Forum Archive Index - May 2004

["Fiona Phibbs" <fibz@xtra.co.nz>]

Hi Snoopy

You are right it may be a perfectly rational decision to lease rather than
own assets from a bottom line viewpoint.  The point I was trying to make
that it is important to compare apples with apples when judging a companys
relative performance compared to its peers and whether its performance
justifies any price premium that it enjoys in the market - if in fact this
is the case.
Like you I did not buy WRI for its ROE but as a turnaround prospect.  What I
did see at the time was a company with a strong brand, little debt, the
sector at a low point, and buying its shares at low valuations which seemed
to boost the odds of a turnaround in my opinion.  The stock has since turned
into a yield stock for me as well and now I face the quandary of where can I
get a comparable yield if I do decide to sell - I guess you are in the same
boat?  Also in regards to WRI I am a little concerned about their strategy.
By investing in R&D and their Solutions strategy they appear to be heading
along a differentiation path in what is essentially a commodity business.
Whether this will work and have long term benefits to the company is
anyone's guess but it is certainly impacting on their near term performance.
If Norgate and Co do manage to get control it will be interesting to see
which direction they will take with the company.

Cheers Dean



----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Wednesday, 19 May 2004 23:05
Subject: Re: [sharechat] WRI battle warming up


> 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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