Guinness Peat Group

by Jenny Ruth

Thursday 26th March 2009

Guinness Peat Group reported a 50 million British pound ($NZ128 million) net loss for calendar 2008, compared with a 129 million pound net profit the previous year, in what chairman Sir Ron Brierley called "a very unsatisfactory year." However, he said those figures "are largely meaningless" because of "exotic" accounting rules and his January update was a more useful assessment of GPG�s year-end position. The update valued GPG�s net assets at 729 million pounds, or $NZ1.33 a share, compared with the 878 million pounds shown in the accounts, down from 951 million pounds a year earlier. GPG shares traded as low as 52 cents on March 3. GPG�s biggest asset, Coats made a $US8.3 million ($NZ14.8 million) net loss for the year, compared with 2007�s $US61.8 million net profit, reflecting tax mis-matches, particularly in its European craft business. Profit before tax of $US38.3 million compared with $95.6 million in 2007.

Sharechat: Many people continue to say Coats is GPG�s Thistle. Is that a fair comparison?

Guinness Peat Group�s New Zealand-based director Tony Gibbs: I don�t think it�s a fair comparison at all. How do I answer that? There is no answer.

SC: Why does GPG have so much money tied up in CSR? There seems to be a theme in the portfolio of favouring building supplies companies?

TG: It seems that way, but not always. We also like insurance companies. CSR was a company we bought and then basically the market declined dramatically and, of course, it�s got all the issues building companies and glass companies and sugar companies have. CSR is one of Australia�s bigger corporations.

SC: Presumably it�s an investment you expect to recover in due course?

TG: I would hope so. I have no idea what tomorrow�s going to bring.

SC: And why some much tied up in Young & Co?

TG: Young & Co is a very good portfolio of pubs around London. We�ve been there a long time. It�s very much handled by our team in London. They believe it�s a very solid investment and I do too.

SC: One analyst estimates GPG realised a profit of about $A13 million on its Myob stake. Is that about right?

TG: $A13 million sounds about right.

SC: Since GPG continues to provide Capral with financial support, you must believe the business can be turned around. What needs to be done?

TG: Capral�s not been one of our great successes. We�re pleased to report a new chief executive has come on board, a very high-powered chief executive. We have great hopes of him turning it around. Capral is very dependent on the building market. It has 40% market share but nevertheless the market�s been very, very soft. The company�s not been a great investment. If however, a housing boom comes, Capral will be well-placed. It�s very strategic in the industry.

SC: Were you surprised at how many capital note holders elected to roll over? The terms didn�t seem designed to encourage roll-overs.

TG: No, I�m not surprised at all. We had no problem with paying people back the money but we gave them the opportunity to roll over if they wanted to. A lot of them decided to do nothing and roll over. It was their choice.

SC: Which of GPG�s assets "are the product of poor investment judgment in earlier years"?

TG: That was Ron. Ron�s not particularly picking any one particular thing there. In the totality of the investments we�ve got, there have been some where our judgment hasn�t been as good as we would have hoped. But I�m not going to go through everything in the portfolio and tell everybody which ones they are. All this is set against a background of a world crisis. Nobody�s ahead at the moment.

Ron said the market�s in terrible shape, we all know that, we need to put out a very conservative valuation. We weren�t asked for it, it was something we volunteered. Whether it was the right thing to do or the wrong thing to do, we get continually thrown at us we never tell the market things. What else do they want us to do? There�s me in New Zealand and Anna (his assistant), there�s about five blokes in Australia and there�s a head office with accountants and a company secretary and people like that in London. We�re not exactly over-staffed.

SC: GPG�s investments have been described by one fund manager as "a random set of assets." Is that a fair criticism?

TG: Does he think we throw darts at a wall? They are a chosen set of assets. There have been themes in the past. They come and go. The theme should be under-valued assets. That�s the main theme and it has been and we�ve had a bad year out of 19 or 20 years. We don�t have random assets, they�re chosen assets.

SC: Why do you think GPG�s shares have bounced back a bit this month?

TG: They went down very quickly. They were sold down quite heavily at one stage. I do think GPG is on everybody�s buy list because we�re such an under-valued stock.

SC: Are you getting any feedback that sentiment is possibly improving?

