2003 Archive
29 December
The year ends with strong gains for the New Zealand share market, which has proved it is no lame duck, despite having gone to sleep while other markets were raging. New Zealand is a true value market, underpinning earnings growth with generally good dividend payouts.
Hirequip (HQP) has announced the $21.2m purchase of North Island business Ready Hire. The listed hire company also said yesterday it had entered a conditional agreement to sell its 30% stake in Northwood Supa Centa, which would net it a $3m profit. Hirequip has previously signalled its intention to expand through acquisitions and chairman Graeme Wong said that purchasing Ready Hire is consistent with that intention. " We now look to further grow our existing hire company, branch expansion and the acquisition of smaller equipment hire providers," he said. The new business model, focusing on its hirequip business, appears to be working with revenues higher and costs lower than forecast. Dividend payments will improve once non-core assets are sold.
Shares in Genesis Research (GEN) fell nearly 16%, after the company announced it was abandoning trials into its psoriasis treatment. GEN said its PVAC treatment had failed to make significant statistical difference to patients compared with placebo treatments. Genesis was aiming for American standards, which require an improvement of at least 75% in patients' conditions. Genesis chief executive Jim Watson said the move was a disappointment after six years of research but he hoped it would not impact on the company too much. Genesis has a number of promising products in its pipeline and plenty of cash, but it is likely to remain a volatile and speculative investment for some time.
Shares in dental software developer, Software of Excellence (SOE) added to their sharp gains of the past two weeks when the company revealed it would benefit from two big Health IT contracts covering the Northwest/West Midlands and Eastern England worth over NZ$5.2bn as part of a National Health Service plan. SOE, which has an involvement with the companies that won the first two regions, the London Region and the North Easter region, said that it was also involved with both of the successful prime contractors that were announced this week. SOE is very well focused, with an excellent niche product. While subject to the high risks, SOE is a good speculative play.
The Warehouse (WHS) subsidiary, Warehouse Stationery is becoming a serious competitor in the cheap PC-set with a cut-price entry level box from HP being sold for $999 with a printer, desk and Windows software. It followed hot on the heels of The Warehouse last week selling out of $999 PCs from American giant Dell Computer. Warehouse Stationery general manager Rob Smith said cheap PC sales are going gangbusters, helped by the low price point following a rise in our dollar. It shows that The Warehouse, whose shares are currently under a cloud, should never be underestimated in the local market. WHS is a category killer in virtually any product range it chooses to sell.
22 December
The NZ share market is ending the year strongly, having proven over the past six months that it is no lame duck, as many had thought. The index has risen strongly which, added to high dividend yields, makes for excellent returns.
Meat processor, Affco (AFF) has issued a profit downgrade following disappointing trading in the first two months of the financial year. Profit expectations for the first quarter, it says, are that the company is unlikely to match last year. Difficulties in livestock numbers processed, particularly in lambs, will be further exacerbated by the increased processing capacity already operating or proposed in the North Island, it says. Over capacity plagues the meat sector and it is doubtful whether Affco can ever produce consistently profitable results. On the upside, the company has now finished a major restructuring and a change in major shareholdings, with Talleys Fisheries taking a cornerstone shareholding is also a good sign.
Ports of Auckland shares (POA) slumped this week, while Port of Tauranga (POT) and Lyttelton Port (LPC) shares headed upward, after P&O Nedlloyd announced details of a new direct express shipping service to South-east Asia. The new service is restricted to just four ports in New Zealand: Tauranga and Napier in the North Island and Lyttelton and Port Chalmers in the South Island. That means Auckland exporters will have to send containers to Port of Tauranga, using the port company's Metroport inland hub in South Auckland, in order to link up with the new service. POA was quick to quantify the damage as a relatively modest $2.5m off its net profit, and the share clawed back some losses.
Restaurant Brands (RBD) has confirmed its acting chief executive Vicki Salmon will be its permanent chief executive. She took up the helm following the resignation of Jim Collier in August. Salmon is said to have already done much work to get the company back on course. The market failed to react to the news, partly because RBD's problems are deeply entrenched: KFC has long been a lacklustre performer - fried food in general having gone out of favour - Pizza Hut faces fierce competition from Dominos and others, and Starbucks has reached saturation point, and is currently said to be cannibalizing its own customers. Nevertheless, you should never underestimate the power of a strong brand, and RBD has three such brands.
Telecom (TEL) is playing down reports of network glitches and cellphone shortages at its Australian mobile investment "3" . Hutchison Australia's fledgling 3G service, of which Telecom is a 19.9% stake-holder, has been the subject of Australian media reports detailing poor service, call centre support woes and a serious shortage of 3G phones. Then the Australian Computer Society published a survey finding that only 11% of its members believed the 3 network offered a "reasonable level of service". Hutchison threatened legal action, saying the survey was defamatory and too narrow in scope. TEL shares hardly responded to the news. With good cash flows and a much stronger balance sheet, TEL appears still well positioned to lift its dividends.
15 December
There was money to be made in several shares subject to takeover rumour this week. The retail sector remains weak, with many believing the downside for retailers now exceeds the upside.
Shares in rural services company Wrightson, (WRI) suddenly pulled out of a slide this week when the Dunedin firm half-owned by former Fonterra boss Craig Norgate began increasing its stake at a premium to market price. It's unclear what Norgate's master plan is, as WRI has just issued a profit warning and the rural sector in general is not looking too healthy. It's possible that Norgate is positioning himself for a move by his former company, Fonterra, to sell its 20% stake. But that is unlikely to happen anytime soon. In the meantime, rural fortunes are looking weak given the strength of the NZ dollar and other factors.
A sharp rise in the Contact Energy (CEN) share price is being fuelled by speculation that its major shareholder Edison Mission is looking to sell its controlling interest. The US energy company has debt problems at home and is in the process of selling some, or all of its foreign investments. The outcome of a hypothetical takeover of CEN is impossible to gauge. Although you cannot go very wrong with an investment in CEN, given its powerful position in energy, the share is not a screaming buy at the current level. At this price the dividend yield is not as high as one would expect from a utility.
Software of Excellence (SOE) shot up 17% this week after announcing that it has sub-contractor agreements with the three Health IT contracts worth NZ$7.30bn handed out in the UK this week. The big contracts follow plans to revolutionise the UK's National Health Service. As a supplier of dental software to the winning sub contractors, SOE is well positioned to boost its revenue in the UK. SOE is very well focused, with an excellent niche product. It's small size means that even relatively modest contracts could boost its earnings substantially. Although it is subject to the high risks involved in tech development, SOE has qualities that make it a good speculative play for anyone prepared to take some risk.
The directors of Briscoe (BGR) have advised that while sales are at higher levels than for the same time last year, their current expectations are that the tax paid profit for the full financial year ended 31 January 2004 will be in line with that reported for last year. Zero growth is not a good look for a growth company trading on a high p:e ratio. That's why BGR shares have slipped to their lowest level in a long time and show no sign of recovering. However, BGR is a quality retailer, with a debt-free balance sheet and capable management. Trading over the December month will have a material impact on final results.
8 December
The retail sector continues to show the strains of tough competition in markets that are slowing down. Many investors steer clear of retail as a rule, because of how quickly the cycle can turn down.
Bad news gets worse at Restaurant Brands (RBD), which has issued a warning that trading conditions have been worse than predicted at the half-year result. Since then, it says, the KFC business has experienced a downturn in sales, which has been a reversal of the improving trend experienced over the previous three quarters. "The extent of the downturn was such that the current quarter's same store sales are expected to deteriorate from -1.5% in the second quarter to -7.5%," the company says. KFC has always been a lacklustre performer and the same-store sales decline figures appear ominous. There is little to be optimistic about as Starbucks is stagnant and Pizza Hut faces new competitors.
Pacific Retail Group (PRG) announced an operating surplus before tax and minority interests for the six months to 30 September 2003 of $1m, a substantial turnaround from $9.3m the previous year. The company said trading had been impacted by a number of one-off events. These included expenses associated with the bid for Farmers and a more difficult trading environment. A loss from the group's recent acquisition, United Kingdom appliance chain PRG Powerhouse, also impacted on PRG's bottom line. After struggling to achieve growth in New Zealand this year, PRG has spread itself even thinner by taking on a troubled retailer in the UK. However, parts of PRG, such as Bendon, are doing extremely well.
GDC Communications (GDC) has been dealt a heavy blow with news that Telecom has not selected GDC as one of the final two organisations with which it will be negotiating field services extension agreements in coming weeks. The present contracts between Telecom and GDC, which run until various dates between August 2004 and April 2005, have generated revenues for GDC of approximately $40m per annum in recent years. GDC faces a downturn in earnings although this won't be immediate as many of the contracts have 8 - 16 months to run. While all hope may not be lost, the future is not very bright but the share has already plunged.
The largest shareholder in Turners Auctions (TUA) has sold out. Guinness Peat Group (GPG), which holds 19.9% of the shares of the company, which it spun out from Turners and Growers, will sell its entire stake. The listing in 2002 could not have been better timed, as it came at the beginning of a car market boom, itself driven by an immigration boom. It's doubtful that such sales momentum could be maintained for much longer. When the original shareholders sell out, it is usually a sign the share price has peaked. TUA shares have had a tremendous run and GPG clearly feel the price downside now exceeds the upside.
1 December
The pressure on the rural and retail sectors is beginning to show, with most of the shares in these sectors starting to soften. However, defensive industries like healthcare continue to hold up well.
Rural services provider, Wrightson (WRI) has warned difficult trading conditions will affect its first-half performance. Conditions in the rural economic outlook remain weak as the NZ dollar continues to rise. At its annual meeting in October WRI advised that its earnings before interest and tax (EBIT) for the year was approximately 10% behind last year. This downward trend has continued, the continued says, and the Group's EBIT performance for the six months to 31 December is expected to be around 20% behind the same period last year. Until the tide turns the other way, WRI's growth will be limited, despite plans to move into less cyclical businesses.
Listed retirement village operator Ryman Healthcare (RYM) has posted a record half yearly net profit of $8.4m - up 10% on last year. Ryman reported operating cash flows of $28m and total revenue rose 16% for the year to September 30. Chairman David Kerr said there was a significant lift in contribution from ongoing earnings. RYM's latest result shows its growth strategy of waiting for the right conditions to utilise its large land bank is paying off. Plans for a $100m village in Auckland should be good for earnings in the medium-term while its arrival to the NZX50 share market index has increased demand for its shares by institutional investors.
At its annual general meeting this week, directors of Taylors (TAY) again played down the company's good performance by predicting only "modest" growth in the year ahead. "While results have been very pleasing, the Board is ever aware of the volatile factors that can impact significantly on results," the company said. "Current projections for tourist movements are strong, however political uncertainties around the world may impact on these for some time to come". The commercial dry cleaner is extremely well run, with negligible debt and a close focus on its market. TAY has also proved itself adept at handling the challenges of a cyclical tourist market.
For the six months to 30 September 2003, Software developer Finzsoft Solutions (FIN) has reported a net profit of $16,000, compared with a profit of $14,000 in the previous corresponding period. Revenue was 27% higher at $2.8m. No interim dividend was announced. While the software market can fluctuate considerably, the directors believe the company's interim results will continue for the full year. FIN remains cautious about its international prospects but continues to grow its already dominant position in the New Zealand market. However, international expansion continues to offer considerable potential, without unnecessary risks. Changes are afoot as the company has to double shareholder numbers to maintain its new main board listing and this could raise the company's profile.
24 November
As the reporting season continues, several NZ companies have delivered good results to their shareholders. The black sector remains retail, where a tough industry is getting tougher for some retail chains.
Plastics manufacturer Vertex Group Holdings (VTX), reported a net profit of $2.2m for the six months to 30th September, up 28% on last year. Revenue was 2% higher at $43m. No interim dividend was declared. VTX's share price has dropped after this week's profit announcement, probably because investors don't like the look of the company's low-dividend policy. VTX says it is unlikely to pay an interim dividend for some time and only pay out 25% of earnings as dividends. That gives it plenty of working capital for growth, which should eventually show through in the share price. The extent to which profits have risen compared to revenues shows the company is on the right track.
Carter Holt Harvey (CAH) announced it intends to explore strategic alternatives for its tissue business, which may result in the company exiting as owner of the business. The decision comes after a recent strategy review, which will see CAH focus on areas of wood-fibre processing and marketing. The tissue business, which contains a wealth of retail brands, would generate a pile of cash for the company. This could lead to a capital return to shareholders and a possible takeover of the remaining forestry assets by its US-based major shareholder International Paper. This may not be a bad thing as CAH continues to face obstacles to growth in a high NZ$ and weak wood prices.
For the six months to 30 September 2003, finance company Dorchester Pacific (DPC) reported a net profit of $2.4m, 50% higher than the previous corresponding period. Revenue was 22% higher at $28.4m. An interim dividend of 4.3c per share was announced (2002: 3.6c). The latest result shows DPC is continuing to grow as the finance and investment markets rock along. The divestment of underperforming businesses has also helped. The company is also adding investment-banking activity, having recently handled its first float. Although growth at current levels is unlikely to be maintained, the company is prudently managed and conservatively geared, making it an appealing investment at a modest earnings multiple.
Shares in the troubled financial services company Tower (TWR) are in strong recovery mode as the market begins to see light at the end of the tunnel. Earlier this year its was forced into a controversial $211m capital raising in order to pay down its heavy debt load. But the strategy of focusing on core business while closing its annuity portfolio to new business and appointing AMP Henderson Global Investors to manage its Australian Ethical Funds seems to be working. Analysts have upgraded next year's full-year net profit by 30%. Added to this is speculation that an Australian company was building a stake, which if true would certainly not do the share price any harm.
17 November
We are in an uncertain market that still favours dividend paying shares. These have held up well and should continue to perform as long as interest rates do not rise quickly, which does not seem to be on the horizon.
Blis Technology (BLT) has announced its intention to complete a rights issue to raise additional capital to fund the international roll out of its products. The rights issue will raise $3.2m by way of the issue of one new ordinary share for every two existing ordinary shares at a price of 10c each. The issue will be fully renounceable. The rights issue will help reduce the risk of what is a very risky investment. The company's interim result was in line with expectations that losses would continue in 2003-4. However, profits are getting closer and BLT is poised to enter a number of large markets overseas.
Fisher & Paykel Appliances (FPA) has posted a net profit after taxation of $34.9m for the half-year ended 30 September 2003, almost $1m up on the 2002 first half. The operating surplus before unusual items was $49.4m compared with $47.5m previously. The Appliances business continues to dominate the results, reflecting the buoyant trading in the New Zealand and Australian markets, and the strong growth in market penetration in the US. This was another excellent performance confirming the impression of FPA as a dividend yield share that has also become a growth share. FPA's looming share split can be expected to benefit the price as new investors are lured at the lower post split prices.
