Brian Gaynor CDL group heads in right direction

CDL Hotels, CDL Investments and Kingsgate received bouquets and brickbats at their annual meetings.

They were complimented for their promising outlook but criticised for low share prices and a reluctance to restructure their cross-shareholdings.

Many shareholders of CDL Hotels and CDL Investments are peeved because they bought in at more than $4 a share. Kingsgate shareholders have not received a dividend since 1986.

The one consolation is that CDL group directors are receptive to the interests of small shareholders but Trans Tasman Properties, another overseas-controlled company, shows little regard for its minorities.

The CDL group goes back to Bruce Judge, the late Sir Frank Renouf and the 1980s sharemarket boom. In 1986 and 1987, Ariadne, Euro-National, Kupe Group and Renouf Corporation were involved in complex share transactions.

The post-crash period was characterised by infighting, litigation, controversy and huge losses. By the end of 1991, Ariadne was the ultimate parent, holding 36.5 per cent of Renouf and 27.7 per cent of Euro-National. Euro-National in turn owned 47.5 per cent of Kupe Group.

In 1992 the Hong Kong-listed CDL Hotels International bought a 72.1 per cent shareholding in Euro-National, 27.7 per cent from Ariadne and the remainder from Malaysian stockbroker Hwang & Yusoff. Euro-National changed its name to CDL Hotels, Kupe became CDL Investments and Renouf Corporation was decoupled and later became Hellaby Holdings.

CDL started off with a hiss and a roar in New Zealand. CDL Hotels bought several hotels and in 1994 bought a 50.4 per cent stake in Kingsgate from Ho Whye Chung of Singapore for 38.5c a share.

At the end of 1994, CDL Hotels' share price was 66c, compared with net asset backing of 43.1c a share. It had 5300 shareholders, several institutional holders and was widely covered by sharebroker analysts.

Kingsgate reached a 10-year high of 38c in 1994 and CDL Investments hit 46c in 1997.

The wheels began to fall off CDL Hotels in 1996 when net earnings fell from $21 million to $15.5 million. Earnings steadily fell to be just $1.5 million in 2000.

Everything from the opening of new hotels, the Asian economic crisis and lower contributions from CDL Investments and Kingsgate were blamed for the poor results.

By the end of 2000, CDL Hotels had only 3000 shareholders, virtually no New Zealand institutional holders and it had dropped off the brokers' radar screens.

The seeds of change were sown in 1999 when Hong Kong-listed CDL Hotels International transferred its shareholding in the New Zealand company to London-based Millennium & Copthorne Hotels. This was part of a restructuring where the unlisted Hong Leong Group of Singapore transferred all its hotel interests to the London company.

John Wilson, Millennium & Copthorne's chief executive, was appointed chairman of the three New Zealand companies. At his first annual meetings he was arrogant and aloof but he has gradually warmed to New Zealand. At the last two annual meetings he has shown a genuine interest in improving the performance of the three companies.

CDL Hotels and Kingsgate both reported higher earnings last year and most of the comments at this week's meetings were optimistic.

Wilson said CDL Hotels had "made an excellent start to the first quarter and it is particularly satisfying that we have enjoyed substantial yield growth".

CDL Investments, which is involved in residential land development, came under fire for its poor performance last year but Wilson told the meeting: "The momentum built in the local property market during the later part of 2001 is showing few signs of abatement. Section sales have been encouraging for the first quarter of the year with revenue up 94 per cent on the same period a year ago."

He also has a positive outlook for Kingsgate because of the strong performance of the Australian economy, a reduction in the supply of hotel inventory in Sydney and higher income from the Birkenhead Pt marina.

It is not unreasonable to assume that CDL Hotels will achieve net earnings of $14 million this year compared with $10.7 million last year.

At a share price of 24c the company has an historic price/earnings ratio of 7.8 and a prospective P/E of 6. Based on last year's dividend, CDL Hotels has a fully imputed dividend yield of 5.8 per cent and is trading at a 62 per cent discount to net tangible asset (NTA) backing of 62.6c a share.

Hotel firms normally trade at a discount to net asset backing - parent company Millennium & Copthorne Hotels is trading at a 33 per cent discount to NTA - but CDL Hotels is being harshly treated because of its poor performance in the late 1990s.

CDL Investments reported a loss of $264,000 last year after a $2.1 million write-off associated with the sale of Knight Frank.

Because of the buoyant residential housing conditions shareholders will be disappointed if the company cannot repeat its 2000 year earnings and dividend performances. CDL is on a prospective price/earnings ratio of 8.4 and a fully imputed dividend yield of 8.6 per cent at yesterday's closing price of 18.5c.

It is more difficult to forecast Kingsgate but at 20c the company looks undervalued for several reasons. It has had a good earnings record in the past few years, is on an historic price/earnings ratio of 7.3, has a strong balance sheet having repaid $108 million of debt and is trading at a 44 per cent discount to NTA. The board may pay a dividend this year.

Despite the positive outlook the three firms can be adversely affected by unforseen circumstances and a write-down in property values.

A possible restructuring of the CDL group was raised at the three meetings. The cross-shareholdings, which is a legacy of the Judge/Renouf era, does not make sense. The three companies have the same head office, managing director, company secretary, virtually the same board and cost $250,000 a year each to list on the Stock Exchange.

There are several options open to directors, all of which would increase shareholder value.

These include the sale of Kingsgate's assets, a merger of the three firms or the transfer of Kingsgate's hotel assets to CDL Hotels and its property development assets to CDL Investments. If the last option was adopted then CDL Hotels' shareholding in CDL Investments could be distributed to CDL Hotels' shareholders.

At the Kingsgate meeting, Wilson said a rationalisation was possible and at CDL Hotels he told shareholders that the board was looking at a plan which may or may not include rationalisations.

Wilson and CDL are not perfect but they could give Jesse Lu and Don Fletcher of Trans Tasman Properties a lesson on investor relations. Wilson listens to shareholders but Lu and Fletcher are almost totally intransigent even though Trans Tasman has not made a profit since 1997, paid a dividend since 1998 and is trading at a 54 per cent discount to NTA.

In response to GPG's motion to liquidate Trans Tasman, Lu effectively told shareholders that if they did not agree with him they should sell out. This was a particularly off-hand attitude as it was Lu that initiated the merger that created Trans Tasman six years ago. Since then, the company's net asset backing has fallen from 101.1c to 58.7c.

CDL group shareholders have benefited from standing up to Wilson. Lu and Fletcher will be more difficult to move but a large number of shareholders are hoping to start the process by voting for GPG's liquidation motion at Trans Tasman Properties annual meeting in Wellington on May 20.

* Disclosure of interest: Brian Gaynor is a shareholder of all four companies.

* bgaynor@xtra.co.nz