Sunday Star Times
Submitted by Joe Hendren on Sun, 17/05/2009 - 2:24pm.
When the rest of the sharemarket rallied from early March, one stock, which had previously traded in lockstep with the market, was left behind: Infratil going backwards instead.
That's because some investors now think the company has a debt problem, the big bogey of the moment. Those investors may well think their fears are confirmed when Infratil reports a hefty bottom-line annual loss tomorrow, probably around the $200 million mark.
But Infratil is no Nuplex with recession-battered earnings. The losses will mostly be paper losses from writing down the value of its listed investments, particularly its 3.3% of Auckland International Airport, and 33% of Australia-based Energy Developments.
Most likely, Infratil will also write down the value of its British airports, which have been reporting mounting losses as the global recession bites particularly savagely in that country.
In a sense, that's all noise. A key number will be operating earnings, which should come in at about $350m, up 11% on the previous year. The underlying earnings of its key assets, such as its 51% stake in TrustPower and 66% of Wellington International Airport, continue to grow at a healthy pace. But the value of Infratil's assets does matter in the context of its bank debt.
Rob Bode, an analyst at First NZ Capital, says one of Infratil's three banking covenants is that shareholders' funds must be above 40% of total tangible assets.
In early April, Bode calculated this ratio could have fallen as low as 43.3% from 49% in September last year. Infratil had kilometres to spare within the other two operating earnings-based covenants, he reckoned. Later in April Matt Henry at Goldman Sachs JBWere conducted a similar exercise and estimated shareholders' funds were sitting at about 48%.
Of the company's main $520m banking facility, a third is rolled over each year and $174m was duly extended in February. A presentation the company gave to analysts this month showed $327.4m net bank debt at March 31.
Given how gloomy the mood in global financial markets was in February, I would have thought if Infratil really was in trouble with its banks, it would have shown up then. Assuming the banks keep rolling over debt, the first major refinancing event Infratil faces is in May 2011, when $112m of its listed bonds mature.
Infratil has a total of about $750m in listed bonds, including nearly $240m in perpetual bonds, all of which rank below its bank debt, which no doubt gives its bankers considerable comfort, but which also led analysts to the conclusion Infratil is over-geared in the current environment.
All of Infratil's bonds are trading at significant discounts to face value so issuing replacement bonds now doesn't look like a viable option, but who knows how sentiment will have changed by 2011.
Acting chief executive Marko Bogoievski says the bank rollover was uneventful. "There wasn't really even a conversation," he says, although the margin Infratil has to pay has gone up, in line with margins everywhere. Nevertheless, Bogoievski says investor perception is a reality which the company must address. Rather than raising equity at huge discounts, as other companies have been doing, Infratil has been selling assets.
In April it sold Fullers Ferries for $40m, yielding an estimated $12m profit over book value, and later that month it sold properties for $23.1m, a $4.1m profit over book value.
Bogoievski says Infratil will probably exercise its put option to sell its 90% stake in Luebeck Airport in Germany back to the city. That will yield about $60m.
Another possible source of funds is Infratil's warrants which lapse in July. If exercised at $1.62 they could raise $136.7m. The shares mostly traded above that level last week, increasing the likelihood the warrants will be exercised.
While Infratil clearly has plenty of time to sort out its balance sheet, Bode's argument that the company needs to position itself to take advantage of current conditions is compelling. "Arguably, Infratil's model and the market are probably much more prospective than they have been for a long time," he says. With a deregulation-minded government, likely opportunities for private participation in infrastructure projects, and the exit of private equity buyers prepared to pay over the odds for the sorts of assets Infratil favours, "the market is ripe with opportunity".
Rob Mercer at Forsyth Barr suggests Infratil also consider selling its stakes in Energy Developments, Auckland Airport and Austral Pacific.
* Jenny Ruth is a freelance journalist and a columnist for The Independent.
Submitted by Joe Hendren on Sat, 28/03/2009 - 11:00pm.