ING Property Trust (ING) announced that it has reached agreement with the trustees of MFL Mutual Fund and SIL Mutual Fund to acquire a portfolio of 71 properties located in Auckland, Wellington and Christchurch, with a mixture of commercial, industrial and retail buildings. The properties were sold as a portfolio. Accordingly, ING will look to dispose of a number of the smaller and lower value properties in due course. The agreed price for the acquisition is $282.7m, to be funded through the issue of 182m new units in ING at $1 per unit and $100.7m in cash. This acquisition gives ING much needed scale to reduce the risks inherent in its small portfolio of buildings.
Briscoe Group(BGR) has reported sales for the three months ended 31 October 2003 of $68.2m, up 6.22% on the $64.2m reported for the third quarter of last year. On a same store basis, the group's sales for the quarter were 0.49% ahead of those for the third quarter of last year. Despite reasonable sales growth, BGR's profit margins are being squeezed by competitive pressures, and management indicates this is continuing. The Christmas period should be very strong, but beyond that pressures are likely to intensify as the economy cools. However, BGR has a debt-free balance sheet and capable management. This makes it a worthwhile longer-term investment for those prepared to ignore shorter-term volatility.
10 November
Beer is not regarded as being a growth market. Far from it. But somehow DB Breweries is beginning to look like a growth share. Its management appears to have made all the right decisions at the right time.
DB Breweries (DBB) announced a 12.5% increase in its September year net profit to $25.3m and says it expects a similar sized increase in the current year. The company says it is reversing a decade-long trend of declining beer sales and plans to invest heavily in themed bars in the suburbs to build on that growth. It lifted its final dividend to 20.5c per share from 14.5c per share a year ago, equal to 67% of profit. DB is a share paying an above average dividend, with growth prospects. The growth is coming from improved marketing, cost control and distribution, despite a flat beer market. The share has risen sharply this year.
Telecom (TEL) has reported a net profit after tax of $162m for the three months to 30 September 2003 - 11% higher than the $146m the company reported for the same period in 2002. Net earnings per share (EPS) for the quarter were 8.5c, compared to 7.8c per share previously. Telecom Chief Executive Theresa Gattung said TEL is "managing a transition over several years from a business based primarily on voice to a business based more on data services." Nevertheless, TEL is seeing significant price pressures in voice calling in both New Zealand and Australia, while other areas are growing. While its growth prospects are uncertain, TEL rates mainly as a yield investment delivering reliable dividends.
Infratil (IFT) shareholders appear to be taking in their stride a 36% fall in the half-year profit for the infrastructure investment company. The majority owner of Wellington International Airport, with major investments in power company Trustpower and stakes in Port of Tauranga and Glasgow Prestwick Airport in Scotland, says its main investments are all performing well. For the six months to 30 September 2003, the consolidated profit, including investment realisations, attributable to the shareholders of Infratil was $12.5m, compared to $19.6m for the same period in 2002. However, one off asset sale gains distorts IFT's performance the previous year. At operating level, the company continues to do very well.
Software of Excellence (SOE) has landed a contract with Geddes Dental Group, which is contracted to the Government to deliver more than 20,000 patients visits each year and operates 11 private practices in Auckland and two in Melbourne. Geddes has agreed to use the EXACT dental software provided by SOE. Software of Excellence sells its EXACT software internationally and has more than 3500 sites worldwide. It holds around 35% of the UK market for dental practice software, where it is one of two dominant players. SOE is a risky company, given the narrow product range. But it has excellent growth potential. The software has been tested in tough markets in the UK, and appears to have found support.
3 November
The New Zealand market continues to deliver big gains in particular shares, as investors witnessing the biggest bull run in a long time gain confidence. Even shares in the rural sector, which faces a downturn next year, have been rocketing ahead.
Steel & Tube (STU) has surprised the market with a special dividend of 10c per share totaling $8.7m million. The payment of this dividend will not affect the ability of the company to pursue growth opportunities, the company says. STU's announcement of a 10c per share special dividend is a bonus for shareholders but might also indicate the company cannot find a viable home for surplus capital. The company has been an outstanding performer in recent years, and has rewarded investors with a sharp rise in the share price. However, with the likelihood that the construction sector is at its peak, profit growth for the company may be hard to come by over the next few years.
Property trust URBUS (URB) has reported an after tax profit of $12.1m for the six month period to 30 September 2003, up 48% on the same period last year. This is largely the result of the larger property portfolio. Earnings per share were 5.43c on an undiluted basis. The earnings per share include net realised gains of $705,000 arising from the sale of four Wellington Office properties for $29.7m. Earnings per share have been relatively flat and this trend is likely to continue unless further acquisitions are made at reasonable prices. On the other hand, it has a well-diversified and large portfolio generating good income, enabling attractive dividend payments that will appeal to income seekers.
Allied Farmers (ALF) chairman Brian Train has warned shareholders that the rural services company is facing another tough year. Allied's half-year profit was likely to be down on last year, he said. The main reason was the set-up costs for its new division, Allied Pine. But trading results for the core business were expected to be in line with budget, Train said. Allied's profit last year, $2.15 million, was 37% down on the year before. The rural economy had entered the downturn side of the commodity cycle, Train said. Despite the gloomy outlook for the rural sector depicted by Allied management, the share is rocketing to its highest level in two years.
Having muscled in recently on TranzRail (TRH), Toll Holdings of Australia is now looking to acquire further assets in the transport sector. It has stepped into the middle of Mainfreight's (MFT) full takeover of Owens (OWN). TOL acquired 6.7m Owens Group shares from AMP Henderson, 11.88% of the company. That means Mainfreight cannot reach the 90% level needed before it can compulsorily acquire remaining shares. The Mainfreight bid for Owens is expected to create a big New Zealand transport company to compete against a Toll-controlled TranzRail. Mainfreight's shares fell heavily on the news, but Owens shares rose 7.5 % on the prospect of a fight for control.
20 October
A spate of good profit results underlines the fact that the recent rally in our market is more than just hype, underpinned as it is by solid growth in many sectors. We highlight some of those success stories this week.
Powerco (PWC) has announced a half-year profit of $30.7m, up from $18.7m for the same period last year. The first half results benefited from the acquisition of the central and lower North Island assets of UnitedNetworks. In a gas and power lines business where size matters, Powerco's asset base rose from $867m to $1.7bn. Combined gas and electricity consumer connections rose from 207,000 to 390,000. The company says it seeing many synergistic benefits from its acquisition of United Networks. It also reaffirmed a full-year profit forecast of $53.6m for the 2004 year. The share has responded positively to the results. A very healthy dividend makes PWC a favourite with income investors.
Fisher & Paykel Appliances (FPA) announced that, in conjunction with James Pascoe, it has entered into an agreement to acquire the shares in the department store Farmers Group. The Farmers Group will be split into two distinct businesses resulting in James Pascoe owning and operating the Farmers retail and FPA owning and operating the Finance and Farmers Credit Card businesses. FPA's contribution to the $311m price tag will be $188.7m funded by debt. FPA ends up with the Farmer's huge finance book giving it further scale and diversity. This coincides with increasing scale of its whiteware manufacturing side, making the company a very significant business with an attractive mix of growth potential and reliable dividends.
Shares in Scott Technology (SCT) are booming again, having risen by 15% this week after the company reported a strong result for the year ended August 2003. Every now and again, this producer of high tech solution to manufacturer surprises the market with an outstanding profit. In its latest financial year, SCT reported a pre-tax profit of $8.4m, an increase of 130% on the $3.7m the previous year. Technology group sales for the year were also a record of $47.5m, compared to $29.2m previously. The balance sheet remains strong, with no debt and cash on hand at year-end of $1.6m. This is quite extraordinary for a capital-intensive manufacturer, and shows how prudently the company is run.
Air New Zealand (AIR) has put in place a major four-year plan to save $245m a year within the next two years. This involves using technology more effectively to shrink the airline's workforce by 15% - about 1500 jobs. The cost cutting was a reaction to rejection of a potential merger with Qantas and increased competition from new budget airlines. This will help it compete with low-cost competitors but it remains to be seen whether the company can generate equal or better profits than last year, when a surprisingly strong profit was still well below its cost of capital. It has proven to have very competent manager in former banker Ralph Norris and this is aiding the company's recovery.
13 October
The market continues to perform well, with the cyclical retailers staging a recovery of their own. Michael Hill International (MHI) appears to be the only chain left out of the current resurgence in retail confidence.
Warehouse (WHS) shares have surged over the past six weeks, as the discounter leads the recovery in retail stocks. The share took a hammering when it failed to meet the market's high expectations in its May 2003 profit downgrade. There have also been concerns about the Australian expansion not working. This week WHS gained 19c to 584, its highest point since late March, before easing slightly. Nevertheless, the market appeared to be re-rating the stock. The Warehouse announced an 8% fall in annual profit last month, but unveiled Project Urgency to revitalise its loss-making Australian operation. The assurance of CEO Stephen Tindall that Australia would come right has turned the tide, thanks to his high credibility in the market.
Dairy Brands (DBN) intends to increase its stake in business information company Hemscott, its 50 per cent-owned British investment. Chairman David Newman told the annual general meeting that it would exercise an option to buy a further 1.62m shares, or 5%, in Hemscott at a cost of about $680,000. Dairy Brands, which posted a net loss of $623,000 for the year ended May 30, became an investment company after selling its final four farms in June last year. It paid $7.5m for 50% of Hemscott. DBN's move into controlling a business in a country on the other side of the world, particularly a loss-making online services company, is potentially difficult and risky and earnings are likely to be volatile.
Restaurant Brands (RBD) - the owner of KFC, Pizza Hut and Starbucks - recorded a half-year net profit drop of 14% to $4.3m. The after tax profit of $4.3m for the half year ended 8 September 2003 compared with $5m for the same period in the prior year. Sales for the half increased by 4% to $167.1m, due largely to growth in Pizza Hut. KFC sales and store earnings were 1.6% and 12.5% down respectively. The result continues the pattern of the past two years: Growth in Pizza Hut, losses in KFC and stagnation in Starbucks. Things aren't going to get any easier with the arrival of US pizza chain Domino's.
In a potentially expensive move, the Fletcher Forest (FFS) has agreed to pay up to $17m to break exclusive negotiation arrangements with The Campbell Group, a potential US buyer of its forestry assets for which it has offered $685m. The new arrangement has been made so Fletcher Forests can negotiate with the Kiwi Forests Group, which has made a competing $725m cash offer. Campbell has been paid half the break fee and will get another $8.5m if it is not the successful bidder. If it does buy the forests, it will refund the initial payment. Until the outcome of these discussions is known, and an independent appraisal report is completed, investors should wait for developments.
6 October
There is a buzz of excitement in the market following the spate of new listings. Many see these as a rare opportunity to make a quick profit on the market. However, investors should study carefully the quality of what it coming to the market.
Freightways Ltd (FRE) listed this week and quickly dispelled fears that would underperform in the wake of some negative media coverage, mainly concerning its debt levels. Listed at $1.60, FRE opened at $1,75 and was up to $1.83 late in the week, a gain of 14%. The forecast for 2004 is for revenue of $207.3m and a net surplus of $12.7m. This places the share on a high gross dividend yield of around 10%. FRE appeals because of its ability to generate cash without any heavy investment in operating assets. The debt should not prove to be a crushing burden as long as it can keep producing the current levels of cash.
Shares in Pacific Retail Group (PRG) have risen by 25% in the past two months. This is a reversal of its direction in recent years, when the share slid relentlessly downwards. The catalyst might be the news that dividends could be increased from next year, and the positive spin of management at the AGM, who said that several of its operating companies, including Bendon, were trading very strongly. Benefits from the recent acquisition of UK appliance retailer, Powerhouse, are harder to assess. NZ companies don't have a particularly good record of running business in the UK. However, PRG might be at the start of a good growth phase.
The recently listed Postie Plus (PPG) has reported earnings for the year ended 31 July 2003, which are slightly ahead of its forecasts contained in its prospectus. The group, which owns Postie Plus, Baby City, Rendells and Arbuckles, reported sales of $32.2m, compared to $31.5m predicted in its prospectus. Net profit before tax was $1.96m, compared with $1.51m contained in its prospectus. Despite a better than expected result, PPG's shares have been sold down indicating profit taking by small investors. One concern is that the component parts of PPG are only just coming together, with several of its retail chains acquired shortly before the listing. Their track record under PPG has yet to be established.
Sky TV (SKY) shares have been climbing sharply in the wake of a takeover bid by Independent Newspaper (INL), which has confirmed the terms of its takeover offer for the third of Sky TV it does not already own. The offer of $3.35 cash for each Sky share and three INL shares for every 10 Sky shares will open on Friday, October 24 and close on Friday, December 5. Telecom, which owns 12% of Sky, had already accepted the terms of the offer when INL proposed it in late August. SKY is trading slightly above its indicative value based on the terms of the deal.
29 September
Wrightson (WRI) Interests associated with former Fonterra boss Craig Norgate have made an above-market bid for a significant interest in WRI. However, the interest is said to be passive and no major changes are planned. Despite this vote of confidence in the primary sector - about which Mr Norgate knows a considerable deal - conditions remain weak and the New Zealand dollar continues to rise. Until the tide turns the other way, WRI's growth could be limited. However, Wrightson has forecast a "satisfactory year" to come. It says it is making good progress in key strategy areas, and further progress with its transition from an essentially commodity-driven, transaction-based business to a customer-focused solutions business with more sustainable earnings.
Carter Holt Harvey (CAH) Ratings agency Standard & Poors recently lowered Carter Holt Harvey's short-term credit rating from A-2 to A-3 and revised the outlook on its long-term debt of 'BBB' from stable to negative. However, this downgrade is no real threat to CAH as it was influenced by a change to its US parent company. CAH remains in good financial shape and, despite industrial troubles at its Kinleith plant, recently delivered a strong half-year result. Its share price is picking up as hopes rise that the world economy is turning and some recovery in timber markets is expected over the medium term. Despite continuing uncertainty in many of its markets, CAH say it has plans in place "to ensure earnings stability".
Pacific Retail Group (PRG) Although it has struggled to achieve growth in New Zealand this year, PRG has not slowed down, recently buying an insolvent retailer in the UK. It has purchased Powerhouse, the UK's third largest specialist appliance retailer, for around $51m. The move does not come as a surprise since the company has always given good warning that it is growth oriented. However, shareholders have seen little benefit from this strategy lately as the company pays no dividends and its shares have been declining.Hope that matters will improve on both fronts has boosted the shares in recent days. Looking forward, the company says it will consolidate existing businesses and continue to look for new ones.
