Jenny Ruth: Glasnost returns to back burner at CDL

For a while there at CDL Hotels, it seemed that glasnost had broken out.

The company was starting to address its clumsy group structure, disclosure levels had improved and it seemed to be interested in improving the lot of its minority shareholders.

The company, which is 70.2 per cent-owned by the London listed Millennium & Copthorne Hotels, which is in turn controlled by the Singapore-based Qwek family (who also control BIL International), was at least making a show of listening to minority shareholders' concerns.

And in 2003, New Zealand Shareholders Association chairman Bruce Sheppard even suggested former managing director and now chairman Tsang Jat Meng as a candidate for chief executive of the year.

Helping to improve sentiment, after Tsang joined the company in July 2000, net profit rose from just $1.5 million in the calendar 2000 to $10.7 million the next year, $17.1 million in 2002, dipped marginally to $17 million in 2003 and then soared to a record $23.2 million last year.

Given that the company reported a 12 per cent rise in first-half net profit and made positive comments, it seems to be on track to report another improvement this year.

It also didn't hurt that the share price went from between 15c and 20c between January 2000 and January 2002 to peak at 67c last February.

Sheppard is still complimentary about Tsang's reign, calling him "very competent" and saying he has "done an excellent job in extracting operating efficiencies from the group".

But it seems relations have since soured, certainly with Sheppard and the shareholders' association.

And glasnost seems to be out the window too, although I may be reading too much into the fact that Tsang's replacement as managing director, B.K. Chiu, declined to be interviewed for this column.

The company does have some reason to be aggrieved with Sheppard. This year, he singled out CDL to oppose its adoption of the stock exchange's "auto pilot" provision under which the constitutions of listed companies are automatically altered every time the exchange alters the listing rules.

At CDL's annual meeting in May, Sheppard and others challenged the company to buy them out of their shareholdings, claiming that changing the company's constitution triggered such a buy-out right.

As it happened, the shareholders' association disagreed with that action as being "flawed in achieving resolution in a fair or equitable manner", as association corporate liaison director Des Hunt said in a letter to CDL in August.

As well as the fact that the constitutional issue is general and not specific to CDL, its shares have always traded at a discount to fair value.

Hunt estimated the discount as consistently between 40 and 70 per cent.

If Sheppard did have the right to be bought out at fair value, he would receive a significant premium to what other shareholders could get by trading on market, which the association deemed unfair. Sheppard withdrew his buy-out notice.

"We appreciate that the business community may well see the NZSA as an extension of our chairman, but I must tell you that this is not the case," Hunt assured CDL.

CDL company secretary Takeshi Ito wrote back to Hunt in September saying his company "has been needlessly put to considerable expense (in internal management time and external legal costs)".

He also declined Hunt's offer to meet the board to discuss ways to close the gap between CDL's share price and fair value.

The shares are now trading at 59c. Net tangible asset backing (the company's book value) at June 30 was 86c. Analysts estimate that the full market value of the company's assets is between $1 and $1.20.

A major reason for that discount comes down to cultural dissonance between CDL's controlling shareholder and what New Zealand shareholders expect of a listed company.

Kiwi shareholders are big fans of dividends, and CDL is a miserly dividend- payer.

Last year, per-share earnings were 6.63c, but the company paid a single dividend of 2.1c a share. In each of the three previous years, the dividend was 1.4c.

On top of that, CDL is awash with cash. That has been the case for some time and has been exacerbated over the past couple of years because it has been gradually realising the assets of its formerly listed Australian subsidiary, Kingsgate International.

In the latest half-year, $2.7 million - or nearly 20 per cent - of the company's $13.8 million net profit was interest income. With another A$40 million of sales settled since June 30, the impact on the annual result will be even greater.

The company had $488.6 million in total assets, including $80.7 million in cash, at June 30.

Sheppard says: "Asian-controlled shareholders don't like parting with assets to shareholders by way of dividends or otherwise."

He also says that Asians don't like selling assets period, although CDL has been selling the Kingsgate assets.

So what will CDL do with all its cash? Sheppard says hotel assets internationally are over-inflated, trading at multiples of 19 times earnings before interest, tax and depreciation, so he doesn't want to buy more hotels at such prices.

While the company has said it wouldn't buy assets for more than an earnings multiple of 10, Sheppard argues that, given that the shares trade at a multiple of about five, such purchases would destroy shareholder value - and suggests CDL ought to be selling its hotels into such a bubble.

But his suggestion that the best investment the company could make would be to buy back its own shares might just find favour. "My line at the AGM was, 'So you want to buy some cheap hotel assets, look no further than your own shares'."

As well as finding a home for some of that cash, such a buy-back would have the advantage of taking out some minority shareholders and the likely outcome of boosting the share price for remaining minorities.

But Sheppard isn't holding his breath. "The thought of parting with cash to pay out shareholders will probably be too much for our Asian partners to bear." 

 
Who, what, where

* CDL Hotels' headquarters: Queen St, Auckland.
* Profile: CDL Hotels has a portfolio of 31 hotels owned, leased, managed or franchised under the Millennium, Copthorne and Kingsgate brands. It also owns 61.3 per cent of KIN Holdings, which took over Australian-listed Kingsgate International last year, and 62.5 per cent of New Zealand-listed CDL Investments, which subdivides and sells residential sections.
* Market capitalisation: $206.3 million.
* Latest results: CDL's net profit for the six months ended June 30 rose 12 per cent to $13.8 million.
* Management: Managing director B.K. Chiu, company secretary Takeshi Ito.
* Major shareholder: Singapore-based Qwek family, with 70.2 per cent.