Report Card

Friday 30th March 2001

Last week, Sir Ronald Brierley announced he was stepping down as chairman of Brierley Investments, partly to mark the company's 40th birthday.

To similarly highlight the occasion, shareholders may wish to have another look at the company's last annual report to see where BIL is and where it is going.

Sir Ronald is one of the few remaining links between the BIL of today and its past.

As the report shows, it has a new home (Bermuda instead of Wellington), different head office and primary stock exchange (Singapore) and a fresh management team.

However, its goals remain the same. One of the prominent aspects of the report is a vision, philosophy and mission statement identifying BIL as an active investment company.

Such willingness to state its objectives and strategy in a clear, concise manner is admirable, especially for a company that in the past has been accused of using the mushroom treatment on its shareholders ("keep them in the dark...").

Unfortunately, the report only goes half the distance. Take this part of the mission statement: "BIL will achieve investment returns substantially in excess of its cost of capital via investment in a limited portfolio of core investments in which it will take an active role." This makes perfect sense, except nowhere in the report does BIL reveal what its cost of capital is. This is essential information to enable shareholders to identify whether the company is producing superior returns. Nor does it define what constitutes a return.

BIL's performance is more difficult than most companies to get a handle on. The numbers usually compared from year-to-year, profits and cash flow, have little relevance when a company makes its living by trading assets.

Because of the uncertain timing and nature of deals, which don't always correspond with balance dates, its profits can be very volatile. As a result, the underlying asset value of the company becomes a more useful indicator of shareholder value. In this regard, BIL once again has performed poorly.

Unusually, the report leaves the explanation up to the chief financial officer, who gets his own segment in the report. This explains how BIL made a $US162 million net loss for the year to June 30 compared with a profit of $US33 million the previous year.

The loss is mainly blamed on a $72 million "impairment of investments" and a $US64 million goodwill writedown on Air New Zealand. Total writedowns on investments during the year were $US364 million, but these were offset by $US322 million described as an "existing general investment provision." Either way, shareholders have seen wealth destroyed rather than a return. Any cost of capital merely adds insult to injury.

Shareholders' funds have shrunk from $US1.2 billion in 1999 to $911 million, a decline of 24%. This is after restating figures to reflect international accounting standards rather than New Zealand standards, which sliced $US166 million from shareholders' funds in 1999.

The company makes no bones about its desire to improve on this result, which is being pitched as a "legacy of the past." Chief executive Greg Terry, who started just a few months before the end of the 2000 financial year, stresses that past issues have been resolved. While the report is relentlessly confident that problems have been overcome and barriers to success have been removed, it offers little reassurance to readers about exactly how it is going to achieve greatness.

Terms such as "disciplined investment," "superior research and analytical capability" and "maximising value for all shareholders" may well reflect sophisticated and well thought out strategies. On the other hand, they may simply be trite phrases of the sort that pepper many annual reports. The lack of detail about the ingredients of BIL's promised turnaround makes it impossible to tell.

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

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