Mainfreight (MFT's) attempt to take over Owens Group has come a step closer with an improved offer to $1.10 per share (from $1.03) and a recommendation by Owens directors that this be accepted. If completed, the merger will provide some necessary consolidation in the industry. The logistics business is very competitive and both companies' operating margins have been low for several years. The takeover could see this improve while MFT's earnings should also benefit from the company's Australian assets which are beginning to perform well. The company has indicated that it expects its performance this year to continue to improve at the same rapid rate as the past two years.
22 September
The market is holding up well after its recent recovery, with even the battered retail sector in much healthier spirits. However, stock selection has become critical as performance depends largely on the story company presents.
Listed diversified property investor Urbus Properties (URB) has sold three office properties in Wellington for a total of $23.4m, $750,000 above their book values. Urbus also confirmed that the company had joined the NZSX 50 index from 1 September. Urbus CEO Murray Barclay said the sales were in line with the company's strategy of reducing its profile to the Wellington office market, which it said was facing increasing insurance premiums, over renting, and loss of major tenants. The funds will go towards repaying debt. These moves should strengthen URB and improve rental yields. Meanwhile URB continues to pay a very respectable dividend of 10%, making it appealing to income investors.
A New Zealand-based consortium has emerged with a $750m cash and shares bid for Fletcher Challenge Forests' 106,000ha forestry estate. That is $65m more than the cash-only deal Fletcher Forests struck on Monday with The Campbell Group, a United States timber management company. On completion of the sale of its forests, FFS intends returning $1 per share in a cash dividend to shareholders. As FFS shares currently trade well above the $1 it intends returning to shareholders, the market is attempting to put a value on FFS's remaining business, without the trees, which is difficult to do at this stage. But FFS shareholders have done very well out of this asset strip, having seen the shares rocker recently.
Restaurant Brands (RBD) has issued a first half profit warning after confirming its second quarter sales of $95.7m were slightly up on its first quarter trading. Restaurant Brands owns KFC, Starbucks and Pizza Hut operations in New Zealand and Victoria, Australia. Group sales for the 16 weeks to September 8 were up 1.8% on the first quarter at $95.7m. The increase was largely driven by Restaurant Brands' Pizza Hutt operation. But despite the improving sales trend, first half trading results will be down on prior year, Restaurant Brands said in a statement. Profit margins were adversely affected by product mix and significant increases in repair and maintenance costs, utilities and store overhead costs.
New Zealand Exchange Limited (NZX) has signed a deal with the SFE Corporation (SFE) for the listing and trading of New Zealand equity derivative products. The deal enables NZX to provide a range of futures and options contracts to New Zealand investors through the listing of these equity products on the Sydney Futures Exchange. "For some time, New Zealand investors have been disadvantaged by not having access to an appropriate range of New Zealand based futures and options with which to hedge their positions and minimise their investment risk," said Mark Weldon, NZX Chief Executive. This is a big move for NZX as derivative trading provides a lot of revenue for stock exchanges elsewhere, including the Australian Stock Exchange.
15 September
The bad times continue for retail companies, who are struggling to maintain the high growth rates of the recent past. The market has been unforgiving of these companies, having driven up their share prices to dizzy heights in recent years.
Briscoes (BGR) growth rate has slowed in the six months to 30 June 2003, the company reporting a net profit of $9.9m, up 3% on the previous corresponding period. Revenue was up 10% to $141m. Despite reasonable sales growth, BGR has delivered virtually no growth in net profit for its first half year because of increasing competitive pressures. These could increase as the economy cools, and has been largely presaged in a share price that has been declining over the past month. But BGR remains an extremely strong operation with a debt-free balance sheet and good management. This makes it a worthwhile long-term investment for those prepared to accept the inevitable volatility in retailing.
For the 12 months to 30 June 2003, the Warehouse (WHS) reported a net profit of $75.4m, 8% lower than the previous year. Revenue was 5% higher at $2b. After adjusting for one-off costs, primarily in relation to logistics restructuring in Australia, normalised profit was $79.7m down 3.4%. This was a disappointing result from New Zealand's most successful retailer, but not as bad as it could have been. CEO Stephen Tindall is dealing effectively with the Australian business while its New Zealand ones continue to do well. Despite being out of favour in a cooling retail sector WHS remains a first class operation with excellent long-term prospects.
Ryman Healthcare (RYM) has become the only healthcare and retirement villager operator to be included on the New Zealand Stock Exchange 50 (NZSX50) indexes, entering the index at number 35. The company's inclusion follows its placement of $48m of shares in June, which increased liquidity to the required level. RYM's inclusion will increase its profile with institutions and other big investors, which can only be good for the share price. In particular, the index funds have to now buy RYM shares to comply with their own constitutions. RYM is a share with time on its side as demand for its services increase in a ageing population of baby boomers.
Rejection of a potential merger with Qantas by Australian authorities is the latest setback for Air New Zealand (AIR). This decision has resulted in a speculative nightmare for investors who chased the AIR share price above 60c in anticipation of a deal. It has since come right back. Although AIR recently turned in a substantial profit, much of this came from cost cutting. Profitability is still well below its cost of capital and reducing debt remains a major priority. Meanwhile, it faces increased competition on its most lucrative routes, has high capital expenditure needs and is vulnerable to changes in the price of aviation fuel or passenger numbers, which tend to be volatile.
8 September
The market continues to deliver outstanding returns in some sectors, while other sectors, like retailing, are finding little support. Nevertheless, this did not prevent the retail chain PostiePlus from concluding a very successful listing.
Retail chain PostiePlus (PPG) has had a successful listing, with its shares trading between $1.25 and $1.33, at a good premium to the $1 listing price. The price is justified given the high projected dividend yield. However, PPG is not in the same league as either The Warehouse (WHS) or Briscoes (BGR), having neither the track record nor brand power of these retailers. It is bringing together several acquisitions, which are being combined to create a group worth listing. There is always some risk in that. However, at the current trading levels there is a good margin of safety in the dividend yield on offer.
Auckland International Airport (AIA) has reported a net profit of $83.5m for the 12 months to 30 June 2003, up 17% on the previous year. Revenue also rose 17%, to $234m. A significant portion of the increase, $17.6m, reflected a retendering of major retail concessions as new five-year contracts came into effect early in the year. AIA has shown good growth over 2002-3, even on a normalised basis, and this has come despite the impact of the Iraq war and the SARS virus on tourist numbers and flight frequencies. This demonstrates the benefits of holding a near monopoly position as a gateway to New Zealand and a diversified earnings stream from rentals and development of its large land bank.
Healthcare property trust, Calan (CHP), has reported a pre tax profit of $9.1m for 2003 ($10.6m in 2002). The reduction in pre-tax profits from the previous year reflects the decision to restructure the portfolio for the longer term benefit of unit holders - by selling poorer performing and non-strategic assets in favour of properties leased by quality tenants which offer the potential for future growth and enhanced returns to unit holders. The funds raised from this will be used to start the construction of Epworth Eastern. Calan 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.
Independent Newspapers (INL) has made a takeover offer for the shares in Sky Network Television (SKY) that it does not already own. INL currently holds approximately 66% of Sky. The offer $3.35 in cash plus 3 INL shares for every 10 Sky shares, values SKY at $4.63 per Sky share. Having sold its publishing assets to John Fairfax Holdings for $1.19b, INL is tidying up its affairs in a tax-effective manner by making a bid for the 34% of Sky Network Television it doesn't already own. As a monopoly provider of pay TV services that has just started to become profitable, the outlook for the new company is bright, although its share price already reflects this.
1 September
The four companies profiled below have all seen a sharp gain in their share prices recently, for very different reasons. Owens (OWN) is a perpetual poor performer, kicked into life with a takeover bid. Pyne Gould Guinness (PGG) and Wrightson (WRI) are rural companies defying the rural bad news story.
Owens Group (OWN) has advised its shareholders against accepting Mainfreight's (MFT) takeover bid because it is too low. Mainfreight managing director Don Braid said his company was assessing a Deloitte Touche Tohmatsu report, which said the current offer was not fair. Mainfreight is offering $1.03 cash a share. Deloitte said in the report that Owens shares were worth between $1.09 and $1.27, and could be worth as much as $1.58 if Owens' strategy of selling non-core assets was successful. There is downside risk if the deal does not go through and OWN falls to its pre-takeover price of 85c. However, there is also a fair chance of a higher offer coming through, giving OWN speculative appeal.
Rural services company Pyne Gould Guinness (PGG) has returned a flat year-end profit, which is highly creditable in the current tougher conditions in the rural economy. The after tax profit of $12.7m for the 12 months to June 30, compared with $12.4m for the 2002 year. Total revenue was $287m, up 12.4% on the same period last year. This was a respectable performance helped along by an increasingly diversified revenue base. The farm supplies division took a hammering, but this was offset by seeds and other divisions. The share rose strongly ahead of the result on perception that PGG would perform better than expected, and better than Wrightsons (WRI) in the same industry.
The other rural company, Wrightson (WRI) reported a 13% fall in its full-year profit due to falling export returns and a high exchange rate. WRI's net profit for the year to June 30 was $18.5m, down from $21.2m for the previous year. The company said reduced livestock prices, a slowdown in farmer spending and bad weather affected the result. Chairman John Palmer said the company would focus on cranking up the scale of operations, in growth areas such as seeds, finance and agri-feeds. WRI has a very conservatively geared balance sheet and is well positioned to maintain its high dividend payout ratio. The share is a good yield investment, but slightly less attractive since the recent price jump.
Tourism operator Tourism Holdings (THL) has reported a better-than-expected net profit of $8.7m for the year to the end of June, up from $255,000 last year. The company said three weeks ago that it expected to report a $7.5m result, but it has since benefited from a favourable review of its Australian tax liability. Tourism Holdings said its business in the second half of the financial year had been seriously affected by the Iraq war and the Sars virus. But Sars and the Iraq war did their damage during the quieter winter period. THL's low debt levels and good cash flows make it a good recovery stock.
25 August
The reporting season has started with companies delivering their June year-end results. So far, the market has been treated to a mix bag, with good results sometimes emerging from where you would not expect it.
The market expected, and Michel Hill (MHI) delivered an indifferent result for the 12 months to end June, 2003. The operating profit of $10.2m was down 16.7% on the previous year, on sales that were up 5% to $224.8m. However, the company's Australian and New Zealand operations performed creditably in a tough environment, and most of the damage to bottom line was due to an unfavourable exchange rate in converting Australian revenue to NZ dollars. MHI has demonstrated the worth of its strategy of sustained, profitable growth over several years. However, we no longer anticipate success in Canada, given the negative comments coming from management. Growth is likely to be in single digits in future.
Auctioneers, Turners (TUA) have had an outstanding first year on the market, reporting an after tax of $6.1m, or 25% ahead of the prospectus forecast and 39% up on last year. Sales of its cars have soared as low interest rates and high immigration fuelled demand for cars. Operating revenues were up 10% on prior year. The combined revenues of Auctions and Fleet were $67.6m, a 10% increase when compared with $61.2m in the previous corresponding period. While there are some risks given its fixed cost structure and resulting need to maintain high sales volumes, the company is well positioned to cope with setbacks. The recent rise in its share price suggests the good news has been absorbed and further strong gains are unlikely.
Provenco Group (PVO) has reported a net operating surplus of $1m before unusual items for the year to 30 June 2003, following an improved second half and strong performances by the Payment Solutions and Technology Divisions. This compares to a first half surplus of $183,000 before unusual items. The net loss after unusual items and tax for the year is $6.4m, which reflects a write-down in intellectual property assets of $6.6m. Writing down its intellectual property doers no harm to the company, as it is the power of those patents to earn revenue that counts. On that score, PVO seems to have turned the corner. But a trend needs to emerge to be sure.
SKY Television (SKY) has finally moved into the black as the network reports a net profit after tax of $671,000, the first time SKY has been profitable since the launch of the digital satellite network in 1998. Total revenues of $391.3m, were up by 13.6% over the previous year. EBITDA (earnings before interest, tax, depreciation and amortization) increased by 39.4% to $150.8m. SKY has continued to improve its position by negotiating better programming arrangements with movie distributors, and was further aided by the strengthening NZ dollar. SKY is an exceptional business from an operational and marketing point of view, but whether it will ever be a money machine is a moot point.
18 August
The market has seen growth and recovery on several fronts, as high yielding shares continue to rise strong, while some previously battered growth shares record sharp recoveries. Investors seem to be wavering psychologically between bull and bear market sentiment.
Fisher & Paykel Appliances (FPA) and US whiteware giant Whirlpool Corporation announced a global strategic alliance. Initially, the alliance will focus on global sourcing of major home appliances, as well as the sharing and co-development of product technology. FPA also announced it would build a new $7m production plant. These developments could give sales a boost, particularly in the US and Europe where FPA's products are seen as sophisticated and attract a premium price. On the other hand, increased sales in the northern hemisphere may be at least partially offset by declining sales in Australia and New Zealand. FPA shares have seen outstanding advances this year, as investors fled towards high quality, high dividend yielding shares.
Air New Zealand (AIR) has introduced everyday, low-cost travel across the Tasman - cutting its full range of Smart Saver fares on average 25%, and up to 38%. AIR is following up the success of its no frills service in New Zealand and is hoping to head off a wave of new competitors starting up transtasman services. However, some of the competitors are bigger and wealthier than AIR and will have no hesitation in meeting or beating AIR's prices. The end result is likely to be good for tourists but it remains to be seen whether increased traveler volumes make up for AIR's lower profitability. Given the vagaries of the airline business, it is an industry investors might do well to avoid
CET Technologies of Singapore said it had entered into a subscription agreement to acquire 16m new Cadmus Technology (CTL) shares for $1.2m.The acquisition will see CET take a 9.9% stake in Cadmus. The agreement will also see CET take on a strategic role in assisting Cadmus market its products into targeted Asian countries. CTL has recorded some success in exporting its eftpos and electronic payments technology and sales are rising. However, it has struggled to maintain positive operating cash flows, which is a concern and it remains to be seen how long the $1.2m in new capital will last. Early indications are that the company's prospects are brightening.
Aged care company Metlifecare (MET) announced a net profit for the six months to 30 June of $6.3m, a 53% increase on the $4.1m achieved for the same period last year. Revenue was $53m, up 23%. MET continues to recover from a period of bad luck and poor management. Its balance sheet has improved to prudent levels as has its cash flow situation. The presence on the share register of major investors the Todd family and company founder Clifford Cook means the company has stable, long-term support. Given forecast increases in demand for such facilities in the future, the company looks attractive on a long-term basis.
