Stock takes: Smoother road ahead for freight firm

Credit Suisse upgraded its rating on Mainfreight to neutral. Photo / Sarah Ivey

Credit Suisse has upgraded its rating on Mainfreight from "underperform" to "neutral" on the basis that the decline in freight volumes across the sector is showing signs of levelling off.

Given that decline however, Analyst Kar Yue Yeo is picking the company to report first quarter earnings of $11.1 million, down 33 per cent on a year earlier and net profit of $4.2 million, down 51 per cent. But with "signs of freight volume stabilising in some markets" Credit Suisse has raised its target price to $4.65 from $4.40.

"Accordingly this warrants an upgrade in our rating to neutral [from underperform] given the weakness in the stock price over the past two months and as it is now less demanding on trough cycle earnings."

Mainfreight shares closed down 1c at $4.08.

TIMING IS EVERYTHING

Holders of $75 million worth of Fidelity Capital Guaranteed Bonds have just missed out on yet another of their semi-annual interest payments, with one investor contacting the Business Herald to tell us he'd received a letter informing him of a shortfall in funds just two days before the payment was due.

The bonds were issued in early 2007 and the money was used to form an investment portfolio containing fixed interest investments to support trading activities, primarily the writing of call and put options managed by Tyndall Investment Management.

They have a coupon of 9.25 per cent but the failure to make the July payment means they have only made two on time.

The December 2007 payment was eventually made with the July 2008 one.

You can add the Fidelity bonds to the list of exotic fixed-interest offerings to retail investors, including Absolute Capital's PINs and Macquarie's Fortress notes, that were issued in time to be crunched by market meltdowns.

At least the Fidelity bonds have a capital guarantee backed by Westpac.

The investor that contacted us reckons the managers can't blame the world recession as the bond was issued after it had begun. Hmmm, that's a tough call. The Fidelity bonds were issued on March 30, 2007. The same day the Business Herald carried a report about US Federal Reserve chairman Ben Bernanke scaring Wall St with a warning that the United States economy was facing growing uncertainties including the knock-on effect from the sub-prime lending crisis into the broader US housing and credit markets.

At that point Bernanke said the sub-prime difficulties were being contained but he didn't rule out that problems in the sector could tip the wider economy into recession.

WASTE COLLECTOR

Yet another Australian company which went on a big acquisition spree including New Zealand businesses, has come unstuck thanks to the credit crunch and global recession.

Transpacific Industries, which acquired Waste Management back in 2006 under somewhat controversial circumstances is seeking A$800 million ($1 billion) from institutional and retail investors in what is being portrayed in the Australian media as a "bailout".

Its case hasn't been helped by the fact it recently restated its 2008 earnings, writing them down by 10 per cent leaving investors wondering how reliable the information provided by management really is.

Stock Takes is unsure how widely held the company's stock is in New Zealand but we do know of one local fund manager who owns it and who was yesterday sifting through the offer documents to form an opinion.

The brouhaha around Transpacific's acquisition of Waste Management was not around the price, which was generally considered to be rather fulsome. Rather it was Transpacific's use of a loophole in the Companies Act to present its takeover as an "amalgamation" which required 75 per cent approval from minority shareholders rather than the 90 per cent required under the Takeovers Code.

CONFESSION SEASON

The period leading up to listed firms June 30 balance date can be a fascinating one in that if they look likely to miss their earnings guidance they are obligedto say so.

With the so called "confession season" over, it's somewhat encouraging to see that the number of downgrades has been lower than we've seen over the last year or so.

There's been a few, Charlie's, PGG Wrightson, Contact Energy and Fisher & Paykel Appliances, but Goldman Sachs JBWere analyst Bernard Doyle says he and his colleagues have been downgrading fewer firms over the last few weeks.

"I'd be cautiously optimistic that this would not be another earnings season where everybody's playing catch-up to falling earnings estimates.

"The lack of a lot of noise ahead of reporting season is hopefully consistent with that view."

The moderation in earnings downgrades is a key factor in Goldman Sachs slightly adjusting its target return for the next 12 months for the NZX-50 to +17 per cent from +16 per cent previously.

PENNIES ARE SAFE

Strategic Finance's news this week that it will take further big provisions on its loan book was particularly bad news for subordinated note holders, who, as a result, will now receive just 85c in the dollar instead of the full repayment of principal they were expecting.

Strategic's Kerry Finnigan assured Stock Takes earlier this week that debenture holders will still get all their cash back and that there is still something of a buffer in place before further provisions would eat into their returns.

Once again, as was the case with South Canterbury Finance's provisioning just a few days earlier, it is further deterioration in the property market that is being blamed.

It hardly bodes well for other finance companies heavily exposed to the sector which are in the process of repaying investors under moratoria or repayment plans, like Hanover for example.

Its repayment plan was predicated on what PricewaterhouseCoopers said at the time were optimistic assumptions. However, Hanover Finance general manager David Bryan told Stock Takes yesterday the company had met its first two repayments to investors.

"The market continues to tighten but we're achieving repayments from borrowers and property sales as we need sufficient to meet our quarterly milestones." He makes the very good point that these repayments were set at "a reasonably conservative level" for the first two years or so, "while the market sorts itself out".

True enough. Quarterly payments this year are set at 2c in the dollar, rising 2.5c next year and 3c in 2011.

"To date we've been quite comfortable in achieving those payments," says Bryan.

UNE GRANDE AFFAIRE

How good would this be? You've just had a month in the south of France soaking up the sun and you return to score the single biggest infrastructure contract of the year.

Such is life for Mark Binns, chief executive of Fletcher Building's infrastructure division. He had taken a well-earned break and was in Provence for some time, returning this week to attend the announcement of the successful contractors for the Victoria Park motorway job. Tres magnifique!