dividends

When Goodman Fielder was floated a little over three years ago it was promoted as a company that provided for investors in the same way as its products - bread, butter, milk and oil - provided for the nation. This was staple fare - a share for grannies.

The tagline on the prospectus for the $2.55 billion share float said it all: "Superior market positions supported by heritage brands - dividends and growth supported by a strong financial position."

Goodman Fielder projected growth in trading profits for the first two years of around 17%, a dividend yield of around 6-7% and imputation credits for New Zealand investors - a rare quality for a company that spanned the Tasman. And the company, in its first couple of years, delivered. Results and yields were robust. Sure, it was not exciting stuff, but it filled investors' tummies.

The last year has not been quite so bright. This is not because management has been doing an especially bad job. Instead it reflects the fact that recent economic conditions have thwarted Goodman Fielder at every turn. Goodman Fielder should be a defensive stock.

As a food manufacturer, it should be relatively insulated against the ebbs and flows of the economy. People might be able to put off buying a new car or a meal out, but they still need their (Meadowfresh) milk in the fridge and their (Molenberg) bread on the table. And when the economy roars away, the more highly-branded elements of its offerings such as luxury desserts or fresh cheeses might tempt shoppers.

However, few companies can withstand the volatility that has harried the market over the past year. This is especially the case for Goodman Fielder, whose fortunes are highly dependent on the trajectory of prices in the sector of the economy which has been subject to the most extreme swings in prices - bulk commodities.

In short, Goodman Fielder is proof positive that stability in prices is more important than the absolute level of those prices.

Prices for key ingredients, such as wheat for Goodman Fielder's baking operations and edible oils for its commercial and home ingredients businesses, soared to a peak around the middle of the year. The rise was linked to a belief that elevated oil prices would spur the planting of crops to produce bio-fuel, displacing food crops and thus elevating their prices.

Goodman Fielder's response to this surge was to lock in hedges at lower rates - believing commodities would be "stronger for longer." But as the turmoil in financial markets began to spill over into the real economy and commodity prices fell, Goodman found itself locked into hedges that prevented it from benefiting from the lower prices.

The firm last week warned commodity price hikes would lop $A100 million from its bottom line and it will not start to see the effects of lower prices until the second half of this financial year. The depth and the severity of the downturn have, ironically, unmasked a weakness in its strategy. Goodman Fielder's brands are supposed to be one of its greatest strengths.

Customer loyalty should allow it to pass on these costs. However, during this downturn, shoppers are leaving these in favour of the growing stable of supermarket house brands, depriving the business of one of the key levers to keep earnings on track.

One of the big questions now facing the company is whether the power of its brands in staple food categories has diminished.

As a result of these forces Goodman cut its earnings guidance saying it expected full-year net profits to be in the range of $A191 million and $A204 million, equating to a fall of 8% to 14% on last year's result.

However, it could be a lot worse. Management, led by former National Foods boss Peter Margin, has been working hard to contain these forces with cost cuts including 225 redundancies, rationalisation of its manufacturing sites and a refinement of its distribution channel.

At the same time it has been investing in new products initiatives. In New Zealand this initiative is represented by the development of a specialty cheese facility at its plant in Longburn in the Manawatu and upgrading the plant's yoghurt and liquid milk operation. In Christchurch it is developing a UHT milk facility from which Goodman Fielder will be able to service its emerging market opportunities, particularly in Asia.

Its balance sheet is also sound. As at June 2008 the firm has $384 million available in its banking facilities and net debt stands at around 65%, and interest cover at around 4.6 times.

Reflecting this strength, the firm has already refinanced well over half its long term borrowings at rates that represent a respectable spread over wholesale rates. It is also trying to increase its economies of scale with acquisitions including the River Mill Bakeries in Huntly, independent liquid milk producer Independent dairy producers, dip manufacturer Copperpot and the biscuit manufacturer Paradise Foods.
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Richard Inder is an investment advisor at Macquarie Private Wealth. His disclosure statement is free and is available on request. His clients may hold shares in the firms mentioned. Comments, think differently? Write to richard.inder@macquarie.com

Infrastructure investor Infratil has reported a 49 per cent fall in first half net profit to $12.5 million.

The reduction in the six months to September 30 compared to $24.6 million in the corresponding period a year earlier.