11 August
It's been a good news week on the market, when several companies, some of which had been trading under a cloud, reported good results. In the past few months, the market has responded as sharply to good news as to bad.
The country's largest tourist business, Tourism Holdings (THL), saw its shares rise after it upgraded its profit. The company has been under some stress following a series of tourist depressing events, that ended in the Sars virus attack. However, Tourism Holdings now says the Sars problem has not had much of an impact, and it told the market its June year net profit would be about $7.5m, well up on the May forecast of $4.5m to $5.5m.The better performance over the last quarter came also from good trading revenue from THL's Australian motorhome rental operations and, to a lesser extent, the same operation in New Zealand.
Shares in The Warehouse (WHS) have taken off after the chain reported sales up 14.2% in the three months ended 31 July 2003, compared with the same quarter for the previous year. Group sales for the fourth quarter were $499.7m and sales for the twelve months ended 31 July 2003 were $2.0 bn, up from $1.8bn last year. The latest quarter saw Warehouse Stationery record sales growth of 52.2% compared with the same period last year. Australian sales also rose strongly although this included a fair amount of stock clearance. This latest result shown WHS is back on track with an excellent growth rate. With Stephen Tindall again at the helm, the WHS is still a company you can bet on.
Telecom (TEL) beat analysts' forecasts with a $709m net profit for the year to June 30. The result, which compared with a median market forecast of $688m, benefited from cost-cutting, a lower interest bill and some recovery in revenue growth in the June quarter. The latest result represents an improvement of $36m or 5.4m on the previous year, when the write down last year of $850m worth of Aussie investment is ignored. TEL has indicated that it is not ready to increase its dividend while it pays down debt, but clearly an increased payout is on the cards. On that basis, and given the greater stability of TEL earnings, TEL is an attractive yield investment.
Fisher and Paykel Healthcare (FPH) is expecting a 25% increase in first-half revenue, due partly to Sars-related sales. This good result has been presaged in good gains in the share price. It must be clewar to everyone now that FPH is capable of capturing a respectable share of the US medical equipment market on the back of innovative product design. The year saw twelve significant new products released into the market, and this the direct result of its heavy investment in research and development, which this year amounted to 5.5% of revenue or NZ$11.5m. The Obstructive Sleep Apnea revenue increased by 28% to US$42m, and Respiratory humidification revenues rose by 12% to US$51m. FPH is an attractive growth share.
4 August
Retail shares have taken a battering as investors move to more predictable sectors of the market. Strangely, the opposite is happening in Australia where the retail shares have been rising in recent weeks.
The extraordinary weakness in shares in The Warehouse (WHS) seems more a case of the entire retail sector being out of favour, rather than any particular problem with the company itself. Briscoes (BGR) and Michael Hill International (MHI) have also been falling like sharply. Only Hallensteins stays firm, and that is because it never reached the heights of the other three popular stocks to start with. The problem with retail shares is that they are at the top of a retail boom - driven by immigration, a strong economy and a rampant residential property boom - that many suspect is about to end. Nevertheless, all three retail shares are reaching attractive price levels given their long term growth prospects.
Contact Energy (CEN) will build and operate a new Crown-owned dry year reserve electricity generating plant on Contact's Whirinaki site, the company's chief executive, Mr Steve Barrett, announced. The Crown will own the plant, and lease the Whirinaki site from Contact, which will receive a fee as compensation for the use of the site and associated rights by the Crown for 11 years. It will also receive an annual fee for operating the station under an operating and maintenance agreement. CEN is a stable share with a role to play in any long term portfolio. It is a reliable performer because it does not have much hydro exposure and generates more energy than it requires to service existing contracts.
The New Zealand Exchange (NZX) has announced its first result as a listed company, a net profit of $584,000 for the six months to June 30. This translates into earnings per share of 5c. Total operating revenue was $5.44m, helped along by a string of new listings for which NZX earns fees. NZX shares have performed very strongly since listing, surprising both the market and the company itself. The share is not cheap, as the price to earnings ratio is extremely high at its current share trading level. However, NZX has many attractive elements, not least of which is the fact that it is a monopoly run by highly motivated management who are determined to increase both the revenue base and profile of NZX.
Tauranga-based power company Trustpower (TPW) has nearly doubled its quarterly profit, reporting $17.2m net profit for the three months to the end of June. Customer numbers fell from 274,000 to 236,000 during this period. It has been exiting markets where it has struggled to make a profit, selling its retail customer bases in a number of centres to former rival Mercury Energy, and sticking to its core geographical areas, which will improve margins. As primarily a hydroelectric power generator, TPW has been vulnerable to dry winters that lead to low water reserves. However, extensive risk management has enabled TPW to reduce the impact of dry winters.
28 July
High yield investments are again in favour after losing ground in recent weeks. Solid, dividend-paying shares like Fisher & Paykel Appliances (FPA) have picked up as investors keep getting drawn back to the solid performers.
Property group URBUS (URB) has reached the market in a low profile flotation, offering a hefty 10% dividend yield. The company had an unsuccessful record in its previous guise of Waltus, with a record for missing its profit forecasts. Waltus was based on single property investments, but these were folded into URBUS to reduce volatility and risk. And the company now listed has a wide spread of property in commercial and retail markets. URB could turn out to be a high quality property float, but it first has to overcome bad memories of its poor record of delivering value to syndicate investors, partly because of the high fee structure.
Food processor, Cedenco (CED) has seen its shares rocket since its major shareholder SKC announced a bid for the 41% it doesn't already own. CED has never been a great sharemarket investment because of the weather-driven volatility in earnings and the inevitable impact on its share price. But recently it's been on a recovery track. For the six months to 31 March, 2003, the company reported a net profit of $2.12m, up 66% on the $1.28m in the previous corresponding period. Revenue was $19.7m, up 52%. Despite this strong result, directors expect the second half of the current financial year and the first 6 months of the 2003/2004 financial year will be "more challenging".
Vending Technology (VTL) has successfully signed its first unconditional franchise agreement in California for US$200,000, just 6 weeks after receiving approval from the California Board of Corporations. The company says it is very pleased with this early success and states that the level of franchisee enquiry to date has been strong. VTL reconfirms that they expect to return to stronger growth for the 2003/2004 financial year. VTL has also secured shareholder approval to acquire the company that owns its vending machines, tidying up confusion between the marketing and distribution functions. The company's products are innovative but like most ventures based on new technology; it is taking longer to break into new markets than anticipated.
When the founder of a company resigns, it usually spells big trouble for its share price. Smart investors know a company is never quite the same without its driving force, and inevitably the business deteriorates within a year or two. However, the exit of John Ryder, who recently sold his shareholding in retirement village operator, Ryman (RYM) has done nothing to dent its sharply rising share price. The reason is partly that RYM is a very stable business operating in a relatively stable industry. Recently, Ryman posted a record net annual profit after tax of $15.3m for the year to March 31, up $4m from last year. The company now owns 12 retirement villages.
21 July
It's been another poor week on the market, with daily share price falls now regularly exceeding share gains. Industry leaders like The Warehouse are faring particularly poorly, partly because overseas investors are starting to sell.
The National Property Trust (NAP) says its flagship retail investment, the recently opened Eastgate Shopping Centre, has been independently valued at $77m.The total cost of Eastgate including the original acquisition price was $64.7m. This represents a development margin of $12.3m and a 19% return on the cost of the project. In the financial year ended 31 May 2003 National expects a gross valuation gain on the Eastgate Property of $7.6m. NAP shares have rocketed to the new NTA valuation on 98c per unit. Property trusts tend to provide only modest capital gains, but with spurts of activity such as we are now seeing in NAP. NAP remains attractive to yield investors because of its healthy, sustainable dividends.
Baycorp Advantage (Au:BCA) has lost another key executive, this time from its receivables management division in Australia. The blow is the fifth to Baycorp's executive and board after chairman Rosanne Meo, chief financial officer Tim Wilson and two other board members quit during the financial year. Managing director Keith McLaughlin said receivables management chief David Fleming's decision to leave was not performance related. BCA has turned out to be an unpredictable investment with a series of bad news reports keeping the share on the deck. The move to Australia has seen the company come repeatedly derailed. Nothing short of a series of profit recoveries is likely to resurrect the share.
Despite industrial troubles at its Kinleith plant, which slashed earnings in its second quarter, Carter Holt Harvey (CAH) has delivered a relatively strong half-year result, mainly thanks to a buoyant housing market. For the six months to 30 June 2003, CAH has reported a net profit of $92m, up 26% on the previous corresponding period. Revenue was down 7% to $1.86bl. But for the June quarter, consolidated net earnings were $41m compared to $56m for the June quarter last year. The market didn't take well to the last quarter deterioration, and its share price is unlikely to have a sustained recovery as long as world commodity demand remains low and the NZ dollar is rising.
GDC has warned its first half to June will show a loss of $350,000 - $400,000, a downgrade on earlier forecasts of break-even at worst. This news follows a severe loss last year, although this was caused by one-off events. The group's interests are in four principal areas - contract network provisioning and maintenance of Telecom's network, design, building and maintenance of private voice and data communications networks, sales of telephone systems and equipment, and provision and operation of communications systems. GDC says it still expects to make a profit for the full year, although the company will have to deliver on this before it wins widespread investor support.
14 July
Much of the steam went out of the market this week as investors started taking profits in many of our top companies. Support for defensive, high yielding shares is also waning, and several of these shares have been falling.
Nothing adds value to a share so quickly as a good scrap for control of the company in question. This has been the case with Tower (TWR), which two weeks ago traded at $1.40 as real concern was felt over its ability to meet $200m debt repayments in August. This week the rebounded to peak at $1.75, after it became clear GPG had gained a major foothold when TWR accepted its plan to recapitalise the company. The current deal calls for a four for three pro rata rights issue at 90c, fully underwritten by GPG. Investors should either sell their rights before 1 August or take up the shares on offer. Doing nothing means you throw away money.
The management of IT Capital (ITC) plans to back the troubled venture capital outfit into marine venture Sealegs, in which it currently owns 70%. Sealegs designs amphibious boats with retractable legs allowing for easier launching off beaches, and is said to have a large amount of outstanding orders. The company has expanded aggressively in recent years, accumulating a diverse portfolio of venture capital/technology investments, but so far has failed to deliver a profit to shareholders. In the first half of 2002-3 ITC reported revenues of $1.2m (down 11%), and a much-reduced loss of $1.4m. However, the share has collapsed and ITC faces an uphill struggle against mounting distrust of new tech investments.
The listing of the shares of the New Zealand Stock Exchange (NZX) is proving to be an outstandingly successful affair. The share is trading well above the issue price of $3.60. Moreover, NZX has been careful to reward small, individual shareholders who are often left out of the action in company floats. Those who are successful could make windfall gains of $1 or more based on the current trading price. The exchange is raising $15m from the IPO shares - made up largely of firm allocations to clients of NZX broking firms of $5m; a public pool of $3.1m and a $5m rights issue. The NZX is of strong interest to investors, given its status as a monopoly.
Scott Technology (SCT) has suffered a savage downgrading after delivering a mildly pessimistic view of trading prospects next year. The announcement said that in the nine months trading to 31 May 2003, sales and profitability are at record levels and the second half profit will exceed that of the first six months. However, the Directors anticipated that the strengthening of the New Zealand dollar, and global slow down, will result in a lower level of sales and profit in the year to 31 August 2004. This was taken to signal that the recent exceedingly high growth rate is slowing, and the share fell heavily. SCT has been one of the fastest rising shares of the past year.
7 July
In the 1990s, technology was the place to invest and get rich. Instead, technology turned out to be a graveyard, with the likelihood of a company failing rating in direct proportion to its level of innovation. Here are some examples of tech stocks trying to find their way.
Certified Organics (CER) directors encouraged shareholders at the annual meeting to stick with the troubled biotech company. Certified Organics said it expected a loss of $900,000 for the six months to June 30 and a full-year deficit of about $1.4m. But it then dangled the carrot of a major investor coming in, something the company has badly needed. The company said that two separate US investors were carrying out due diligence, looking at putting up to US$30m ($51.6m) as a joint venture partner into pushing its innovative weed killer into the US market. Part of its problem is that CER has needed to issue mountains of shares at very low prices thereby diluting shareholders wealth.
Telecommunications network services company, Cabletalk (CTG) has reported a $1m turnaround in operating performance in the second half of the 31 March 2003 financial year. For the six months the company recorded a net surplus before amortization of $646,000, ahead of the $400,000 to $500,000 estimate it gave in March. This compares with the loss of $395,000 for the six months to September 2002. The share price has rewarded this performance by doubling since March. The improvement in financial performance shows that CTG's change of strategy away from low margin, short-term projects and towards more reliable long-term work is paying off. The sector is very volatile, however, and CTG should be regarded as speculative.
Power Beat has indicated to the High Court that the proceedings relating to the allegation of oppressive conduct by IT Capital (ITC) and others will be discontinued and all that remains is an issue of costs. Power Beat had taken action after ITC subsidiary Deep Video Imaging announced a restructuring. ITC's share price gained no ground despite the settling of a law suit. Difficult conditions for venture capital and technology companies has seen ITC divest many of its assets and take substantial write downs. The share, which once traded at 90c is now 1c, which offers some valuable lessons to investors who remain starry eyed about technology.
Telecom (TEL) has announced the appointment of Jonathon Stretch as Chief Executive of AAPT, its troublesome Australian subsidiary. An Australian, Stretch is currently based in Paris where he is Vice President of AT & T Business Services, responsible for Europe, Middle East and Africa. Before joining AT & T in 1999, Stretch was with IBM Australia where he held a number of positions including General Manager, Asia Pacific, IBM Global Network Services. This appointment of a highly experienced IT leader should be well received in the market, given that AAPT is in a tough competitive battle in Australia. In general, TEL has been looking more appealing, with many expecting increased dividend payouts from TEL in future.
30 June
Some investors think the share market is worth avoiding right now because of rising global uncertainty. However, those who know where to look are making a lot of money, as some of our comments below indicate.
The final price for the shares offered in the flotation of the New Zealand Stock Exchange (NZX) has been set at $3.60 per share. NZX says the price has been set after taking into account trading data from the trading of existing shares and rights, overall demand for shares, and valuations provided by institutions. The final price of $3.60 per share is well above the indicative range, which was shown in the prospectus, indicating the success of the float has caught NZX by surprise. NZX has the making and the management of a very successful new listing. However, we believe too little data has been provided to make a good assessment of the price.
