How profits were won and lost over the half-year

By Peter V O'Brien

Friday 5th March 2004

The December 31 reporting round produced many good profit results, an unusual element being their continuation to the effective end of the period.

There were 25 profit announcements between February 20 and the end of the month, excluding those from companies listed in New Zealand but based overseas.

A few releases showed losses. Most recorded solid profit gains, some being excellent. The use of "excellent" must be related to the previous situation, because what seems excellent on superficial examination ain't necessarily so after deeper consideration.

Payments systems provider Provenco, for example, reported a net profit of $2 million for the six months ended December, compared with a loss of $171,000 in the corresponding period of the previous year.

That looked a remarkable result until compared with other figures. Provenco lost $6.43 million in the year ended June 30, after accounting for unusual items of $7.46 million.

Profit in 2002 was $4.46 million, including unusual gains of $2.22 million, and $880,000 for the six months ended December 2001.

Provenco did well to restructure and get back to sustainable profit but the latest report included a comment from chairman David Wolfenden that the company's previously announced "anticipated full-year operating profit after goodwill amortisation and before tax of between $4.8 million and $5.2 million remains."

Taking $5 million and deducting tax of, say, $600,000 (roughly double the $314,000 provided in the first six months) we get net profit of $4.4 million, less than in 2002.

Provenco's latest and projected results were excellent in the short-term and from a recovery perspective but less impressive after allowance for the strength or weakness of previous bases.

The market gave Provenco credit for the recovery, because the share price went from 24c at the end of 2002 to 62c on Monday, a gain of 158.3%.

Computer and information technology specialist Renaissance Corporation had a similar history to Provenco. The company earned $1.33 million for the year ended December, compared with a $1.27 million in the previous year, the latter including deductions of $1.17 million for unusual items and addition of a $741,000 tax credit.

Renaissance lost $3.48 million in 2001. The recovery was excellent in the past two years but fell short of strong profit "growth" given the base.

Share price growth was strong, being 143.5% from 23c in December, 2002 to 56c on Monday.

Investment groups Hellaby Holdings and industrialist Broadway Industries produced excellent profit growth from sound (and previously growing) bases.

Hellaby earned $9.29 million for the six months ended December, a 49.4% increase on the $6.21 million for the first half of the previous year.

Net profit was $22.24 million in the year ended June but included $6.6 million as a one-off tax gain.

The company said the "underlying after-tax surplus" was therefore $15.7 million or 11.3% ahead of 2001's $14.11 million.

Hellaby says little in preliminary reports, but the latest said full year earnings were expected to "comfortably exceed" last year's $15.7 million.

The half-year report said the $9.29 million result reflected higher earnings from the retail division, "in particular Rodd & Gunn [clothing] and the Australian operations of Hannah's [shoes[ and the contribution from recently acquired TRS Agri-Tire."

Rodd & Gunn seems to have done well, moving to profit, because the 2003 full-year report said the subsidiary recorded "a substantially reduced operating loss."

Hellaby is an oddity in the market, being an industrial investment holding company, a breed discredited in the 1987 crash.

Investors have accepted the group's sound operations. The share price was $3.11 at the end of 2002 and $4.98 on Monday, a 60.1% increase in 14 months.

Broadway Industries had problems in earlier years, a legacy of which appeared in the $5.37 million accumulated deficit in the accounts at December 31. This has been reduced in line with Broadway's return to profitability, albeit modestly in the initial stages.

Broadway earned $1.9 million in the six months ended December, compared with $879,000 in the corresponding period of the previous year $1.36 million for the whole of 2003 and $1.11 million in the year ended June 2002. Its photographic equipment supplier subsidiary H E Perry did well recently, apparently benefiting from increased sales of digital cameras in the wake of lower prices.

Broadway's share price was 38c on December 31, 2002, and 91c on Monday.

A 139.5% capital gain in 14 months would suit most investors. They should be careful about the future, because Broadway will eventually use up tax losses, with a consequent effect on after-tax profit. That day is admittedly a fair way off.

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