Forum Archive Index - May 2004

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

Hi Dean,
 
>
>My analysis has uncovered a
>few things that have 'cooled my ardour for the stock'.  You 
>probably know that WRI has an ROE that is higher than its 
comparable
>companies such as PGG and WKI and that the market generally 
rewards
>companies that can earn better than average returns than their peers
>by pricing them at a premium over their net assets that is also
>greater than their peers.  Well have you ever disagregated WRIs 
ROE? 
>

No.  But then ROE was not the reason I bought into WRI!    At the time 
I regarded WRI as more of a yield play.

>
>If you do you may find some interesting things.... Basically WRI
>boosts its ROE by having an asset turn that is greater than its peers
>and this is achieved through operating leases instead of owning
>assets!  In fact I believe that it does so at a rate that is almost
>twice that of its rival firms.  If you adjust WRIs performance to take
>account of this the its ROE then drops to below that of the industry
>average and more in line with its profitability which is also below
>industry. 
>

Great work Dean!    I hadn't done the exercise that you have done and 
it certainly is food for thought.

It's an interesting question as to whether owning stuff or leasing stuff is 
best.    Tranzrail certainly got into a lot of trouble with sale and 
leasebacks as epitomized by the sale and lease-back of the 'Aratere' 
ferry.    It made the balance sheet look good for a while and they 
started paying out dividends at a rate that looked sustainable but was 
in reality a higher rate than they could afford.  This was brought home 
in the next business downturn when the revenues reduced but the 
cash payments on the ferry lease did not.   It put Tranzrail into a real 
cash squeeze that almost destroyed the company.

Leasing buildings is another question again.     Generally you still need  
premises to operate from both, in good and bad times.  So I don't see 
that WRI leasing office space (if that is indeed what they are leasing) 
is necessarily analogous to the Tranzrail ferry case.

Restaurant Brands went through the exercise of selling all their 
property and leasing it back.  The theory dished out to the 
shareholders was that it didn't make a lot of difference to the overall 
operating result.    Although lease payments were higher than before, 
depreciation and interest costs were lower.    One almost exactly 
offsetting the other.    Did you manage to take changes in depreciation 
and interest payable into account in your comparison with PGG and 
WKI?

The advantage of leasing is that should you wish to quit a site, you can 
simply wait until the lease runs out and it is done.    From what I have 
seen WRI shops are not in premium property locations.   That means 
that if WRI started to shut down stores they might have to take some 
severe property write-downs if they owned the stores and decided to 
walk away from them.   By having stores that are leased they avoid 
some closure costs.   

 I think that Alan Freeth is reviewing the future of the retail stores 
network with the idea of culling out non-performing physical stores 
when the business case doesn't stack up.   If so, the amount of WRI 
property that is leased  might not be a bad thing!    I am just guessing 
here that many of the leases as described in the WRI annual report 
are in fact property leases, so please correct me if you know better.

In summary, I'm not sure that having a lot of leased stuff on the 
balance sheet is a bad thing at all, in this instance.     

>
>I wonder how long its price premium will continue?  What do
>you think??
> 


It is funny to think of WRI as being 'premium priced'.    I certainly don't 
see it that way.  But then again I haven't done the same detailed 
comparisons with other rural companies as you have!  

I will guess that the 'premium' price for WRI shares will continue until 
the earnings catch up with the price.  I sincerely hope that Freeth is 
right and that this will be in FY2006.  In the meantime the forecast 
normalized dividend for this calendar year is 8.5c.     Based on a share 
price of $1.40 that makes a gross yield of 9% at the low point in the 
business cycle.    That 9% gross figure neglects the special dividend 
that is forecast to be declared this year.    But even 9% is a darn good 
return and that return neglects any possible significant contribution 
from the reincarnated finance arm, or any benefits of combining parts 
of the WRI operation with RD1.   

If you think the 'premium price' of WRI will correct  with a significant 
share price fall,  then I would argue that I have outlined the case above 
as to why that scenario won't happen.

SNOOPY

discl: hold WRI, and have not decided whether I will offer my shares to 
Norgate and Co. yet!







--
Message sent by Snoopy 
on Pegasus Mail version 4.02
----------------------------------
"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


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