Richina Pacific (RCH) shares have taken a tumble after the company revealed a litany of problems. Pelt quality affecting margins and revenues at Shanghai Richina Leather has caused the company to trim its estimated half-year operating profit by $700,000 to $3.5m for the six months ending 30 June, 2003. Chairman, Alastair MacCormick says that anticipated sales of garment leather for coats and
jackets made in China from New Zealand sheepskin were not generating
expected revenue levels, and the margins are lower. He also said that the SARS virus had decimated attendance at the company's Blue Zoo aquarium in Beijing, with revenue losses of $1.5m expected. RCH is a volatile share with mainly speculative appeal.
Hellaby (HBY) has received an income tax refund of $9m from the Inland Revenue, which will improve the investment holding group's reported earnings for the year to 30 June 2003 by $5m. At the same time, Hellaby directors confirmed that the underlying trading profit of the group up to the end of May is in line with the company's forecasts and comfortably ahead of the group's profit for the same period last year. The share has been on a steep rise since 2000, and keeps strengthening on perception of a sustained turnaround. Of major interest is the fact that it's biggest shareholder is Hugh Green, one of the country's smartest investors.
Shares in Ports of Auckland (POA) are hitting record levels and the port itself appears to have been rerated by investment analysts. Traditionally, POA has been regarded a low growth share linked closely to economic cycles, attractive mainly for its good dividend payout. However, the markets appear to be rerating it as a growth stock in its own right. Earlier this year, it was selected by the P&O line as one of the key NZ ports to handle the P&O's newest mega container ships. Total container volumes were up 8% for the 12 months to end-March 2003 and up 6% on March 2002. The share is attracting both yield and growth investors right now.
23 June
There is a fair amount of rescue activity in the market, which provides a good opportunity for investors to buy distressed shares and wait for someone to launch their rescue bid.
Toll Holdings (Au:TOL) is not giving up on Tranz Rail (TRH), despite the NZ Government's determination to force through its own bailout of the troubled rail operator. TOL has revised its offer for TRH shares. The listed Australian freight company has increased its share offer by 20c to 95c per share. Managing Director Paul Little said the company has removed a number of conditions previously in the takeover notice, which required Tranz Rail directors to confirm the company's 3rd quarter and 9-month financial results to 31 March 2003. TRH has taken investors who backed its survival on a great rise, but perhaps it is time now to take some profits.
Financial firms seem to be tripping over each other in an attempt to rescue Tower (TWR). GPG is well advanced in its capital-raising scheme through which it will recapitalise the depleted insurer, and gain a controlling stake. But this week, a rival $200m capital raising plan started to emerge, with financial services company Hanover Group laying a stake to becoming cornerstone shareholder. Tower is under pressure from its bankers to repay at least $200m of debt by August 8. While the GPG deal has been criticized because it gives GPG control at a discount to market price, we believe that could be offset by the undoubted value GPG would add to TWR at every level, including management.
Fletcher Challenge Forests (FFS) has accepted Macquarie's recommendation to conduct a trade sale process for the entire forest estate. The company has long hinted at the prospect of selling its forests as it firmly believes that the realisable value of the forest assets is significantly in excess of the value implied by its share price. The sale of the forest estate, it says, would facilitate re-investment in processing and distribution activities, and the "subsequent release of substantial surplus capital to shareholders." The market seems to agree that the company is better off without its trees, as the share price spiked 16% in response to this announcement. Investors are hoping for a windfall from the sale of trees.
The Warehouse has rocketed over the past week to claw back most of its losses incurred after CEO Greg Muir resigned. The reaction to the resignation of Muir was extreme as many thought it confirmed the company's troubles in Australia. However, investors would do well to follow a few simple rules: If the CEO of a company in trouble resigns and there is no obvious successor in place, bale out. If the founder of a company sells his shares, bale out. If the CEO of a successful company resigns, and there is a successor in place who happens to be the best retailer in the country (Stephen Tindall), then don't bale out but buy in at the weaker share price.
16 June
The biggest share price moves in recent weeks have tended to be large, cash rich dividend paying companies, like DB Breweries (DBB), Sky City (SKC) and Fisher & Paykel Appliances (FPA), who keep rising, chased by yield investors looking for a safe haven.
Fisher & Paykel Healthcare (FPH) has scored a breakthrough in Germany, winning a health insurance endorsement for its flagship sleep apnoea product. This means German medical insurance companies are now covered to use Healthcare's integrated flow generator-humidifier, used for the treatment of obstructive sleep apnoea. FPH has already proved its credentials in the US, and there is every reason to believe that after cracking that difficult market, it will succeed elsewhere. Germany is considered the world's second largest market for obstructive sleep apnoea treatment devices so insurance approval is a big boost for the company. FPH shares have risen sharply since April, on perception the company has entrenched itself in the US market.
The newly listed insurance giant, Promina (PMN) is expected to be one of the companies that will benefit from a quarterly review of the Australian stock market's main indecies by Standard & Poor's. Promina is expected to be included in the indices, given its size and liquidity. This will increase its importance to fund managers and could further support its rising share price. PMN has enjoyed a far stronger debut on the stock market than many had expected. Its listing was perfectly timed, hitting the market just as the whole insurance sectors was rerated, and most of the shares began climbing. PMN's Australian competitor, QBE, has also seen its shares rising sharply recently.
Shares in Baycorp (Au:BCA) have bounced all over the place this week, as rumours of legal problems began to circulate in the Australian press. The latest fall was triggered by talk of possible legal action against the company in relation to the debt ledger it acquired from Telstra last year. The press stated that debts acquired from federal government agencies cannot be placed on its consumer credit database without the written permission of the creditor, and that legal action under the Privacy Act would follow. For once, BCA responded quickly and emphatically, refuting that it had broken the law, and releasing to the Stock Exchange a statement supporting it from the Privacy Commission. The share immediately began to recover.
Listed casino operator Sky City (SKC) rumoured to be interested in buying Australian gambling company Centrebet, after New Zealand's TAB has already turned down a chance to pick it up. Centrebet, which reported revenue last year of A$400m, has been up for sale since the A$1.2bn purchase of its parent company, Jupiter Casinos by Australia's largest gaming group Tabcorp, which did not want Centrebet. SKC already has a large stake in Canbet, another online gaming firm, and this could be its opportunity to rationalize the industry. However, SKC has declined to comment. SKC is expanding in several directions, including the development of a new five-star hotel, thereby reducing its over-dependence on the Auckland casino.
9 June
Analysts were somewhat perplexed this week when the New Zealand Stock Exchange listed itself on the exchange, accompanied by a prospectus with no meaningful forecasts. The explanation for the omission was also amazing: That most companies get it wrong anyway, so why bother!
Rating agency, Standard & Poors has lowered Tower Group's (TWR) credit rating from A- to BBB+, after the insurer revealed a hefty $154.4m half-year loss and plans to embark on a capital raising that would give Guinness Peat Group a controlling 30% stake in the company. The $200m raised by the issue of new shares would be used to reduce Tower's debt - a move S&P regarded as positive. But the credit agency was concerned about the insurers poor earnings outlook, particularly in Australia. Nevertheless, TWR shares have been gaining value all week, despite the credit downgrade. GPG's entry as controlling shareholder is seen as a very positive factor, providing some direction, which has been sadly lacking for years.
Shares in the newly listed New Zealand Stock Exchange (NZX) have enjoyed a very successful debut on the market. The existing shareholders are the stockbrokers, whose shares began trading on Wednesday (latest price, $4.00). The stock exchange will issue another $15m worth of shares, $10m to the public in an initial public offering, and $5m in a rights issue to existing shareholders later this month. The rights issue, in the ratio of one for two held, will be at $1.50 each. That suggests the share price could be diluted down to over $3.16 after the rights issue, which we believe is too expensive for this company. Potential investors might be advised to wait till after the rights issue.
Kiwi Income Property (KIP) reported a 3.2% increase in net income after tax to $44.75m for the year to 31 March 2003, shrugging off a decline in consumer confidence in the last quarter of the financial year. Total assets grew $31.6m to $911.6m, up from $880.0m the previous year. Kiwi Income Property Trust Chairman, Jim Syme, said "the result is very pleasing and demonstrates that the Trust, with its diversified portfolio of prime office and retail property assets, is well placed to weather uncertainty in financial markets and take advantage of an upswing in investor confidence, when it occurs. KIP shares have enjoyed a steady rerating this year, as defensive, high dividend paying companies came back into fashion.
The Warehouse Group (WHS) shares have been extremely weak since it surprised the market early in May by revising downwards its after-tax earnings for the year ended 31 July 2003 to a range between $73m and $80m, from NZ$90m to NZ$95m previously. This downgrade of around 17% resulted in a 27% fall in the shares, which reflects the market's concern that it could presage deeper problems for WHS, particularly in Australia. That view seemed to be confirmed this week when CEO Greg Muir unexpectedly walked out. He and others at WHS insist, however, that Australia has nothing to do with the resignation. However, the market is choosing to wait and see, while WHS shares languish at its lowest point in years.
2 June
Sectors of the market appear to have bottomed, and many shares are on the rise. The market is particularly well disposed towards companies in stable industries, paying high dividends.
Retirement village operator Ryman Healthcare (RYM) has posted a record net profit after tax of $15.3m, up $4m from last year. Ryman declared an annual dividend to shareholders of 7.5c, a 34% increase on the previous period. The company now owns 12 retirement villages which produced a net operating cashflow of $39.7m in the year to March 31, up $3 million on last year. RYM is rapidly increasing its operating base, having brought on stream the luxury Grace Joel village at St Heliers in Auckland, and four new hospital facilities. RYM is a good defensive share with some long term growth characteristics, based on a natural increase in demand for healthcare services.
Turners Auctions Limited (TUA) has entered into a joint venture in Canada to be called Turners Auctions Inc. TUA will initially hold 51% of the shares in the Canadian company with the other 49% being held by the family company of Alan McKenzie an expatriate New Zealander. The Canadian company will begin with one pilot outlet to be opened in Richmond, Vancouver in July. TUA says that the company continues to trade profitably and ahead of its prospectus forecast. TUA is a well-run business with good growth prospects. It is too early to say whether Canada will add much to that growth, but a test store is certainly not going to hurt it.
Shares in Fisher & Paykel Appliances (FPA) have rocketed this week after the manufacturer reported a strong profit of $73.5m for the March year. The $73.5 million bottom line included a $9.5 million dividend from Healthcare - in which Appliances has a 19.4 per cent stake - and a $7.8 million contribution from the company's finance operations. The result was higher than last year's pro forma result of $40 million, which included costs of $36 million stemming from Fisher & Paykel's split into two businesses, Appliances and Healthcare, in November 2001. Although the result had been expected, it seemed to concentrate minds on the high quality of FPA's earnings, and very attractive dividend payout.
New Zealand's fifth biggest electricity generator-retailer, Trustpower (TPW) has rebounded with an after-tax profit of $47m, compared with just $1.3m the year before. The profit was earned from revenue of $662.9m, on a far better margin, due to a return to a more normal trading and generation after the hammering it took in the winter of 2001. A dry and cold winter had left Trustpower scrambling to buy in electricity at high prices on the wholesale market. As primarily a hydroelectric power generator, it has been vulnerable to dry winters that lead to low water reserves. But the company learned from that experienced and risk management procedures have helped it through yet another dry winter.
26 May
The market abounds with recovery situations, as troubled companies become takeover targets, or find solutions to their trouble. The market is a speculators dream, for those prepared to do their homework.
Fisher & Paykel Healthcare (FPH) is proving to be one of very few New Zealand companies to move overseas, and crack it. Shares in the medical equipment maker rose 20c to $10.90 after the company said it had lifted its March-year net profit by 17% to $72.9m. This came on the back of a 28% increase from sales of sleep apnea products and a 12% rise from respiratory humidifiers. The New Zealand dollar rose 26%, from 44.06USc to 55.49USc, during Healthcare's 12-month reporting period, but the company had hedging at an average exchange rate of 45.13USc. This could see some pressure on future profit as the hedging expires and US revenue is translated at a weaker rate.
Tranz Rail (TRH) shares came tumbling back after Rail America withdrew its bid for control of the troubled rail operator. That leaves Toll Holdings to build up its own stake at its leisure. The fact that the share price had risen to 95c, well above the 75c offer was an indication the market believed it wouldn't succeed, but that a takeover battle would drive it higher. This proved to be overoptimistic. It often pays to sell half your shares in the heat of a takeover, so as to hedge your bets on the outcome. Meanwhile TRH is trying to unlock value by selling assets, refinancing its stretched balance sheet, and improving earnings from its core interests.
Shares in insurer Tower Ltd (TWR) took a 35% dive after it released a profit downgrade that will take it to a half-year loss of more than $180m. This is due mainly to a write down in the value of its assets, and it is still expected to produce a half-year operating profit of $3-6m. It said it planned to raise new capital of $200m, which would be used to cut debt. The large write down could be the result of new management input from GPG, which forced its way onto the board recently. The capital raising is a mixed blessing, helping TWR to reduce debt, but at the cost of issuing shares at what could be a low price.
Vending Technology (VTL) has reported a net operating surplus of $2.6m for the twelve months to 31 March 2003 compared to $5.4m for the same period last year. The year's results, VTL's first as a franchisor of 24seven vending systems, was achieved on total operating revenues of $19.2m, down 7% on last year. This can be explained by lower than expected Australian operator sales combined with a later than planned entry into the US market. A complete operational and systems review has been undertaken. VTL is taking longer than expected to get going abroad. However, it has some speculative appeal.
19 May
There is a lot of money to be made in the shares in lousy companies, if you can buy at the right moment. TranzRail, which recorded among the largest gains this week, proves the point.
Punters who dared buy into TranzRail (TRH) when it looked on the verge of collapse have been rewarded with a takeover offer and near doubling of the share price last week. RailAmerica, the world's largest operator of short line and regional freight railroads, announced that it intends to commence a takeover offer for 100% of the equity of TRH at NZ$0.75 cash for each ordinary share. The offer price is so far above the recent trading price that the bid has a high likelihood of succeeding. For those who got in at the low, a bit of profit taking seems in order. Alternatively, they might wait and see what transpires.
The insurance giant, Promina (PMN), defied the skeptics when it delivered a 10% premium over the $1.90 issue price in its first day trading. Many were expecting the float to deliver little if any gain over the issue price, given the environment it was floating into - a weak share market and troubles at AMP. However, if Promina follows the pattern often seen in major floats, the share price could trade high in the first week on the strength on institutional buying, and then recede when the institutions have accumulated the desired weightings in their funds and are no longer buyers. Watch out for a mild correction in the price.
