Forum Archive Index - September 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi winner69,
 
>
>Snoopy - I think you have answered all your own questions, 
>just give it a bit more thought.
> 
>You are worried about goodwill as an asset and its 'amortisation'
>What not about fixed assets and its depreciation? Both (irrespective
>of the cost) are the acquisition of assets to generate income. Yes?
>and expensed (as amortisation and depreciation) over the life of that
>asset.
>

I agree that both depreciation and amortisation are non cash items.  
But tables, chairs, counters, cookers and refrigerators all do wear out.   
You can't disregard those items even in a strong cashflow business as 
eventually you will need some of that cash so that these items can be 
replaced.    OTOH there is no need to replace the goodwill.  KFC and 
Pizza Hutt could operate in New Zealand for a hundred years with no 
goodwill at all.

I object to the 'incremental' goodwill on the books that I previously 
highlighted because it gives the impression that taking over Eagle 
Boys will will give RBD 70% of the NZ pre-prepared pizza market for 
seventeen years, and that is why it is on the books.    If even Warren 
Buffett isn't prepared to guess what will happen to a business more 
than ten years out   then how do RBD management know what the 
Pizza market in NZ will be like in 2020?

> 
> You right when you say If you consider RBD as a pure yield play, do
> RBD *need* to build up anything of long term value for shareholders?
> Thats exactly what RBD is - using leading brands to generate what cash
> they can.
> 
> Therefore you'd be better of looking at cash flows 
>

I tend to agree.

>
>(including future capex and investment requirements) 
>

I think depreciation will largely cover that, which is why I am leaving it 
in.

>
>to assess the sustainability of  those dividends.
> 

Yes

>
> By the way I am even more convinced than ever that the Pizza Hutt and
> Starbucks concepts in NZ are running at a loss. As the company refuse
> to break down performance to this level you need to judge this
> yourself.
> 

I've been doing my homework on this topic.    It is not definitive but an 
educated guess is better than nothing.

RBD give us a total depreciation figure so I am spreading that out 
between KFC, PH and SBUX based on the number of restaurants in 
each category.

Amortisation is largely covering Pizza Hutt, with a bit for Starbucks.   I 
can't see anything in the accounts that says amortisation is being 
written off for the KFC concept.  Does that accord with your impression 
of things?

General and Administration expenses include the franchise fees 
payable I think.   It also covers the head office costs which will be 
carrying costs that should be allocated between the three concepts.   I 
have allocated these resources in the ratio 1.6:1.0:1.0:0.8 representing 
KFC/PH(nz)/STARBUCKS/PH (oz).  Total amount to be divvied out I 
have guessed at $NZ4.2m.   The rest I have allocated in a ratio of 
sales to try and reflect the franchise fees.

Next I allocate the interest expense divided up based on the number of 
stores that each concept has.

That is enough information to have an educated guess as to whether 
each concept is making a profit or a loss.  We have the total tax 
payable given to us so we can allocate that among the concepts 
making a profit in proportion.

FWIW I think PH (n.z.) is making a profit, albeit a small one.  However, 
PH (n.z.) would be making much more of a profit if they didn't have all 
that amortisation to write off ( I estimate 2c per share ) every year. 

I predict that when the new CEO is appointed they will write off much of 
this Pizza Hutt attached goodwill.     Collier is gone, so he will be 
blamed for spending too much on Eagle Boys, and such a write off will 
give the new CEO a much more robust spring-board to go forward with 
and bring the company into line with International Financial Reporting 
Standards.

"In December 2002 the New Zealand Accounting Standards Review 
Board announced that International financial reporting Standards 
(IFRS) will apply to all New Zealand entities for periods commencing 
on or after 1 January 2007.   Entities will also have the option of of 
voluntarily adopting IFRS standard for periods beginning 1 January 
2005.  Adoption of IFRS will bring New Zealand into line with the 
increasing number of jurisdictions that are mandating their application."

"While IFRS are similar to existing New Zealand Financial Reporting 
Standards, there are a number of significant differences, most notably 
in the areas of accounting for financial instruments, taxation, 
**intangible assets** and business combinations."

My emphasis on the word intangible assets.   As I understand it 
companies will be required to keep goodwill on the books at a 
realizable value.    And as long as it remains at 'fair value' it no longer 
needs to be amortised.

That quoted information is from the TEL annual report BTW, but highly 
relevant to RBD too IMO.

SNOOPY





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