It followed a rise in interest costs to $68.9m from $31m, with Infratil saying today that $20m of the interest increase reflected the consolidation of TrustPower. Depreciation and amortisation was $35.9m, up from $19.8m.

Earnings for the six months before interest, tax, depreciation, amortisation, realisations and impairments, and fair value movements of financial instruments (ebitdaf), was $165m, from $69m a year earlier, Infratil said.

The operating surplus was $82.2m from $29.3m.

Infratil has a majority stake in power company TrustPower, owns Glasgow Prestwick, Kent International and Lubeck airports, two-thirds of Wellington International Airport and a small share in Auckland International Airport. It also has investments in NZ Bus and stakes in Australian power generators and retailers.

The company is to pay a fully imputed interim dividend of 2.5 cents per share.
Infratil said that as a long-term investor, it considered each of its core investment sectors would deliver attractive returns.

The global trend to renewable energy and public transport was only starting, air travel was increasingly within reach of the world's growing middle classes, and restructuring of the Australian energy sector continued, the company said. "Infratil's businesses are continuing to build long term value through efficient operations and providing excellent services in a manner which ensures widespread community support."

Developments during the half-year illustrated the disparate nature of its businesses and the relative complexity in measuring their performance, Infratil said.

As at September 30 debt comprised 42 per cent of Infratil's capitalisation. That reduced to 39 per cent if the proceeds of the October issue of partly paid shares was included.

The issue of new shares was undertaken to ensure Infratil was well placed to be able to take advantage of opportunities should current financial market volatility result in further deterioration. With that possibility in mind, the company had started to purchase hedges against equity market risk, with $1.5m of those hedges expensed during the half year, Infratil said.

Infratil shares closed at $2.93 on Friday, having ranged between $2.26 and $3.25 in the past year.

The company said today that from next June it would stop issuing quarterly reports and work to upgrade the quality and materiality of its monthly reports. Reporting had been done quarterly since 2004, but that frequency had attracted some negative feedback from share analysts and institutional investors. Investors and financial analysts interviewed said the two quarterly reports were not of particular benefit, given the ongoing information Infratil provided about its operations, Infratil said.

Children's clothing company Pumpkin Patch has reported its annual net profit after tax fell 3.2 per cent to $27.6 million.  That compares to $28.5 million last year and was made on total operating revenue up 17.9 per cent to $365.7 million for the year to the end of July.

A final fully imputed dividend of 4.5 cents per share was declared, taking the total dividend for the year to 9cps, from 8.5cps the year before, Pumpkin Patch said today.

An increase in the number of stores opened in the year, and a greater proportion of the more expensive United States and British stores in the mix, led to an increase in depreciation to $14.5m from $10.5m.  Increased bank borrowings to pay for the expansion of both existing and new markets, combined with increased interest rates led to interest costs increasing to $3.5m from $600,000, the company said. Quota costs in the US and European Union markets were $4.2m, up $800,000 on 2006. Before quota costs, net profit after tax was up 0.8 per cent to $31.8m.  After recognising the $4.2m in quota costs, earnings before interest, tax, depreciation and amortisation (ebitda) was up 9.4 per cent to $60.6m, while earnings before interest and tax (ebit) was up 2.6 per cent to $46m.

Despite facing a high New Zealand dollar for most of the year all segments generated sales growth both in NZ dollars and local currency terms, Pumpkin Patch said.  Strong sales performances in Australia and New Zealand reflected the strength of the Pumpkin Patch brand in those markets.  Sales growth also came from the developing United States and British retail markets and from the wholesale division.

During the year a total of 35 stores were opened – 13 in Australia, 11 in the US, seven in Britain and four in this country – taking total store numbers to 200.  This year the company expected to trade strongly in Australia and New Zealand, Pumpkin Patch said.  A continuation of store growth and margin retention would be the platform to drive earnings for reinvestment in new markets.

While interest, store opening costs and local market development costs would continue to have an impact on financial results in the short term the directors and management team were confident current strategies would the best long term financial outcomes, the company said.

In Australia, sales from retail stores rose 6.4 per cent in the latest year to $A156.9m ($NZ187.2m), while Australian retail ebit was up 9.2 per cent to $35.5m.  Trading conditions were solid throughout the year with a noticeable improvement in sales performances in the second half.  In this country, retail sales grew 7.8 per cent to $64.3m. Again sales performances improved in the second half despite fickle market conditions, the company said.  An ongoing focus on inventory and margin management ensured ebit grew 7.2 per cent to $12.7m.

