Jenny Ruth: Riding the profit-and-loss rollercoaster

A near 30 per cent drop in annual net profit isn't normally a good look for a company.

In the case of New Zealand Experience, which owns and runs the Rainbow's End theme park in Auckland, it's a mostly positive result.

That's because most of the reason for the fall is that the company has been sufficiently nursed back to health for it to have used up all its tax credits from previous losses and to be actually paying tax.

Net profit in the year ended last June dropped to $831,000 from $1.18 million the previous year, with the company paying $408,000 in tax, after paying $70,000 in 2003.

That tax payment allowed the company to make its first dividend payout of 2c a share. The company has been listed since its 1991 float.

Director Andrew Clements, who represents 80.5 per cent shareholder Emerald Capital and who was previously New Zealand Experience's chief executive, is also looking forward to another milestone.

Despite having been profitable since chalking up its third loss in a row in 1996, the company is still carrying $7.76 million in accumulated losses on its balance sheet.

That's a number Clements freely admits he hates. "It will be a great day when we've actually made enough profit to overcome that.

"I just don't like companies with accumulated losses. It says something is fundamentally wrong."

What used to be fundamentally wrong with the company wasn't Rainbow's End. Although it had gone into receivership in 1987, that reflected pre-crash financial engineering shenanigans rather than any problems at the operating level.

Clements said that since it was bought out of receivership in 1990 by Craig Barnes, who is still on New Zealand Experience's board, it had been profitable.

The problem had been the company's other asset and its original reason for being, the Mt Cavendish Gondola in Christchurch, which never earned its expected returns.

Emerald initially bought into the company in 1995 when it bought Rainbow's End, taking a 48 per cent stake, and Clements became chief executive.

The next year, he wrote down the gondola's value by $8 million to $2.6 million, which resulted in a net $8.9 million loss for 1996.

In 1998, Emerald bought out 34 per cent shareholder Malcolm North and then, in mid-2001, it finally got rid of most of the company's problem by selling the gondola, which had cost $11 million to build, for $1.4 million.

Ironically, the purchaser, Armada Tourism, is owned by former Shotover Jet chairman Jim Boult.

North had thwarted a takeover attempt by Shotover in 1994 when the gondola was still the company's only asset.

New Zealand Experience sold the last vestige of the gondola business, land at the base of the gondola, in May 2003, also to Armada and also at a loss. Armada paid $450,000 - $109,000 less than New Zealand Experience's book value.

That sale allowed the company to repay all its remaining debt and to set about providing shareholders with returns - at last.

By late December 2003, the company had returned $4.76 million through a buyback of shares that was funded by debt.

By balance date last year, equity was down to a more efficient 56 per cent of total assets, from 95 per cent the previous year.

The company is also promising that last year's dividend is no flash in the pan. Its policy now is to pay up to 90 per cent of net earnings out as dividends and it is aiming to repeat last year's 2c a share payout this year.

As Clements says: "It provides a nice little return for almost no effort now."

The number of directors' meetings needed a year is down to four.

But the company does have some growth potential, even if it simply continues to run Rainbow's End. Last year, the company introduced a new ride - the first since 2001 - upgraded its facilities for younger children, added more picnic and barbecue areas and demolished and rebuilt the entrance building.

The new building includes a proper cafe (an alternative to the usual fast-food fare at fun parks), a video arcade and facilities for group functions.

On a cash basis, the company is healthier than its net result suggests: cashflow from operations was $2.02 million. That was down on the previous year's $2.2 million, reflecting a decline in visitor numbers from 300,000 in 2003 to 289,000 last year.

That reflects the lack of new rides, and last year's capital spending should help to lift visitor numbers.

The pattern seems to be that a new attraction will bring in more visitors in its first year, with the flow-on to profitability in the second year and a decline in visitor numbers in the third year.

Clements says that while conventional wisdom in Australia is that fun parks have to add a new attraction each year, New Zealand Experience thinks it can stretch that out to three years.

But it also wants people to think there is always something new at the park.

"We never want people to come and think nothing's changed."

Making people think the park is changing involves tricks such as putting up large signs promising a new ride eight months ahead of its actual installation, Clements says.

But despite last year's capital return, the company is still open to potential acquisitions.

Clements says he had looked at many tourist ventures during the past 10 years but they all looked like potential repeats of the gondola situation.

And if there is an acquisition, the company would pay through a share issue rather than in cash.

"We're going to be exceptionally disciplined. Our first priority is to provide shareholders with an 8 per cent yield."

If a venture comes along with the potential to return more than that, the company would probably do it.

Keeping that potential is a major reason for such a small company to remain listed. With its shares trading at 36c (up from 11c three years ago), its market capitalisation is $13.3 million.

Emerald also remains conscious that many of the original gondola shareholders are still on the register and it doesn't want to do anything to upset them further.


With its 80.5 per cent shareholding, Emerald is in breach of one of the stock exchange rules: listed companies are supposed to have at least 25 per cent of their shares held by at least 500 members of the public.

The exchange gave the company a waiver running until this month. Clements expects the exchange will extend the waiver and that there's little chance of the company being delisted.

Emerald doesn't particularly want to sell, but it will consider any offers for up to 6 per cent of the company. But it isn't prepared to accept a low price from any "bottom-feeder".

"We are genuine," Clements says. "We would prefer to be within the rules.

"If we could find someone to buy 6 per cent, we would sell them that at the drop of a hat."