Guinness Peat Group plc (GPG), has launched a buyback offer for up to 62.5m ordinary shares of Guinness Peat Group plc to be satisfied by the issue by GPG (UK) Holdings of up to 156.25m convertible subordinated unsecured Loan Notes. GPG is swapping equity for debt in a deal that seems to be taking advantage of the market's current appetite for fixed interest paying instruments. GPG could be signaling that it considered its shares under priced at around $1.50, the level when the offer was launched. GPG shares have recovered sharply this year on the back of a string of positive events, and this latest buyback is unlikely to harm it in the long run.
Telecom (TEL) has reported net earnings of $498m for the nine months ended 31 March 2003 - an increase of 3.8% on reported net earnings of $480m for the previous nine months ended 31 March 2002. The result was driven by strong third quarter 2002-2003 earnings of $197m, which were up 17.3% on the same quarter in 2001-2002. On an adjusted basis (removing one-off items from the previous corresponding nine months) net earnings for the nine months ended 31 March 2003 increased 6.6% on the previous corresponding period. This was a solid result and shows Telecom driving revenues in its core markets, while maintaining control on costs and expanding margins. The share price has responded positively.
12 May
The current market conditions lend themselves to a strategy that picks sectors first, and then a company in that sector. Investors should be underweight at this stage in the rural and tourism sectors as conditions in both lurches from bad to worse. However, the defensive stocks in liquor and food are more than holding their own in tough times.
DB Breweries (DBB) has reported an after-tax profit for the six months to March 31 up 25.1% cent to $16.8m, against $13.4m for the corresponding period last year. The brewer also posted a 10.8% lift in earnings before interest and tax to $23.4m compared with $21.3m. Net sales in the key summer trading period were up by 6.6% to $170.5m - a good result achieved in a stagnant beer market that owes much to previous brand-building in the Wellington and central North Island. Following years of low growth, DB appears to be picking up the pace. The bottom line is also aided by a recent $60m upgrading and consolidation of the brewer's operations at Auckland's Waitemata site.
Tourism Holdings (THL) says its full-year profit could be down about $2m on forecast due to the fallout of the SARS scare and general downturn in tourism. Profit would drop from the $6m to $8m range expected in February to between $4.5m and $5.5m, the company said. The New Zealand tourism industry was expecting a 10% to 12% drop in forward bookings for the three months to July 31 compared with the same period last year. THL shares fell 6.3% to 89c immediately after the news, but has firmed since then. In recent years, THL has used its cash flow to reduce debt, preparing it well for the ups and downs of the tourist market.
Fisher & Paykel Healthcare (FPH) announced that it has settled a dispute with ResMed, its major US competitor, over patent infringement. The lawsuit was filed against Fisher & Paykel over its Aclaim mask products, used in the treatment of sleep-disordered breathing. ResMed will dismiss the lawsuit. In return Fisher & Paykel will be introducing a new design of its Aclaim mask by August 1, 2003, and will continue to sell its existing Aclaim masks under a license from ResMed until it introduces the new version. When news of the litigation first appeared, FPH shares suffered because of the implications it could have had on future sales. Shareholders will be relieved at this outcome.
Allied Farmers (ALF) says that the effect of the prolonged drought in the West Coast of the North Island over the summer and autumn will cut its annual profit by approximately 40% from the record return of $3.4m last year. Dairy Production has suffered severely, which along with the decreased 30% payout has severely trimmed dairy farm expenditure. Prices for dairy stock are tracking at 30 to 40% behind the values achieved last year. Livestock values for sheep and beef have fallen by between 20% and 30% respectively over the last twelve months, which is impacting on discretionary spending. The company is financial strong to handle the inevitable rural low points.
5 May
New Zealand companies operating in Australia have a poor record of success there. But when our best retailer, The Warehouse, finds it difficult, one has to ask whether the big expansion across the ditch is actually worth the risk.
The Warehouse Group (WHS) has surprised the market by revising downwards its expectation of after-tax earnings for the year ended 31 July 2003 to a range between $73m and $80m, from NZ$90m to NZ$95m previously. This downgrade of around 17% resulted in a 27% fall in the shares, which reflects the market's concern that it could presage deeper problems for WHS, particularly in Australia. The company says Australia is proving trickier than anticipated and it will take longer to make a go of that market. Without success in Australia, WHS growth rate could be expected to slow as the NZ operation reaches maturity. However, the company has excellent management capable of bringing its Australian operation to health.
Financial services giant AMP has announced a demerger, with its UK operation transferred into a new company to isolate it from the New Zealand and Australian businesses. The businesses in Britain will be put into a company called Henderson and the Australian and New Zealand businesses will go into a company that retains the AMP name. Investors will hold shares in both companies, with details of the share issue still to be determined. This move should benefit AMP given the huge risk premium being placed on its UK operation - a market that investors in this part of the world have difficulty understanding. The shares had bounced off their low point before trading was suspended.
Evergreen Forests (EVF) announced that its independent forest valuer had given a preliminary indication that the company's forest value for the year-end 30 June 2003 would be in the range of $141m to $149m, substantially down from its value at 30 June 2002 of $162.4m. Evergreen was still expecting an operating result similar to last year ($6.9m), before non-cash adjustments. The fall reflects three current unfavourable trends for exporters: low log prices, high shipping costs and a higher NZ dollar. The company briefly took advantage of an upturn in prices to increase logging but that window has now closed and the company is facing weak earnings growth.
Leading New Zealand gas and electricity network company, Powerco (PWC) , and the State Government of Tasmania, have signed a development agreement, which allows Powerco to distribute natural gas to Tasmania's major industrial and commercial customers. This agreement follows negotiations on the first stage of the Government-initiated project. The total initial investment for stage one, over the next 18 months, will be approximately NZ$38m. The Tasmanian Government has agreed to contributeNZ$9m to Powerco to develop the backbone network. The latest deal will boost the bottom line of PWC, and was responsible for a sharp spike in the shares, ending a long decline. PWC appeals mainly as an investment for income.
28 April
We are in a market where good news tends to get better and bad news tends to get worse. We have seen it again this week with Air New Zealand (bad news) and ANZ (good news)
Air New Zealand (AIR) continues along its turbulent course. The company says that the continued softening of forward bookings on some international routes due to the effects of Severe Acute Respiratory Syndrome (SARS) has resulted in the airline making further cancellations of some services for May and June, in addition to those previously announced. These changes represent a 7% reduction in total available capacity across the airline's international network (as measured in available seats per kilometre). This illustrates again how unbelievably unpredictable is the airline industry, which has to cope with the volume of travellers, fuel prices and the New Zealand dollar - all at once. Many investors won't go near the sector.
Cedenco Group (CED) has surprised investors by reporting a strong half year operating revenue of $19.7m and an after tax net surplus of $2.12m. This result compared with $13m revenue and an after tax surplus of $1.28m for the 2002 half year. Equity earnings from Cedenco Australia were also stronger at $1.3m as compared to $800000 in the 2002 half year. The stronger result, it said, was due to an increase in production capacity for both frozen peas and corn and an increase in sales of tomato and squash products. However, the directors are expecting a tough second half, with the stronger NZ dollar and drought in Australia having an impact.
BIL International (BRY) has received nearly 6% of the total acceptances it needs to take full control of the UK hotel group, Thistle. BIL currently owns 45.8% of the share capital of Thistle. But it wants full control so that it can take the measures needed to revive the under performing hotel chain. However, BIL's bid for Thistle has done little to revive BIL's seriously depressed share price. Some believe that, instead of getting rid of a white elephant, BIL wants to own more of it, and run up debt in the process. Thistle has been a disastrous investment, never living up to the hype that surrounded its string of London hotels.
Australia and New Zealand Banking Group (ANZ) announced an operating profit after tax of $1.1bn for the half-year ended March 2003 up 8.7% for the same period last year. Earnings per share were up 8.6% to 72c. The interim dividend of 44c was up 12.8%. CEO John McFarlane says most of its specialist businesses performed well, with the exception of the credit card business, where returns were unacceptable. ANZ is on track to deliver 8% growth in underlying earnings this year, thereby continuing its history of superior returns. The share has risen sharply recently on perception that ANZ has good defensive as well as growth qualities.
21 April
The "cockroach" theory holds that on the market, bad news tends to be followed by more bad news that had been hidden. That's being seen with some shares that just keep falling as more and more cockroaches appear.
Tranz Rail (TRH) shares plummeted 50% in one day after court documents were made public showing that the company would be in a very precarious situation if by the end of June if it did not sell assets. That was the view that rating agency Standard & Poor's who changed a planned three-notch downgrade in Tranz Rail's BB+ credit rating to a five-notch downgrade to B- on Monday. The downgrading would have been worse, to CCC had TRH not had the support of its bankers. Although TRH shares have some speculative appeal at their current low level, its financial health is too uncertain to even contemplate taking a punt.
Carter Holt Harvey has announced earnings before interest and tax (EBIT) of $77m for the three months ended 31 March 2003, up 51% on the same quarter last year. Net earnings were $51m compared to $17m for the March quarter last year. The company has benefited from the strong housing market, which has continued in Australia and New Zealand. It has also stayed focused on controlling costs and prices have generally improved. CAH remains vulnerable to many economic factors, including the spot price of energy. The energy spikes have cost it approximately $3m in the latest quarter. The many uncertainties have prevented the share price reacting more positively to its latest results.
Software of Excellence International (SOE) shares have rocketed this last week after the company made some positive noises about its overseas operation. The company says that its US sales effort is beginning to gather momentum, now that several of its key reference sites in that market, including the University of California, Los Angeles, are up and running and that key customer, HealthPartners, has committed to rolling out the system to its 16 offices. SOA has a unique product in computer software aimed at the niche, dental market. However, the share is highly speculative and tends to be driven by SOE's press releases more than fundamental improvement in its revenue.
Ports of Auckland (POA) provides an accurate gauge of the New Zealand economy. And if its recent operating report is anything to go by, the economy continues to boom. POA said this week that it had handled 638,284 "20-foot equivalent units" in the year to March 31, 8% more than the same period last year. The company also said it handled 6% more containers in March this year than March last year. Containers make up about 70% of Ports of Auckland's throughput. Traditionally, POA shares are categorized as "plodders", providing low but reliable growth, and a good dividend payout. However, the shares have really taken off this year as import volumes reached abnormally high levels.
14 April
There is a recovery theme running through the market. Not so much in the NZSE 40 index, which is rising almost imperceptibly, but in some of the quality stocks that have been hard hit, and are now again in demand.
Fisher & Paykel Appliances (FPA) rose sharply following a steep fall over four weeks. The worry with FPA is that its big-ticket sales will be the first to suffer in a downturn in consumer spending in NZ, Australia or the US. However, last week it unveiled a top loading clothes dryer - a world first - thereby emphasizing that as a niche marketer of innovative products, FPA has a built in resistance to recession and tremendous potential as an exporter. The share, which delivers a high dividends yield, took off after news of its new products, with the memory of its successful launch of its DishDrawer in the US still fresh in investors minds.
Guinness Peat Group (GPG) is another share to take flight recently. A lot has been happening at GPG, and all of it positive for the Ron Brierley led group. First GPG directors Gary Weiss and Tony Gibbs were voted overwhelmingly onto Tower's board, giving it a great deal of leverage in how the troubled insurer will be run. That was followed by a High Court judgment that stripped US hedge fund Perry Corp of part of its Rubicon shareholding and boosted GPG's stake in the Fletcher Challenge spin-off to 20.9%. And to top it off, GPG revealed it is working with a group that includes Jacob Rothschild to bid $1.2bn for a listed sewing thread-maker, Coats.
Baycorp (Au:BCA) is yet another company on a sharp recovery track, following months of steep falls in its share price. The New Zealand credit information company, now based in Australia, has shot its credibility with investors in Australia after delivering several surprise announcements of write offs and costs incurred that hadn't been expected. However, "smart money" has been finding BCA shares, which are widely believed to have fallen too far. Analysts note that the company's fundamental business is as sound as ever. Its credibility has also picked up in the wake of a solid interview given recently by BCA CEO Keith McLaughlin, who dispelled many of the negative perceptions about the group.
Jeweller Michael Hill International (MHI) suffered a 7.5% plunge in its share price after it lowered its full-year profit forecast. The company said it expected an operating profit of between $9.5m and $10.5m for the year to June, about 14% less than last year's result. The company laid blame on the stronger New Zealand dollar, higher infrastructure costs and the Canadian foray that it said was costing double its original budget. It is not just the cost of the Canadian operation that will be worrying investors. But also the perception that it will struggle to make it there. The expansion into Australia was relatively painless. Going further a field is likely to be very painful.
7 April
Amid all the uncertainty, an insurance company (Promina) has decided to float on the New Zealand and Australian stock exchanges. Although still several weeks away, the success or otherwise of the Promina float will give a good indication of how deeply we have descended into a bear market.
Telecom (TEL) shares jumped this week as the company launched an aggressive new strategy in Australia. TEL is relaunching its Australia subsidiary, AAPT - the source of most of its woes in the past year. TEL appears to have overpaid for AAPT - which is only number three among telecoms in Australia, and vulnerable to being squeezed out - and was forced into making a huge write off against the asset. But last week AAPT began to attack the Australia's residential phone market, offering free line rental and cheap long-distance phone calls to premium customers. It is supporting this move with print and TV advertising, aimed at improving its brand recognition in a crowded market.
Lion Nathan (Au: LNN) is contemplating up to $800m worth of acquisitions over the next three years as it expands its premium wine business. This was revealed last week by CEO Gordon Cairns, who was speaking at a conference in New York. Currently its wine interests include Petaluma, Banksia and New Zealand's Wither Hills. The company wants to build a $1bn wine division and has indicated that it will consider acquisitions in the US, South America, or South Africa. Through its acquisitions, and a strong focus on margin management, LNN has grown despite falling beer consumption. It has delivered compound annual earnings per share growth of 11.4% over the last five years, displaying growth and defensive qualities.
Auckland International Airport (AIA) shares have dipped sharply, falling to their level six months ago, as the company announces a new CEO to replace John Goulter. However, the fall has nothing to do with the appointment of Don Huse, an experienced airport manager who has held executive roles at both Wellington and Sydney airports, and everything to do with falling inbound tourism. In particular, the market is unsure of the impact of SARS- the flu virus - coming as it does on top of the Iraqi war. However, AIA shares have long been vulnerable to a fall, having risen to a price:earnings ratio over 20, which is unusually high for a utility.
