Report Card

Friday 16th February 2001

Welcome to Report Card, a new column designed to help investors find their way around annual reports.

Chances are, most investors who receive a fat, glossy annual report give it a quick flick and file it. This is understandable considering the amount and complexity of information in a typical report.

However, it is worth making the effort. Annual reports offer the easiest way to get to know a company, and people who buy shares in a venture without learning all they can about it are taking huge risks.

US financial planning expert Errol Moody says there is only one way to evaluate an investment properly. "It's called research, research, research. If you can't do that, you are one bad investor."

To aid this research process, Report Card will take investors through an annual report each week. I will look for the useful titbits of information, or crunch some numbers, to try to give some guidance on the company's worth as an investment. I will be relying entirely on the report to form my views, which will be a test of a company's ability and willingness to present information.

This week's report is from brewer DB Group.

One of the things that leaps out about this report is that investors are not easily able to compare like with like.

The statement of financial performance shows a plunge in revenue of 17.5% from $642.9 million to $530.3 million for the year to September 30. We all know liquor consumption in New Zealand is on the way down but not at that sort of rate.

A reason for the decline is shown in the notes to the accounts where it is revealed DB sold its liquor distribution business, NZ Liquor, on March 31. That was halfway through its financial year, meaning there is roughly $168 million in revenue missing from the 2000 year.

Although the NZ Liquor sale is mentioned in the directors' report, it would have been nice to see some "normalised" numbers to make it easier to make meaningful comparisons with the previous year. The same situation will occur in the 2001 report because of the sale of Corbans on October 1.

More explanation about the sale of these assets would also be welcome in another area. In its statement of corporate governance practices, the company refers to two waivers obtained from the Stock Exchange's market surveillance panel over the sale of subsidiaries. Although detailed explanations would have been made at the time, it would be useful to remind shareholders what the waivers meant and why they were sought.

Despite the fall in revenue, DB improved its profitability partly thanks to an even greater decline in operating costs to $483 million. This is down 20% while revenue fell 17%. After interest, non-recurring items and a painful return to taxpaying status, the company's net profit was an impressive 96% above last year at just under $23 million.

However, this figure is influenced by a big change in non-recurring items, mostly caused by costs and write-downs related to closing down or disposing of assets. From 1999's write-offs of $26.4 million, non-recurring items shrank to $6.3 million last year. Another distorting factor is a $20 million increase in the amount of tax paid last year compared with 1999.

Add these back and the company's gross profit would be $47.3 million against 1999's $39.1 million. This is a more modest but still creditable gain of 21%. To its credit, DB shows both operating and net profit figures in its review of operations.

In cash flow terms, the gain is also not as flashy as the bottom line figure would indicate, although again it is good. Operating income less expenses rose 34% to $72 million. From segmented figures shown in the report, we can see liquor was delivering a gross margin of 5.5% compared with 12% from brewing and 9% from wine.

These hint at why DB wants to focus on its core brewing business. By selling off its less profitable or more capital intensive assets, it is steadily improving its profitability and return on shareholders' funds.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Email davidm@mcewen.co.nz

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