Postie Plus Group's history as a listed company has been a sorry saga and I'm not holding my breath for anything much to change. That's despite the company promising to deliver a "modest" profit for the year ending July, providing the recession gets no worse.
The commentary around its latest results was mostly upbeat: a slightly smaller first-half loss, a 30% inventory reduction and a 32% debt reduction.
A closer look is far from reassuring. Yes, the bottom-line loss for the six months ended January narrowed to $2.7 million from $2.9m. However, the previous first half included the since-offloaded Arbuckles manchester chain's losses and the company's interest bill was down 31%. Stripping out these two items, the company's operating loss blew out to $3.1m, up 23.5%. Sales were down 5%, although the company was able to point to an improving trend: first-quarter sales were down 8.8%, but second- quarter sales were down only 2.3%. Inventory does seem to be under better control: it was $24.9m at January 31 compared with $35.3m a year earlier - it was up from $20.9m at July 31, but the company's second half is traditionally its strongest, so having more stock heading into it makes sense.
Ron Boskell, who was on holiday last week, has been chief executive since October 2005 and with the company since 2002, ahead of the September 2003 float. It isn't hard to argue he was handed a poisoned chalice. The company was a grab-bag of five retail chains thrown together in an unseemly hurry and floated when it was still an incoherent mess, and many of the strategies aimed at bringing it together simply didn't work.
And its warehousing and distribution system was based in Westport - a more inaccessible base would be difficult to find. It reflected the flagship Postie+ chain's origins as a Westport- based mail-order business.
The company was slow to move, shifting it all to Christchurch in bits and pieces. It finally bit the bullet in January last year and shifted the last bits, the hardly unimportant store replenishment functions, to Christchurch, a move which is saving it about $1m a year in logistics' costs.
Chairman Peter van Rij gave a strong indication then of what took the company so long. "If it was a question of the heart making the decision, we would not be moving.". Implementing adequate information systems took a couple of tries, but was finally achieved in April 2007. And it's now free of Arbuckles continuing losses and pared down to just two chains, the 79-store Postie+ and the 21-store BabyCity, and its Schooltex school uniforms business, which supplies more than 1500 schools.
Boskell has always acknowledged a key change needed to be better stock control. When he took over, the company was buying stock only twice a year and anything it didn't sell was put into storage to be recycled again the following year. The combination was nasty: customers were offered tired goods and the company incurred high storage costs. The aim now is to have fresh stock in all stores every six to eight weeks to give customers a reason to return.
But it seems to be taking Boskell rather a long time to get it right. In January 2006, just after he took over, inventory stood at $29.5m and it sank to $25.8m the following July. However, by July 2007, it had blown out to $37.2m and was still at $35.3m in January last year, well after the new information systems were up and running.
In March 2007, Boskell was talking about the company having a "clean stock position" but it clearly didn't. Van Rij told last November's annual shareholders meeting about the company's "crippling stock overhang from poor buying decisions in 2006".
Perhaps Boskell does have it right now. The results posted earlier this month assured shareholders "the group has entered the second half with a clean stock position for the crucial winter selling period" and that profit margins are lifting. Possibly shareholders are taking him at his word, for now. The share price hit a 20 cent nadir in February, but was trading at 32c last week. More likely it's Kathmandu founder Janet Cameron's continuing interest. Last year she bought all Arbuckles stock and took over 13 of the stores to turn into her Dogs Breakfast Trading Company stores and, earlier this month, she announced she had lifted her stake from 15% to 17.8%.
* Jenny Ruth is a freelance financial journalist and a columnist for The Independent.
Submitted by Joe Hendren on Sun, 15/06/2008 - 12:00am.
A fully-fuelled company car is worth $4000 more than a year ago - and businesses are trimming salaries to claw cash back, writes Esther Harward. If you've got a company car, don't expect a pay rise.
Bosses are cutting salaries to compensate for higher vehicle running costs and cancelling perks such as allowing staff to take vehicles away for long weekend trips.