Williams & Kettle Limited (WKL) has reported an after tax profit of $5.2m for the six months ended 31 January 2003, marginally down on $5.5m for the same period last year. Lower contributions were recorded from the livestock, wool and rural real estate divisions reflecting the tougher market conditions. But thanks to much stricter cash management, cash flow remained strong over the period, rising to $4.9m compared with a deficit of $2.7m last year. This was a creditable result given difficult climatic and economic conditions impacting on the rural sector. The recent strategy of diversifying its earnings into new products and new geographical regions seems to have paid off.
Composite insurer, Promina is courting retail investors with a offer of preferential shares, the price of which will range between A$1.40 and A$1.90. The final price will be set by institutions in a bidding process. In the meantime, investors are being asked to send a cheque pricing the shares at $1.90, and await a refund if the price is set any lower. The problem is that Promina at $1.90 is not a great investment. But at $1.40 it certainly is. Investors who believe the market talk that the issue will eventually be priced at the lower end of the scale could apply for shares. But there does not appear to be any upside if the price comes in close to the upper level.
31 March
The market is in a dangerously erratic phase, where money can be made or lost overnight. It is neither an emphatic bull or bear market we are seeing, so investors need to select shares for reasons affecting only that specific company.
The directors of Richmond (RHD) have sent a letter to shareholders advising them to accept the offer from PPCS that expires on 4 April. The offer at $3.11 is slightly below the mid range of the independent valuation placed on them of $3.00 - $3.65 per share including a takeover premium. Investors should accept the offer, which was increased from $3.05 to $3.11 per share on 11 March, given that Richmond shares are unlikely to trade at or above the offer price for some time if the offer was rejected. Shares in RHD have risen to $3,14, higher than the current offer, which is not entirely logical under the circumstances.
Guinness Peat Group (GPG) directors Gary Weiss and Tony Gibbs have been voted overwhelmingly onto the board of Tower (TWR). GPG, which holds 9.9% of Tower's shares, were thwarted when they tried to acquire Tower four years ago. They have returned to a damaged company, its shares at less than half the price GPG had offered for Tower, and its reputation in Australia in particular, in tatters. GPG had wanted to merge TWR with its own financial services group, Tyndall, and had warned TWR did not have the scale to go it alone. This proved correct. TWR share price has failed to react to the news of the appointments, but most believe it can only benefit TWR.
The Graeme Hart-controlled Burns Philp (BPC) looks to have tied up the loose ends in its acquisition of Goodman Fielder (GMF), having just surpassed the 90% threshold of shareholder acceptance. BPC lifted its offer 2c a share to $1.87 two weeks ago, and declared it unconditional. The move finally dislodged the reluctant Goodman Fielder board and five of its eight members resigned. When the takeover bid was first announced, the shares in BPC failed to respond. The market was incredulous that it would succeed, given the fact that BPC is a minnow compared with its target. But last week BPC shares rocketed by 20% as the deal reached its conclusion. BPC is still of speculative interest.
Advantage Group (ADV) has changed its name to Provenco Group after losing a court case against another company of the same name. ADV supplies electronic payment solutions, mobile computing, barcode data capture, retail oil automation and integrated IT services, having rid itself of some of its periphery interests that had caused it so much harm. However, the going remains tough for ADV, whose shares have been relentlessly sold down by the market. It slipped into the red in the December half year as demand for its electronic payments software was hit by the global downturn, reporting a $177,000 after tax loss for the December half, compared with $880,000 profit previously.
24 March
Although the market continues to deal harshly with any company delivering bad news, there are signs that bargain hunters are staring to snap up shares that have fallen too far on the back of mildly negative events.
Shares in Sky City (SKC) took a hefty dip following release of a Parliament's health report recommending a complete ban on smoking inside pubs, restaurants and casinos. The market's fears are well founded as similar moves in Australia caused casino earnings to dip. While casinos in general have a captive market of gamblers, these gamblers demand a hassle free environment, and they will find something else to do if that's not provided. In Australia, even altering the size of notes the change machines were allowed to accept, with big notes rejected, caused a slump in casino earnings in one particular casino last year. It proves again that the only real threat to SKC is the regulators.
Hallenstein Glassons (HLG) has reported a flat half-year profit after tax for the six months ended 1 February 2003 of $5.8m (2002 - $5.8m). Profit was earned on sales
revenue of $90.4m (up 2.5% on last year) compared to $88.2m achieved in 2002. Glassons continues to make progress in Australia but the New Zealand results were impacted by disappointing sales in the key trading month of December. However, the 20.5%, increase in its Australian sales, with that operation about to break even, is very significant as it points to the venture succeeding. The share remains attractive from a dividend yield point of view. But investors looking for capital growth should avoid HLG.
Briscoe Group (BGR) has lifted net profit after tax by 34.6% to $23.6m for the year ending 31 January 2003. The result is 33% above the profit projected for 2002-03 in the group's November 2001 prospectus. The earnings were generated on operating revenue of $297.6m, up 17% on the $254.3m generated in the previous year. On a same-store basis, sales growth for the year was 15.5% for the Group. Briscoes Homeware and Rebel Sport returned same store sales growth of 17.7% and 10.6% respectively. This was an excellent result from a real retail growth story. However, the share price has fallen below $2 - offering real value - as investors are nervous about a link with Farmers.
Shares in energy provider, Contact (CEN) have been on the rise this year in the face of a looming energy crunch. Contact tends to do well in dry winters, when the hydro lakes are running dry and electricity prices rising. It has a mixed generation capacity, not overly reliant on hydro generation, and so is able to cope, while benefiting from high prices. This week, Energy Minister Pete Hodgson again raised fears of another dry winter and high power prices, saying a new power-savings push is on the way. Prices have reached $800 a megawatt hour - 10 times normal levels. These events have fuelled some interest in CEN.
17 March
The volatile environment continues to throw up opportunities to make short-term gains from shares that have been oversold. Here are four shares in recovery mode over the past week.
AMP Ltd (AMP) shares rebounded 6.5% in one day following a series of events, which included a rebound in the UK share market following its steepest one-day slide in eight years. However, the recovery in AMP also had a lot to do with the actions of its altered board of directors, who have managed to get shareholders on their side. First, there were reports that a senior executive had bought a large parcel of AMP, thereby underscoring his confidence in the company. That was followed by the board's refusal to succumb to the severance demands of its previous CEO Paul Batchelor, which went down well with the financial giant's unhappy shareholders.
The Warehouse Group (WHS) announced a tax paid profit (after adjusting for logistics restructuring costs) for the six months ended 31 January 2003 of $63.5m, an increase of 7.2% compared with the same period last year. Reported tax paid profit was $58.2m after taking into account a $7.5m charge for logistics restructuring costs in Australia. WHS shares took a hammering last month after it reported mildly disappointing quarterly sales. However, the shares have started recovering and this latest report, which shows red shed operating margins remaining very healthy above 13%, confirms that it remains in good health. Sales growth could again pick up with the introduction of new product lines, such as jewelry.
Metlifecare (MET) has reported a record net surplus of $10.4m for 2002 up 44% on the $7.2m achieved during 2001. Strong demand for the company's products and services resulted in record total revenues of $100.7m, compared to $82.2m in 2001. Total assets grew from $166.2m to $184.6m. All areas of the company's operations had improved revenues and margins, most notable the resale of villas and apartments with revenue of $36.9m compared to $31.1m in 2001. After lagging in its performance in recent years, MET is recovering well, aided no doubt by the property boom. Its aged care facilities are well placed to benefit from the inevitable increase in demand from an ageing population.
Burns Philp (BPC) has clinched victory in its battle for control of the Australian food giant, Goodman Fielder (GMF). GMF's board this week recommended that shareholders accept BPC's offer of A$1.635 a share, which Burns Philp had increased by two cents while also waiving all remaining conditions in order to get the deal through. BPC needed full control of GMF so that it could have access to the substantial cash flow in GMF to finance the takeover. BPC takes on a mountain of debt, so that large risks remain in the merged group. Despite the obvious risks, BPC continues to stack up well as a speculative investment.
10 March
The market is displaying several bear signals, one of which is that share price falls are outnumbering rises on most days. Those shares that do record a price rise, are usually recovering some ground after crashing the previous week. In other words, the market is in a highly uncertain, speculative mode.
BIL International Limited (BRY) is bidding to acquire all the remaining shares in its 45.8% associated company, Thistle Hotels PLC not already owned by BRY. The offer price is 115 pence in cash for each Thistle share, equivalent to a 15% premium to its share price on February 20, when BRY first signaled its intention. The rationale for this takeover is that BRY will have more flexibility to deal with Thistle once it is a private company. Thistle has been an awful performer, its hotels apparently not stacking up well in the London market. For BRY shareholders, it means more debt will be raised in the faint hope of reviving its seriously ill white elephant.
Commercial dry cleaners, Taylors (TAY) has reported a 9.5% increase in net profit after tax to $1.9m, in the half year to end December. Operating revenue for the period was $28.6m, up 7% from $26.8m in the prior period. Sales across all areas of the company's operations have increased with strong demand from customers operating in the tourism sector, particularly in Auckland and in the Central Otago. The company is attracting major hotels with its linen rental solutions. TAY is a very well run business, seldom delivering a nasty surprise. The share has been rising in recent months as investors are drawn to reliable companies in stable industries, paying decent dividends, and turning away from highflying growth stocks.
Restaurant Brands (RBD) has produced a solid result for the quarter to end February 2003, with sales rising 8.6% to $68.6m, from $63.2m previously. However, underlying these figures are some worrying trends. While Pizza Hut increased sales by 6.3%, sales for KFC New Zealand at $39.2m were down 6.5% on the prior year - with same store sales also down by 6.5%. This highlights concerns that the "fried" cooking style is going out of fashion. Starbucks Coffee sales of were $5.5m, up 9.3% on the prior year. But same store sales fell 6.3%, which highlights a worrying trend for new Starbucks stores to take sales off existing ones. RBD shares have been slipping over the past four weeks.
CDL Hotels' (CDL) has reported profits of $17.1m, up 60% on last year, thanks mainly to a boom in tourism. Revenue from the company's 28 Millennium, Copthorne and Quality hotels was up 8.5% due to increased occupancy (up 5.9%) and average room rates (up 4.5%). Total group revenue - including the contribution from part-owned subsidiaries CDL Investments and Kingsgate International - fell 6% because of a drop in Kingsgate's revenue. The company is looking to reduce its exposure to tourism markets by boosting its domestic marketing. International visitors accounted for 63% of CDL's guests last year and that ratio is expected to fall to 60% this year.
3 March
In a bear market, the pessimists are said to set the agenda. And that spells disaster for any company that does not meet the market's expectations. Baycorp is the latest victim of the current tendency for the market to overact to bed news.
Baycorp Advantage's (Au:BCA) share price tumbled 37% to an all-time low after the company announced an A$11.9m ($12.9m) loss accompanied by a warning that full-year revenue would be below market expectations. The fall in the share is a somewhat exaggerated reaction, given that the loss was due to one off events that had already been signaled, the major one being a $10m legal settlement after it lost a court case. In the half year to end December, BCA in fact produced a net profit of $7.4m before significant items and amortization of goodwill. Cash flow also remains very strong. But BCA management has lost much of its credibility with investors, after reporting one write off after another.
Auckland International Airport (AIA) says more passengers and increased retail income helped it to a 13% rise in first-half profit. And it is predicting a record full-year profit. The company reported a net profit of $39.7m - in line with market expectations - for the six months to December, compared with $35.1m a year ago. The business generated by its new runway and development profits from continuing building activity on airport land should see AIA continue producing a high rate of growth. However, balancing the strong prospects for this very well run company is the fact that the share is expensive, trading on a high price to earnings ratio for what is still a utility.
Woolworths (Au:WOW) has won a landmark case against The Warehouse (WHS) in Australia (WHS), reports The Australian Financial Review. The paper says Woolworths had sought to prove that WHS was selling items in breach of its development consent. The issue is whether some retailers could set up in cheap industrial land, paying a fraction of the rent paid in shopping centers. Under Australian regulation, they can do so if they are a bulk distributor of large items like fridges, but not if they sell vast quantities of small items. The implication of this ruling could be huge not only for WHS, but other Australian discounters. WHS shares have been notably weak this year,
Tourism Holdings Limited (THL) announced a doubling in after-tax profit to $5.2m for the six months to 31 December 2002, up from $2.6m for the corresponding period the previous year. Excluding one-off items, a $4.3m profit was achieved which is 43% higher than the $3m reported for the six months to December 2001. The company predicts of a full-year net profit after tax (NPAT) of $6m to $8m, while noting that the New Zealand tourism industry has bounced back to pre-September 11 levels while the Australian market continues to be depressed. The share price slipped sharply after the results were announced, which appears to be classic case of "buy on rumour, sell on fact."
24 February
When markets become jittery, investors return to good old-fashioned dividend paying shares. These are often old-fashion companies trading in conservative markets - like DB and Cavalier selling beer and carpets respectively. Shares in both these companies have lifted recently, with investors drawn to the dividends. This could be a theme for many months yet.
Shares in plastics container maker Vertex (VTX) tumbled this week after the company announced another downgrade of its expected earnings. VTX now expects earnings for the year to March 31 before interest and tax to come in between $9.2m and $9.6m compared with a September estimate of $10.1m. It says domestic consumer demand for some dairy products has weakened with a knock on effect on consumer packaging. Since its listing last year, VTX has under performed the forecasts contained in its prospectus. The company's credibility is pretty low right now. And the main reason for investing in it is the fact that some very "smart money" - belonging to South Island businessman George Gould - has done so.
There has been a tremendous re-rating of DB Breweries (DBB) shares after the directors made some positive noises at the annual general meeting in Auckland this week. DB management tends to be quite conservative, so when directors started talking about "a significant increase in earnings", the market started taking notice. DB has been a low growth company. But last year it amalgamated two separate production facilities into one Otahuhu site, which is expected to deliver substantial cost reductions, and an immediate boost to earnings. The company pays a high dividend, and this is set to increase after directors indicated the payout rate would increase as major capital expenditure projects were now coming to an end.
Broadway Industries Limited (BWY) has reported a profit for the six months ended 31 December 2002 of $879,000, up 24% over the comparable period last year. Sales were $19.06 million, as against $19.79 million last year. The share - a "penny stock" that appeals to punters more than investors - shot up on this result. BWY owns the photographic equipment supplier H E Perry, which had a good six months as a result of buoyant Christmas sales. It also owns Mercer Stainless, which was not as strong as last year, while Mercer Building Products sales increased following the commissioning of the new factory and plant during the period. Future profits could increase substantially as BWY squeezes better margins from its high sales base.