TG: I would like to think sentiment is improving. The reality of GPG in New Zealand is we�re a big part of many thousands of investors� portfolios and brokers� portfolios, a very big part. People are selling shares because they need the cash. You have fund managers who are getting redemptions and, whether they like it or not, they have to sell GPG because the people in their funds want their money back. The fund managers are very unhappy but the reality is, they�re selling the stock because they have to meet redemptions from their punters. It�s a real downward spiral. Are we concerned about the share price? Yes, but to the point of absolute distraction? No. We�re concerned about making sure the businesses we run are in good hands and in good shape. If the world went shopping again and started buying more clothes and started building more houses and started going back to half-pie normal, GPG�s investments would be looking a lot healthier than they are now and the GPG share price would be looking a lot healthier.

SC: Given the deep discount to NAV shown in the share price, wouldn�t a share buyback make sense? Is there a better investment out there?

TG: We get this all the time. We get everybody telling us how to run GPG. We should do this, we should do that. We�re not asleep. We go down all these roads. We�ve looked at everything you could possibly ask me. We�ve been there. Have we looked at buybacks, have we looked at floating this off or floating that? Of course, we look at all of them. When we�re all in agreement and happy, we will do something. I have to stress this: we�re constantly looking at where we can find value for our stock holders. I was at Wellington airport the other day and some young fund manager who I vaguely know came and told me how to run GPG. I said, why don�t you go and buy more stock. That will help us more than your suggestions. They�re all experts in running our business.

SC: GPG still has a lot of cash. Is it the intention to just sit on it when interest rates are now so low?

TG: We feel comfortable with having a lot of cash on our balance sheet right now. We feel very comfortable with it. There is debt in the group remember and we have some tranches of capital notes out there although they don�t mature for a few years.

SC: Isn�t most of the debt non-recourse to GPG?

TG: (Agrees) but nevertheless from GPG�s comfort point of view, we�re happy to have cash now. At some point we will make decisions as to what to do with it. The board�s charged with working in the best interest of GPG and that�s what we intend to do as we see it.

SC: Do the comments about returning value to shareholders in 2010 mean this is likely to be delayed?

TG: These things get a head of steam like there�s no tomorrow. We�re always looking at ways to get a good return for shareholders. When Ron wrote this originally, he signaled he would retire as chairman but he didn�t say whether it would be in January or November. He is getting on in age. We will be giving value to shareholders as soon as we possibly can. There is a plan to try and return good value to shareholders but we can only do what we can in the current market conditions so 2010 may not be the correct date.

SC: What do you think it�s going to take to turn the global economy around?

TG: We have to get the banks, and I mean the international banks, American and German and English banks, who are in terrible messes and the US Treasury is doing everything it can to sort it out � whether or not it�s doing the right things, I�m not qualified to say � until that�s sorted out, nothing else is going to get sorted out. Once that is sorted out, companies and corporations need to trade between themselves. It will change how people feel about themselves. The world needs to go shopping and then sales will recover and house prices will go up, not down. I don�t think this is going to be finished in six months. I would hope it will be over in six years. I have simply no idea when it�s going to be over. All I know is there�s been a paradigm shift in what happens in the world. Maybe this is a new world order in banking. I don�t know. I�m not qualified to say. But we have to get the banking systems fixed one way or another.

SC: Just how badly is Coats being affected? It has factories in China and by all accounts everything in China just stopped late last year.

TG: We�ve got about four or five operations in China but we�re in 70 something countries, Indonesia, we�ve got operations in Thailand, we�ve got operations everywhere, in Brazil, we have huge operations in Brazil and South America. We�re the biggest manufacturer of thread in the world. One in four, or less than that, it�s almost one in four garments has got our thread in it. If sales of socks and shirts and dresses go down, Coats sales have to go down too. Coats� input costs, nylons, resins, fuel and power, are going down so Coats is picking up a decrease in input costs but, of course, it�s sales are declining. As everybody knows in business, it�s not easy at the moment, no matter who you are.

(Gibbs refused to answer a number of questions about Coats, including whether it was cashflow positive in the fourth quarter � it was for the full year, whether, given the commentary about fourth quarter conditions persisting, that means 2009 sales will be down 20% and what Coats� banking covenants are. Gibbs said it would be inappropriate for him to answer and would "border on insider trading." Coats� net debt at December 31 was $US358.8 million while its banking facilities totaled $US625 million.)

Written by Jenny Ruth, 25th March 2009

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