Bottom feeders gather as THL's big holders bail

Friday 24th May 2002

As a former public hospital manager Denis Pickup has some experience in the care of the seriously ill. This will be serving him well in his new job running Tourism Holdings.

When he took over as managing director in August 1999 THL's shares were trading at around $2.60. They peaked late that year at $3.60, valuing the company at $330 million.

The slide since has been pretty much uninterrupted. Trading in recent days has valued the company at a mere $74 million.

Various theories have emerged about the most recent fall. Conspiracy lovers think someone out there is softening the price up for a takeover. The drier end of the market suspects the last of THL's institutional supporters have lost faith and are selling out.

ING, Axa Asia Pacific and Guardian Trust have all notified sales to below the reportable 5% threshold and may by now be THL-free.

AMP last reported its holding at 8.4%, down from 9.4%.

Analysts say there's nothing new to report despite the Stock Exchange market surveillance panel querying the company over a slide from around 98c two weeks ago to 86c last Friday.

The fall may simply reflect investors' reaction to the accelerated rise of the New Zealand dollar in recent weeks.

THL traditionally relies on German tourists to hire its campervans, on the Japanese to fill its tour buses, and on Americans to ski, take scenic flights and charge around the waterways in jetboats.

But since the beginning of the year, the local currency has risen by about 12% against the greenback, 8% against the yen and 5% against the euro.

As those rises make it more expensive for foreigners from key markets to visit New Zealand they might be expected to knock the share price around.

In fact, over the years the negative correlation between the company's share price and the exchange rate with the US dollar (standing as proxy for the TWI) has been patchy at best.

Predictably, a much stronger correlation exists between THL's share price and the level of its profits.

According to Datex Services the company's June-year normalised profits, after one-off items, were $1.2 million in 1998, $11.2 million in 1999, $19.7 million in 2000 and $18.2 million last year. This year it has said it expects only to break even.

The volatility reflects the fact THL has had very high fixed costs which allow the company to book respectable profits when all the stars governing its hotch-potch of businesses are aligned but consume its margins entirely when they are not.

Much of Pickup's work has gone into reducing those costs and simplifying the business.

The most significant moves have been in the rental business, which last year accounted for $110 million of THL's $200 million of revenue.

The trouble is, or was, that in years when the tourists didn't show up, all those Maui and Transit campervans, not to mention the coaches, lay around unused but still depreciating.

The company has turned itself into a vehicle dealership, managing its fleet by buying in upturns and selling in downturns.

It has also been upgrading the average fleet age, aiming for two-and-a-half to three years in Australia and three-and-a-half years in New Zealand, where vans don't do the same mileage.

The Ford Transit fleet inherited from Britz is being dumped in favour of Mercedes vehicles.

As a result new fleet capital expenditure is high, around $85 million a year, but it also sells $30 million to $40 million.

Even so the environment is tough on this side of the Tasman and positively bruising in Australia. Over there THL has a host of competitors, including Kea and Hertz.

High internet access in tourism contributor countries has made it far easier for holidaymakers to shop around. And with Avis discounting heavily to replace revenues lost from its alignment with the defunct Ansett, nobody's making money in Australian rentals this year.

A second major problem for THL has been the proliferation of activities having different drivers and needing different management skills.

Pickup's strategy is to shrink the company down to a core of businesses. It is hanging on to Kelly Tarlton's, Waitomo Caves, the Milford Red Boats and the Great Sights coach business. Treble Cone, the Mount Cook scenic flights unit and a raft of smaller units are up for sale.

Pickup and his management team haven't done themselves any favours with their investor communications. Their internal forecasting has been woeful. Last year they cut their profit forecast three times and this year there won't be any profit at all, if they are right.

That's partly down to sheer bad luck. Ansett's demise and the September 11 terrorist attacks meant the company's three-month peak season was a washout.

About the only good news is that Air New Zealand's international capacity expansion should translate into cheaper inbound fares.

Analysts estimate THL's net tangible asset value, on the basis it's able to make "undistressed" sales of unwanted assets, is around $1.49 so the brave might be considering the shares as a countercyclical buy.

The less courageous will no doubt wait to see if Pickup's redesign allows the company to make sustainable profits at a level that will return its cost of capital.

The "time bomb" ticking under Telecom's share price appears to have been of poor manufacture.

Newspapers reported gleefully last week that unidentified US-based hedge funds had sold 65 million Telecom shares short in anticipation the company's share price would follow a worldwide declining trend for telco share prices.

The speculators, the story went, had been caught with their financial underwear round their ankles when the telco's price held up. They would now have to cover their positions.

The time bomb would presumably have blown Telecom's price skyward as the speccies scrambled to buy up 62 million Telecom shares over an abbreviated space of time.

Shoeshine hopes nobody has bought Telecom shares in the expectation of this happening.

The time-bomb story was stood up on supposed New York Stock Exchange reporting of "short interest" positions.

The May report, released on Wednesday last week, shows short positions in Telecom's American Depositary Receipts "as of May 15, reflecting transactions through May 10" totalled 141,866 ADRs. As one ADR represents eight Telecom shares the total of short positions on May 15 was 1.13 million shares, or 0.06% of the company's shares on issue.

As 4.5 million Telecom shares changed hands on Tuesday the hedgies shouldn't have too much trouble pulling their pants back up.

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