a net loss of $1.3m compared with $1.4m in the previous corresponding period. However, the share did a little jump this week after the NZ Herald wrote an article about its unique cars.
19 January
The market mood remains very buoyant. This is helped by strong indications that interest rates will not be raised, for fear of sending our dollar higher. By contrast, the rural sector mood is downbeat, yet rural shares do not reflect the pessimism on the farm.
Sky City (SKC) continues to look for casino acquisitions, having confirmed that it now wants to buy Darwin's biggest casino to fulfill plans to expand in Australia. The MGM Grand Darwin is the only licensed casino in the city and is said to be worth around $A180m. Sky City already owns the Sky City Adelaide gaming and entertainment complex in South Australia, in addition to its gaming and entertainment complexes in New Zealand at Auckland, Hamilton and Queenstown. Sky is a strong cash generating business with money in the bank and only modest debt. Its key strategy for using the cash to add shareholders value is to buy new casino assets without substantially increasing debt.
Trustpower (TPW) announces it is re-entering the bond market with the offer of a new ten-year unsecured bond at 8.5% interest, to raise at least $50m. TPW is raising bond debt as part of the company's strategy to improve its capital structure while it develops new generation capacity. This increased use of debt funding reflects "the maturing nature of the electricity industry", it says, and Trustpower anticipates solid earnings going forward. TPW shares are hitting record highs, thanks to higher electricity prices. A strong balance sheet has led to capital return plans and a number of wind-turbine projects are underway or have been approved, including one in Australia. This is a solid investment, but fully priced.
Tranz Rail (TRH) shareholders who rejected Australian bidder Toll Holdings (Au:TOL) attempts at gaining full control have been vindicated with a share price that has gone from strength to strength and currently trades 45c above the $1.10 offer. They have forced Toll, which holds 84% of TRH, to run the company with minority shareholders it did not want. Ironically, the TRH price is climbing because TOL is seen as a deep-pocketed owner who has helped reduce credit risk in the troubled rail operator. Recently Toll lent Tranz Rail $55m. With TRH likely to remain a listed company, and with Toll's track record in the transport field, any further decline in TRH's fortunes appears unlikely.
Sky City Leisure (SLL) has announced that its wholly-owned subsidiary has agreed to purchase the existing Whangarei 'Cinema City 5' multiplex for $2m. The complex includes five cinemas and is the only multiple cinema complex in Whangarei, a city of more than 47,000 people. The acquisition makes sense for SLL which needs to widen its earnings base. Cinema City 5 is already a strong-performing business and the only multiplex north of Whangaparoa . SLL says the complex presents opportunities for continued improvement. SLL shares have performed poorly over a long period, despite a booming market in movie entertainment. However, SLL is on a good trend of recovery, which gives the share speculative appeal.
12 January
Retail stocks, led by The Warehouse, have recovered over the past week as news of a bumper Christmas reached the market. This helped push the old benchmark top 40 index to its highest level in nearly six years.
Shares in The Warehouse (WHS) have started the new year more confident, gaining on perception of strong Christmas trading at the Red Sheds. This comes after a dreadful year for the discounting giant, when its shares fell from over $7 to under $5 - an unheard of setback for WHS shares. The problem is that, after a shaky move to Australia, investors are no longer convinced WHS can be successful across the Tasman. At the same time, it faces saturation in New Zealand, where some stores are so closely located, they threaten to cannibalise each other. Nevertheless, the power of the WHS brand should see the company maintain a good growth rate even without Australia.
Bluff based port company South Port (SPN) says that the decision by the shipping companies involved in the Trans Tasman Butterfly Service to rationalise port calls will impact container volumes through the Port in the short to medium term. The ports of Bluff and Timaru are to be omitted from the existing Trans Tasman rotation with effect from January 2004. SPN shares have slipped since the news emerged. SPN is likely to continue to feel the effects of a softening in rural sector activity, in response to a high dollar and weak world commodity prices. However, SPN still makes for a sound utility investment, paying a reasonably attractive dividend, with some potential gains once conditions improve.
Shares in Fletcher Building (FBU) have fallen back from a two-month high after statistics on Australian building approvals showed a 6.7% fall in November. This is seen as proof that the building boom across the Tasman is cooling, with knock on effects for all builders, including FBU. The correction follows what has been a strong year for FBU shares, which have risen around 25% on the back of the building boom in both New Zealand and Australia and a more focused approach by management. Some believe the speculative bubble in property could burst rather than merely run out of steam. If this happened, it could have a severe impact on companies like FBU.
Shares in IT distributor and assembler Renaissance Group (RNS) have rocketed over the past two months, as the company seems to come to grips with its problems of the past few years. In 2003, the company decided to halve its $200m revenue in favour of a more focused approach distributing Apple computers only and pulling out of the PC distribution business. The slimmed-down and more focused Renaissance was able to turn a small profit of $700,000 for the half year to June 2003, compared with $67,000 in the previous comparable period. Revenue was 20% lower at $50.6m. The perception of Apple products is better than ever, and this could be helping margins.
5 January
The New Zealand sharemarket took a lead from its overseas counterparts drifting up to new highs. The benchmark NZSX-50 was up 7.94 points at 2441.94 this week, its highest level since it began in March. The local market is soaking up good economic and corporate news, with no real dark clouds to be seen.
Former Auckland International Airport (AIA) CEO, John Goulter, was honoured this week as Companion of the New Zealand Order of Merit. This is for his success in turning around AIA after taking over the reigns in the late 1980s. Until his arrival, AIA resembled a provincial airport in a provincial town. There was hardly any shopping. Goulter realised that 15 million people carrying 15 million wallets were passing through his airport every year. And all he had to do was create an environment to capture that spending. He did this brilliantly, sending AIA shares to remarkable heights. The share is very expensive, based on its price:earnings ratio. But you should never underestimate AIA.
Telecom (TEL) shares have risen to their highest level in two years, after a series of positive recent events. First the Commerce Commission ruled that TEL would not have to open its copper line network to competitors such as TelstraClear. Telecommunications Commissioner Douglas Webb backtracked on a draft proposal released in September, which recommended that the Government unbundle Telecom's "local loop" - effectively allowing competitors to piggyback on its vast network. As though to emphasise its monopolistic power, TEL this week increased the cost of the homeline monthly rental, taking a lot of criticism in the process. The market has responded to these moves, and to the prospects of higher promised dividends, by chasing the share to new heights.
The stock exchange (NZX) was forced to issue an apology after technical problems stopped trading for the fourth time in five months. For a company whose credibility hangs on its ability to deliver reliable trading conditions, these glitches are very serious. However, the problems have had no impact on NZX shares, which continue to go from strength to strength. The last quarterly result showed strong earnings growth and its fourth quarter to December should also be attractive as it launches its new AX market. However, its share price remains at a high level relative to underlying earnings and the company would need to exceed already high expectations for rapid growth to justify the price it now trades at.
Resin maker Nuplex Industries (NPX) has acquired Australian chemical manufacturer Megachem for A$1.6m. Nuplex said Melbourne-based Megachem would complement the existing business of APS Surfactants, a division within the Nuplex specialty products segment. NPX shares have risen strongly this year. Despite the losses in Medihold, now divested, NPX has performed very well, thanks in part to a robust construction sector. This is forecast to cool, although an improvement in profit is likely in 2003-4. NPX's rate of growth could be much less than that of recent years and may slow further if forecasts of economic slowdown prove correct. However, the company's improved focus is bringing it a lot of support from the market.
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