British retail sales grew 29.5 per cent to £19.6m ($NZ55.9m).  Ebit including quota costs was $1.2m, down from $1.8m a year earlier, and continued to be affected by new store opening costs and investment in support infrastructure needed to manage a growing network of stores, Pumpkin Patch said.  In the US retail sales rose 236.8 per cent to $US12.8m ($NZ18.2m).  Ebit loss after quota was $1.5m compared to an ebit loss of $400,000 last year.  Wholesale and direct turnover was up 26.7 per cent to $50.4m.  Ebit including quota was up 20.7 per cent to $14m.

Research was under way on various European markets to identify future opportunities.

The Warehouse has announced annual net profit after tax of $115.5 million compared to $29.3 million last year.  Sales from continuing operations for the year ended July 29 were up 2.4 per cent to $1.76 billion, The Warehouse said today.

Net profit after tax, excluding the sale of The Base development in the latest year and the divestment of the Australian business the year earlier, was up from $96.2 million the previous year to $97.9 million in the latest year.  Total operating revenue for the year was down 5.3 per cent to $1.8 billion from $1.9 billion.

The company confirmed the final dividend of 5.5 cents per share announced earlier, bringing the total for the year to 17.5cps, along with a previously announced special dividend of 35cps.

Chairman Keith Smith said the result demonstrated continuous improvement in the group's performance and a further strengthening of its balance sheet, which would result in a total of $163.2m being distributed to shareholders in dividends for the year.  Same store sales were up 2 per cent for the year. Earnings before interest and tax were up 2.6 per cent to $147.2m. 

"The result for The Warehouse New Zealand is creditable given two difficult seasons for apparel, a higher level of discounting in the market since Christmas, and our strategic investment in category start-ups, pharmacy, liquor and fresh foods," group chief executive officer Ian Morrice said.  "Despite these challenges, operating margins were held year on year."  Good growth was seen in homewares, health and beauty and confectionery. In apparel, new brands such as Bonds, Maya and Match were performing well, Mr Morrice said.  "We have also continued to invest heavily in improving service during the year; speeding up transaction times through the replacement of all our point-of-sale terminals, increasing on-shelf availability by replacing our stock allocation and store replenishment systems, together with further improvements in our distribution centres."

The second of the company's Warehouse Extra stores opened during the year in Whangarei. It was also the first conversion from an existing store.  Following the conversion of the Te Rapa store last month, no more Extra stores were planned for the current financial year, providing the company with time to refine and test the format.

"Although we are expecting overall sales in the Whangerei store to increase by 30 per cent in the same selling space, this is below our target for its first year," Mr Morrice said.  "Sales mix and gross margins in this store are broadly in line with our expectations, but operating costs are higher than originally anticipated."

Warehouse Stationery sales were up 0.9 per cent to $213.5m, with same store sales up 2.2 per cent for the year, the company said.  Growth categories included consumer electronics, computer consumables and packaging and postal products. Ebit was up 2.2 per cent to $9.5m.  "The past twelve months have been a period of consolidation for Warehouse Stationery with the significant challenges in introducing new systems putting other initiatives on hold," Mr Morrice said.

In the coming year, The Warehouse expected to increase sales despite unpredictable market conditions and continued competitor space growth.  Shares in The Warehouse closed at $5.95 yesterday, having ranged between $5 and $7.32 in the past year.

The Warehouse Group is to pay a special dividend of 35c a share.  The group said today the decision resulted from a review of its capital structure following the sale of its Australian subsidiary, various property assets and the recent sale of the group's interest in the The Base at Te Rapa, Hamilton.

The group would consider undertaking further capital management initiatives in the 2008 calendar year.  An ordinary dividend of 5.5cps would also be paid, with both dividend payments to be fully imputed.

The dividend had been declared ahead of the company's annual result announcement next Friday in order to maximise the benefit to shareholders, particularly those institutional shareholders joining the Portfolio Investment Entity (PIE) regime, The Warehouse said.

Shares in The Warehouse closed at $5.74 yesterday, having ranged between $7.32 and $4.95 in the past year.