Forum Archive Index - October 2003

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

I've been running the numbers on this one, just to get a better idea 
where things are going.   The board and management are still working 
on the 'strategic new direction',  so I will have to do their homework for 
them.

First the debt position.  For FY2002 if I take the net profit and divide it 
into the long term debt I get a minimum payback period of:

$16.31m/$16.04m= 1.02 years

You can't get much more conservatively geared than that.  For FY2003 
the position is superficially much the same

LT Debt/ NPAT= $12.943m/$11.625m = 1.11 years.

However, I don't believe that this tells the whole picture.   On closer 
examination of the accounts there seems to be a heavy imbalance 
between short term liabilities and current assets.    Reading between 
the lines I think this represents the LPC half share of funding the 
automated coal unloading system, a project jointly undertaken with 
Solid Energy.   It seems that LPC is financing its half of the 
construction cost with shot term debt.    Because the coal facility has a 
design life of 25 years, I don't believe it is reasonable to regard this as 
'short term debt' regardless of what accounting conventions say you 
can do.    Adding $13m of short term debt, back into the long term debt 
ledger will fix this indicator:

($12.943m+ $13m)/$11.625m = 2.23 years.

That means the company is still very conservatively geared in my 
opinion, and should be able to fully fund further replacement and 
enhancement projects without having to request more funds for 
shareholders.    I am sure the Christchurch City Council will be pleased 
to hear that!.   This is where LPC was on balance date (30th June).

Now we are in a position to take an educated guess at where they 
want to be in FY2004.    It looks like LPC are going to have to 
capitalize $5m extra of cost overrun debt into their coal handling 
assets.  Now let's assume LPC management decide to push ahead 
with a replacement fuel handing wharf and a brand new dedicated coal 
ship wharf to be completed in FY2004 as well.    Assuming all that 
building will go ahead in one year is probably extravagant, but such 
aggressive assumptions will be useful in estimating LPC's worst 
possible financial position.

We were told at the AGM that each new wharf would cost around 
$15m to construct.  So let's say debt will balloon in FY2004 by:
($15m+$15m+$5m)= $25m.  At an effective borrowing rate of 6.4%, 
this means an extra annual interest bill of $1.6m.     Construction of 
these new assets will result in a higher depreciation bill too.  For the 
two new wharves, that LPC can depreciate away over forty years, this 
amounts to ($15m+$15m)/40= $0.75m per year.  Once the coal facility 
is fully on the books and capitalized over its twenty five year life, the 
extra depreciation is $31m/25=$1.24m per year.  Adding the extra long 
term interest to be paid to this higher depreciation we can expect LPC 
profitability to deteriorate by:

$1.6m+$0.75m+$1.24m= $3.59m per year.  

These are straight increases in cost that come off the underlying 
bottom line profit.  If we take the underlying profit to be $13.5m  ( this is 
FY2003s $11.6m with two thirds of a one off $2.9m employment 
agreement settlement added back in) that gives an expected profit in 
FY2004 of: 

$13.5m- $3.59m= $9.91m

Divide that by the number of shares on issue (101,995,040) and we get 
a net profit of 9.7c per share.    I'll take that as the long term yield as 
LPC have a history of paying out all of their 'long term profit' to 
shareholders.  

Based on today's savaged share price of $1.70, that means an 
imputed yield of 8.7%.      To me that seems a fair yield for a fair price.   
I think Mr Market has got it right with this one.  I'll be holding my shares 
at $1.70.

At this point some smart trader will produce a chart that shows LPC 
broke it's uptrend last Friday and everyone should sell this morning.  I 
note that 80,000 shares were sold before 1pm today.  If we take out 
the 68% of shares in Christchurch and Ashburton council management 
that are not for sale this means that

80,000/ 36,638,412= 0.24% 

of free float shareholders were able to 'get out'.

By my reckoning 'getting out at $1.70' is simply selling at fair value 
anyway.    This shows a fallacy in the share trading argument when 
applied to low liquidity shares.   'Getting out' on paper is not the same 
as 'getting out' in practice.     That is why I have always considered 
LPC as one for the income investor.  I hope none of you traders were 
'caught out'  holding this share.

SNOOPY

discl:  hold, and will continue to hold, LPC in my 'income' share 
portfolio.


--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"Stay on the upside of the downside, 
Anticipate the anticipation!"




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