Healthcare products distributor, Ebos Group (EBO) has reported an operating surplus after tax of $2.6m up 12.8% to compared with $2.3m in the corresponding period last year. Operating revenue improved by 9.5% to $113.82m, compared with $103.9m in the prior half year. Earnings before interest and tax increased by 13.6% to $5.19m ($4.57m), including the group share of associated company earnings made by the now 47.5% owned Global Science & Technology Ltd. This is yet another good result from EBO, which is a consistent performer paying a consistent dividend. The company has a successful strategy of acquiring and integrating new businesses, something that is not always easy to do.
17 February
Retail shares on both sides of the Tasman are falling as jittery investors continue to overreact to any sign of bad news. It's not that retailers are doing badly, most are holding up very well. But everyone is aware that retailers are more vulnerable than most to a slowdown in the economy, which is expected later this year.
Hallenstein Glasson (HLG) has indicated that its net profit before tax for the half-year to February would match that of the previous year, or fall slightly below. Investors already nervous about the retail sector, sent the shares down 8% on hearing this no-growth prediction. Sales for the 6 months were $90.4m, (last year $88.2m) which was 2.5% ahead of the same period last year. Sales in Australia were $9.1m, up 20% on last year, whilst sales in New Zealand were $81.3m an increase of only 1%. However, HLG has suffered pressure on its margins. HLG has a low growth profile, which is offset by a policy for paying high dividends, making it an attractive investment for income seekers.
Sky City Leisure (SLL) has rebounded with a net profit of $1m for the six months to 31 December, compared with a $5.5m loss in the same period a year ago. This marks a turnaround in the movie operator, which, in its previous guise as Force Corporation, teetered on the brink of collapse following a disastrous foray into Argentina. Operating revenue was up 9% to $19.1m, with its cinemas producing good revenue. But its property investments remain problematic - in particular, the IMAX center in Auckland. Although its balance sheet has been strengthened with new funds, the company remains highly geared. SLL remains a speculative investment.
Skellmax Industries (SKX), which manufactures and sells agricultural and industrial products, has reported earnings before tax and interest for the six months ending 31 December 2002 of $10.4m, up 12.7% on 2001. Net surplus after tax rose 15.4% to $6.3m, and according to its directors, SKX is on target to meet its full year prospectus forecast of $12.44m. The financial position has improved since 30 June 2002 with term borrowings having been reduced by $5m. The share fell sharply after its listing last June, and while they have recovered somewhat, they remain below their listing price, due partly is continuing worries over the agricultural economy.
Michael Hill (MHI) shares suffered an uncharacteristic fall this week after the jewelry chain warned that its operating profit for the six months to December 31 would be about $7.5 million, $800,000 less than for the same period last year. It cited a number of reasons for this lower than expected performance, including: The strengthening of the NZ dollar, start up costs for the Canadian operation and lower than expected sales revenue in November in New Zealand. Most of these problems appear to be temporary in nature, and we expect MHI to resume its previous growth rate. MHI is an excellent company, which long-term investors should accumulate during weakness in the share price.
10 February
Several top companies have seen their prices correct in the past week, through a combination of a deteriorating global situation and profits that did not meet expectations. In a jittery market, investors look for excuses to sell out. In a bull market they find excuses to buy.
Shares in The Warehouse (WHS) have slumped since the company reported sales that were well below analyst's expectations. Quarterly sales for the three months to 31 January were $657m, up 5.3% on the same quarter last year. Sales for the six months to 31 January were 8.5% ahead while the market was looking for closer to 10%. The problem is that its same store sales have stalled on both sides of the Tasman. In New Zealand, same-store sales increased mere 1.4% in the quarter while in Australia, same-store sales increased 4.6% - a very bad sign. However, investors should watch the next two more quarterly reports to see if this is a trend.
Telecom Corporation (TEL) has beaten analysts' forecasts, reporting net profit of $155m in its second quarter. However, it posted a 3.5% fall in net profit for the six months to the end of December, to $301m, on revenues that slid 8.4% to $2.6bn. This could have been a lot worse but for the sharp cost reductions achieved at TEL. Essentially, chief executive Theresa Gattung is managing to cut costs faster than the fall of revenue, and so is keeping cash flow and profits at a respectable level. But cost cutting is not a permanent recipe for growth, and revenue growth at reasonable margins is likely to remain difficult to achieve in the embattled telco industry.
Briscoe Group (BGR) has reported a 17.6% increase in fourth quarter sales for the three months to the end of January. Sales increased to $103.1m compared with the corresponding quarter's sales of $87.7m. Briscoes Homeware store sales increased by 17.0% to $72.4m while Rebel Sport store sales increased by 19.0% to $30.7m. Sales for the 2002/03 year totaled $295m, 16.6% ahead of $253m for the previous year. Ironically, the BGR share price fell despite these excellent results, falling in sympathy with The Warehouse's decline after poor results, taking the whole retail sector with it. But BGR is an exceptionally well managed retail chain, which is currently delivering more than it promised at its listing.
Shares in Infratil (IFT) fell for no apparent reason this week, after it announced that Wellington International Airport, in which it has a 66% stake, had increased its charges, a move that could substantially increase the airport's net profit. IFT's recent focus has been on emerging airports and the renewable energy sector, and almost all its investments are performing well. IFT has reduced dividends in light of a lack of imputation credits, which did not endear the company to income seekers. However, this situation will turn around in future years as the profitability, and hence tax payments, at both TrustPower and Wellington International Airport begin to increase, and imputation credits are restored.
3 February
The New Zealand market has continued its pattern of ignoring global fears and is trading within a narrow band. Within this band, however, there are a number of significant movements.
Ports of Auckland (POA) shares have corrected a little in January after a strong recovery in the last quarter of 2002. Investors reacted favourably to strong volume growth and latest figures show this continued in December. Total container volumes were up 11% on Dec 2001 and up 7% for the 2002 year. Transhipments grew by 15% for the month and 15% for the 12 months. Containers comprise approximately 70% of the port's throughput and about 90% of business activity. POA shares have climbed sharply over the past year, on the back of a boom in the domestic economy. Nevertheless, they remain attractive for investors seeking a respectable dividend and modest, but reliable capital growth.
Eldercare (ELD) has delivered on a promised recovery, posting a net profit for the half year of $671,000, compared with a loss of $842,000 in the six months to 30 November 2001. The healthcare and medical services company has substantially lowered its risk profile since moving out of property development and acquiring a string of healthcare assets. In the process its earnings base has become far more reliable. The shares spiked after the result was announced. However, a lot of risk remains, and ELD will have to produce a trend of at least three consecutive increases in earnings and cash flow before investors can be totally convinced its new direction is working.
TrustPower (TPW) improved its nine-month net profit to $39.2m, from a loss of $1m in the same period last year. Cash flows for the period have been strong and reflect a significant improvement on the outflows of the same period last year. The return to profits comes on the back of "more normal generation patterns" compared with the previous year, the driest in 70 years. As primarily a hydroelectric power generator, TPW has been vulnerable to dry winters that lead to low water reserves. The current, sharply higher share price has accounted fully for the recovery to normal generation levels. But the downside risk of another dry winter weighs heavily on the share.
In the absence of a higher offer, the directors of Richmond (RHD) are recommending to shareholders that they accept the offer made by PPCS at $3.05. They note that, while the offer price at $3.05 is at the lower end of the value determined in an independent report, it does represent a significant premium over pre-offer recent trading. Strangely, The RHD share price is still well below the offer price. This seems to indicate that even at this late stage, many believe the deal will not go through because of some intransigence by major shareholders. Investors risk a big fall in the share if the deal falls through, so should consider cashing in at current levels.
27 January
The market has been quite soft and there's been obvious concern over the very strong Kiwi dollar and the impact it will have on the local economy. Nevertheless, not everyone is suffering.
Shares in Scott Technology (SCT) have gone ballistic in the last week after the company reported receiving a significant order from the United States. The Christchurch based appliance business has secured a contract to provide two automated production systems worth $14m in the 2004 financial year. After two years of poor performance, SCT has clearly hit its stride with forward orders reaching well into 2004. It is an excellent, but risk prone company because it handles a handful of very large orders, and just one or two cancellations can do the business real damage. SCT is emerging, as a business with real growth prospects, but expect some volatility.
The Warehouse (WHS) has been drifting down as investors reassess prospects for retailers in the current year. Predictions of a slowdown in our economy, and uncertainty about shares in general haven't helped. However, The Warehouse is an unusual company in that it performs relatively well even when the economy is down. That is because it's a discounter and in a recession consumers move towards perceived value for money. The WHS share price has a predictable pattern, moving sideways for anything up to a year, and taking off in short bursts when it reports good results. The share is a must have for any long-term portfolio carrying a mix of top grade NZ businesses.
Carter Holt Harvey (CAH), the second biggest share by weighting on the NZSE-40, has declined sharply in recent weeks. The continuing strength of the NZ dollar has focused investors' attention on the lower returns in NZ dollars that CAH is going to get for its logs overseas. CAH is a cyclical stock, which moves through the peaks and valleys of market demand and international prices for its products. It's not the kind of share you can buy and lock away forever, as a conscious decision has to be made to sell at the top of each cycle, and buy at the bottom. Currently, CAH shares are standing midway between its historic high and low points.
Shares in financial services giant AMP plunged to record lows in Australia and New Zealand after more bad news from its troubled British operations. AMP predicted a worse-than-expected annual net loss of A$900 million ($975.6 million) for the 2002 year. Within 10 minutes of trading on the Australian Stock Exchange after the news broke, the group's shares had dived more than 6% to A$10.56. The profit downgrade came as a shock, because most analysts had assumed the earnings downgrade of the previous month had dealt with all the problems. Unfortunately, bad news tends to foster more bad news in the financial services industry, where products are sold on a perception of rock solid security. However, AMP is inherently strong and should recover eventually.
20 January
Investors have started the New Year with a bang, with confidence levels rising rapidly judging by a spike in the daily breadth chart, which compares the number of shares rising with those falling.
Among recent significant price movements was Feverpitch International (FVR) after it said it would completely change the nature of its business. It is to buy KidiCorp - which manages 40 childcare centres - for $11.7 million to be settled with the issue of shares. FVR was founded to develop online technology but has struggled to become viable. FVR may have chosen the childcare sector because three listings on the Australian market of similar companies in recent months have proven very successful. With the deal settled in shares, FVR will have a strong balance sheet, trading in an industry with real prospects. The share price has already jumped 33% on the prospect of a takeover. Details of the takeover are sparse, and FVR remains a highly speculative investment.
Baycorp Advantage (BCA) - the share Australians love to hate - is clawing back from its disastrous drop below $2 late last year, climbing 11% in the past week. The company was trading at $7.50 a year ago after Baycorp Holdings merged with Australian company Data Advantage, but slumped after twice reporting results that were below expectations. The company has been abandoned by many Australian investors, who don't trust Kiwi companies as a rule. However, BCA remains a company with excellent growth prospects and analysts are predicting earnings to lift by around 33% in the 2003/4 financial year. The prospect of growth beyond the current year is bringing support from investors with a longer-term perspective.
Vending Technology (VTL) has seen its shares slump after issuing a profit warning. It says results in the year to March will be "significantly lower' than last year. This is the result of poorer than expected sales and foreign exchange losses. The market is very unforgiving of profit warnings, and VTL seems to have overestimated its chances of success in very competitive market, particularly in the US, which invented vending machines, after all. Nevertheless, the company's products are innovative and the concept - intelligent food and beverage vending machines that know when they need restocking - has considerable merit. VTL is a volatile investment but its shares have begun creeping up as speculators return.
The bad news just seems to multiply for insurance group Tower (TWR), which has been reeling from a year in which its share price collapsed, its managing director walked out and profits disappeared. Last week it said it would increase Tower Australia's surplus assets by a further A$30 million to improve the solvency of that business. If that wasn't enough, the Australian Prudential Regulatory Authority (APRA) has commissioned an independent review of the valuation of certain assets. Despite these new announcements, the impact on TWR shares has been minimal, suggesting the shares may have bottomed amid expectations for a much improved profit result next year. Either that, or investors simply cannot be shocked any further.
13 January
Investors have started the year with improved confidence, assisted by moves to stimulate the US market. Short-term indicators are positive, with a good chance that the market will finish higher in January. This will encourage those who believe in the 'January effect' where the market tends to end the year as it finished the first month of the year.
Shares in Michael Hill International (MHI) have run strongly in the New Year, as the full implications of its overseas expansion begin to sink in. The jeweller proved in Australia that it could take on a tough new market and succeed. Canadian expansion appears to be going according to plan, with its first Canadian stores opening in time for Christmas. The growth potential for operations in Canada is viewed as "enormous", with the possibility of 100 stores over the next 10-15 years. MHI has great growth potential, which is not fully accounted for when the share is compared to other high growth retailers. Even after the recent price rise, MHI shares trade on a much lower price to earnings ratio that the Warehouse or Briscoes - the share is around one third "cheaper" than either of those two. MHI stacks up well as a long term buy.
Shares in Waste Management (WAM) have been rising lately. The company was hit hard in Auckland last year by the entry of Australian company e-Waste. But its fortunes have turned up following a new disposal contract with e-Waste and the North Shore City Council, improved disposal prices at the Redvale landfill, and strong economic growth in Auckland, its main market (more growth equals more waste). After a period in the doldrums, WAM seems to be entering a period of earnings growth that could see it make up some of the sharp decline in its share price since January 2001. WAM rates a speculative buy for its recovery potential.
One of the worst performing shares of last year, Tranz Rail (TRH) has been steadied by an upgrade from ratings agency Moody's, which has improved its outlook for the troubled rail operator from negative to stable. This follows TRH's successful attempts at refinancing itself through a $65m capital issue half of which was used to repay bank debt. At the operating level, the company remains in a weak position. But at least most of the financial risks have now been removed. With so many problems remaining, TRH rates no better than a hold for existing shareholders. Others should avoid it.
Shares in Richmond (RHD) have risen sharply following an offer by PPCS at $3.05 per RHD share for all the fully paid ordinary shares in Richmond not already held by PPCS. Notably, however, the RHD share price has failed to meet the offer price, indicating there are some doubts about the deal going through. Much depends on the response of major shareholders, who are not jumping at the opportunity to sell out. If the deal goes through, anyone buying the shares today could make around 34c on the current price. But if the deal failed, the share could be expected to fall steeply to its pre-takeover level. The downside appears to exceed the rewards at the current price, and doesn't warrant a speculative punt.
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