Remuneration consultant Helene Higbee said higher petrol prices and interest rates had pushed up the value of a company car to an employee. A medium- sized 2.4 litre company car for personal use was now worth $17,306 a year - up from $13,199 last year.
Higbee said employers were now less willing to give staff unlimited use of company vehicles and most set a spending limit on personal travel. One employer asked last week if she could do anything about an employee running up an $800 monthly fuel bill.
Cars were the most emotive part of remuneration negotiations and most companies tried to keep them out of contracts so they weren't forced to meet rising costs, she said.
Employers and Manufacturers Association (Northern) chief executive Alasdair Thompson said employers were starting to factor in the increasing value of a company car when considering a pay rise. It was now very common for employers to reduce salaries to make up for higher vehicle running costs, he said. Companies tended to revise the value of car and fuel packages every year, and the price of petrol had risen by more than a third over the past 12 months.
At the same time bosses were increasingly wanting to cash up vehicles and paying employees the equivalent in cash because they were sick of the hassle of insurance claims, administration and staff abuse of vehicles.
HR consultant Kevin McBride said most employees preferred the cash equivalent of a company car, despite paying more for fuel. "Whereas in the past a company car was a bit of a status symbol, increasingly employees prefer to make their own decisions about what sort of vehicle they buy."
Staff who use their own car for work and claim costs back from their employers could find they are not getting properly reimbursed.
Many companies use the IRD's mileage rate of 62 cents a kilometre to claim back tax. The rate was set in 2005 when petrol was $1.53 a litre, and is under review. The AA says it costs 79c a kilometre to run a medium-sized car.
Meanwhile, the AA says motorists are getting stranded in increasing numbers as they try to stretch out the last few drops of fuel in their tanks. Its staff delivered 2061 emergency fuel drops in May - a 20% increase on the February total.
National road service manager John Healy said more city dwellers than rural people got stranded, and in many cases they ran out of fuel on motorways and bridges. "People are taking a risk, thinking 'I'll just let it get down a bit further and wait till I see a petrol station where fuel's a bit cheaper, or they have fuel vouchers for a particular type of station."
Superintendent John Kelly, of Waitemata's road policing unit, said drivers who got stuck on high- volume roads such as the Auckland Harbour Bridge caused chaos and made it dangerous for police and AA staff to rescue them. "They don't save anything . . . It defies any sort of common sense really."
Submitted by Joe Hendren on Sun, 16/12/2007 - 9:00am.
New Zealand is likely to lose more home-grown companies as head offices follow manufacturing facilities overseas, warns a Treasury report, but ministry officials say there may be little the government can, or should, do about it. The research was part of a wide array of work at government level assessing the risks of a "hollowing out" of the economy as jobs, firms and ownership go overseas.
Consultants Andrew Sweet and Murray Nash reported to the Treasury in September that New Zealand firms with global ambitions soon encountered the almost irresistible pull of large masses of consumers and bigger manufacturing bases overseas. Once production left New Zealand, they said, sales and marketing soon followed, with head office and R&D usually left last.
"Once a company has begun relocating key components of its supply chain offshore, a self-reinforcing process often begins, with the relocated components acting as `magnets' of attraction for components remaining in New Zealand," the study, based on confidential interviews with 15 firms with substantial overseas sales, said. Head office functions tended to be "stickiest", or most resistant to uprooting, often because key staff wanted to stay in New Zealand. However in the long run, even this was not always compelling.
The report also found that companies, once purchased by foreign owners, were more likely to have their local offices shut down and moved overseas. Other than to access New Zealand's natural resources, "firms see few compelling benefits from locating activity here".
Although the Sweet/Nash report highlights the risks of corporate exodus, Treasury's position, revealed in papers released to the Sunday Star-Times under the Official Information Act, appears to have shifted in the past 12 months.
