Reporting season enters full swing while Government responds to markets taskforce
The investment sector moved into top gear this week with a number of important profit results, further developments regarding the Capital Markets Development Taskforce and the release of the Independent Advisers Report in the highly controversial Cynotech takeover bid.
The reporting season is now in full swing as all companies with a December or June balance date must make their final or interim profit announcement before the end of February.
The results have been pretty horrible - and dividend rates have been slashed - but most companies are reasonably confident about future prospects.
The first eleven domestic based New Zealand NZX-50 Index companies to report had total ebit (earnings before interest and tax) of $933.9 million for the six months to December 2009, a 23.6 per cent reduction over the $1223.1 million for the same period in the previous year (see table).
Results have been compared on an ebit basis because a number of companies have had a sharp reduction in interest costs because of capital raisings last year.
Michael Hill International had the best result with ebit for the six months to December 2009 up 42.2 per cent compared with the July to December 2008 period. This was due to improved trading conditions in Australasia over the Christmas period.
AMP NZ Office Trust's ebit was up 10.1 per cent, ING Medical Properties reported an 8.4 per cent increase, SkyCity's ebit rose 6.7 per cent and Sky TV was up 6.5 per cent. However, the performance of SkyCity's Auckland casino continues to disappoint.
New Zealand Refining and Steel & Tube had by far the worst results. The former was adversely affected by lower refining margins and the latter by a sharp decline in steel volume and prices.
Skellerup's earnings were down 39.7 per cent but chief executive Don Steward released bullish forecasts for both the June 2010 and June 2011 years.
These optimistic forecasts were surprising in light of the uncertain economic environment and the inability of Skellerup to achieve earlier forecasts.
Telecom experienced a 19.4 per cent decline in ebit in the latest six month period. Revenue declined by 6.5 per cent, costs were down 8.9 per cent but depreciation increased by 17.2 per cent.
The company has had to invest heavily in its infrastructure but it is not getting a good return on this investment because its selling prices continue to decline.
Fletcher Building reported a 15.8 per cent decline in ebit.
The latest result contained a number of one-off items and the group has a hole in its construction workload for the June 2011 year following the completion of a number of major projects including Eden Park.
Freightways, which is one of the best barometers of domestic economy, reported a 14.7 per cent reduction in earnings although chief executive Dean Bracewell saw some positive signs.
The good news for investors is that a number of other chief executives also saw some positive signs. The economy has bottomed out but the earnings outlook remains uncertain.
This is reflected in the dividend announcements, with only Michael Hill raising its payout. Three of the companies, ING Medical Properties Trust, Sky TV and Telecom, held their payout rate while the remaining seven companies cut their dividend per share.
The total dividends per share of these 12 companies are only 62.27c compared with 111.22c in the same period 12 months ago. Although a number of chief executives indicated that these dividend cuts are due to other reasons they do indicate that directors have a cautious view of the economic outlook and they want to strengthen balance sheets through higher earnings retention ratios.
We will get a better indication of the earnings outlook next week when all the remaining companies with a December or June balance date will announce.
Commerce Minister Simon Power's announcement on the Capital Market Development Taskforce was extremely disappointing because one year and seven months after the Taskforce was established the Government is still talking about the release of "discussion documents on potential changes" with "potential changes implemented by October 2011".
Power's release was more aspirational than action oriented, particularly as far as the immediate future is concerned.
The problem with an October 2011 action date is that this is just before the next general election and Governments are notoriously reluctant to introduce new legislation in the period leading up to this event.
The Taskforce made 60 recommendations and the preferred course of action would have been for Power to divide them up into the following categories:
* A number of recommendations to be implemented immediately.
* A further number that could be implemented early next year after limited consultation.
* The more difficult ones to be enacted by October 2011 after more comprehensive consultation.
* Recommendations that he is unwilling to proceed with should have been discarded immediately.
By bunching the 60 recommendations together, and having an implement date just before the 2011 general election, Power has set himself an unrealistic task. At best, there will be significant slippage before the Taskforce's recommendations are implemented.
Finally there is the derisory offer for Cynotech by Allan Hawkins, which was covered in last week's column.
The release of the Independent Advisers Report this week revealed that Hawkins, who is Cynotech's chairman and chief executive, has relied on family, friends and associates to fund the finance company and he wants to retire in two years.
The company has total funding of $14 million and the main loan providers are Mike Daniel, who had lent Cynotech $6 million, and the National Bank $1.71 million.
Daniel was Hawkins and Equiticorp's main stockbroker in the 1980s and his $6 million loan is now current and he probably wants his money back.
Daniel also purchased a further 400,000 Cynotech shares this month between 7.7c and 8c.
Under the takeover proposal Hawkins will offer one preference share, which he values at 13.5 cents each, in one of his private companies for each ordinary share.
Then Cynotech will be liquidated, Daniel, the National Bank and all the other funders will be paid back and any money left over will be used to redeem the preference shares issued as part of the takeover.
The Independent Advisers Report believes that the preference shares will be worth far less than 13.5 cents and shareholders would be far better advised to reject the offer and stay with the listed company.
This assessment is based on the premise that the listed Cynotech will be almost identical to Hawkins' acquiring company and shareholders should hold their shares in the listed company, where they have the full protection of NZX listing rules, rather than swapping these for preference shares in a private company where they will have almost no regulatory protection.
Essentially Cynotech has no future because Hawkins has run out of steam, his existing funders want their money back and he can't raise new funding as reflected by the dismal response to last year's Capital Securities issue.
Cynotech is the third listed company that Hawkins has controlled and its fate will be little better than the other two, Equiticorp and Ararimu Holdings.
Hawkins owned 38 per cent of Equiticorp, which collapsed after the 1987 crash, and his family interests acquired a 51 per cent stake in Ararimu which then purchased 10 million Equiticorp shares and 13 farms and horticultural properties from Hawkins.
Ararimu borrowed money from Equiticorp and was placed into statutory management after Equiticorp's statutory managers won a Court case against the company.
Cynotech shareholders should realise some value for their shares but the prospects of this will be enhanced if they reject Hawkins' takeover offer and the company remains listed.
Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.