A December 2006 Treasury internal discussion paper on "hollowing out" says the loss of head office type functions and high-skill, high-wage jobs overseas poses risks to the economy because of spillover effects. These include loss of income for New Zealand; loss of job opportunities and career progression; loss of international connections; and loss of expertise that could encourage the emergence of a cluster of industries. Prime Minister Helen Clark was briefed by Treasury on the issue in March, a month before Fisher & Paykel announced 350 job losses due to shifting production to Thailand.
But by October this year officials were telling ministers there was no hard evidence any "hollowing out" was under way, and that there was little the government could do about persuading firms to stay in New Zealand.
It pointed to the fact that total manufacturing jobs have grown by 14% between 2000 and 2006, even as manufacturing declined in relative terms compared to other sectors of the economy. Treasury said even the loss of entire firms overseas was not necessarily a problem, as long as skilled individuals and capital switched to new ventures in New Zealand. There was already evidence, for example, that ex-Navman staff and management had been re-employed. "In practical terms this means there is probably only a limited role for policies directly aimed at holding firms in New Zealand, given the fiscal and economic risks of the government targeting support and assistance toward narrowly defined sectors or firms," it said.
Finance Minister Michael Cullen told a law firm's business breakfast meeting last month that firms would succeed by focusing on their strengths. "If New Zealand can determine which elements in the value chain we can realistically seek to achieve some level of dominance, we can go one step further in improving our competitiveness and in securing greater gains from globalisation," said Cullen. He pointed to the introduction of a new research and development tax credit from April 1 and said the new research showed policies such as KiwiSaver helped retain local ownership.
Submitted by Joe Hendren on Sun, 09/12/2007 - 9:00am.
The Warehouse Group considered attempting to buy supermarket operator Progressive Enterprises as it looked at options for entering the food business, court documents show.
Ironically, Progressive, which operates the Foodtown, Countdown and Woolworths supermarket chains, was later taken over by Woolworths Australia, which has since applied for High Court clearance to make a takeover offer for The Warehouse.
The information about The Warehouse's ambitions for Progressive was contained in the court's ruling released last week, which cleared the way for Woolworths or rival supermarket operator Foodstuffs to make takeover offers, unless the decision is appealed.
The documents show The Warehouse also considered forming a partnership with another food retailer as a way of entering the food market, but instead decided to go it alone and roll out its Extra stores. However it appears The Warehouse has not completely abandoned the idea of buying another retailer.
Although much of the evidence the court examined has not been publicly released, the judgement reveals that Warehouse chief executive Ian Morrice told the court: "The Warehouse has a strong balance sheet. The Extra strategy has been testing a number of different things and there is a long list of things the board will need to consider. That includes what other investment opportunities are presented." The judgement also suggested that at least some of The Warehouse directors shared institutional investor scepticism about the Extra concept and the risks it posed. It quotes Warehouse founder Stephen Tindall as saying "the boardroom battles we had around going into food were quite historic" and that the strategy was always seen as "risky".
The court papers also throw some light on the difficulties The Warehouse has encountered since opening its first Extra stores and suggested the company has been disappointed at the prices grocery suppliers were prepared to offer the company. "Suppliers had indicated to The Warehouse that a third player would be welcomed but `reality' and `promise' are two different things," the judgement said. This meant The Warehouse Extra stores could not match the special promotional prices provided by discount operators like Pak'n'Save.
The Extra concept was also adversely affected by the acquisition of Progressive by Woolworths, which created a common buying umbrella for that company's Australian and New Zealand supermarkets. Morrice told the court that Woolworths' acquisition of Progressive had put pressure on suppliers to cut their prices. As a result, competitive conditions had fundamentally changed since The Warehouse embarked on the Extra strategy. When the research for Extra was carried out, the margins in supermarkets were higher than they are now, the court was told.
The Sunday Star-Times also understands that when The Warehouse opened its first Extra store at the Sylvia Park mall in Auckland, it accused Progressive of predatory pricing in its neighbouring Foodtown outlet, and sought a High Court injunction and the intervention of the Commerce Commission. It was unsuccessful in both instances.