Companies returning to solid profits feature in latest round

By Peter V O'Brien

Friday 23rd August 2002

Companies reporting a return to solid profitability or a reduction of earlier losses were the interesting aspect of the current reporting round.

Assuming such recoveries will continue, investors could profitably look at some of the companies' share prices. They may be coming in a bit late for the best price (in terms of earlier lows) but there can always be mileage in acquiring shares ahead of sustained profit recovery.

Tourist facility operator New Zealand Experience turned in a spectacular profit gain, reporting a figure of $1.93 million, compared with $184,000 in the previous year.

The company had no tax liability in either year but the improvement would still be solid after accounting for a full tax deduction.

Comments accompanying the preliminary report for the year ended June included the understatedly bland "This [the profit] was a substantial improvement on the $184,000 reported last year and $25,000 reported for the June 2000 year."

An improvement was signalled in February with the group's interim report for the six months ended December.

Profit was $356,000, described as a "significant increase" on the $54,000 in the corresponding period of the previous year.

The apparent disparity between first- and second-half profit arose from the seasonality of New Zealand Experience's section of the tourism market. It also owed something to the October opening of an 18-storey "fearfall" tower at the company's Rainbow's End theme park in Auckland.

The company said the tower was a drawcard for visitors to the park and complemented (it said "complimenting") other major attractions and increased the park's profile as "a prominent feature alongside the Auckland motorway."

New Zealand Experience is not a major company. Shareholders' funds were $7.42 million at June 30 and total assets were $10 million. Those figures would hardly get a mention at the likes of Telecom, Carter Holt Harvey and other market heavyweights.

They were relevant to any discussion of recoveries, because they showed determination to improve a company's fortunes and the ability to reach that goal were not confined to groups that dominate business news.

The company's controllers were remarkably sanguine about their achievement, which represented a 15.6% return on average shareholders' funds.

New Zealand Experience's share price closed last week at 16c. That could seem ho-hum but it was 12-months high and compared with 12c in March and 10c in September, 2001.

A 33% capital gain in just under six months and 665 in about 12 months would please most equity investors.

Healthcare provider Eldercare produced an "improve-
ment" of another type.

The company's deficit for the year ended June was $2.82 million, including $2.2 million of unusual items, the latter figure before and after tax.

That was a massive "gain" over the previous year when the loss was $8.18 million, of which unusual items provided $7.66 million.

The preliminary report for the year ended May 31 said the company "confirmed achievement of its two-year repositioning programme."

Eldercare showed "increased group revenue, improved earnings before interest and tax and net profit after tax."

Group debt was down to $32 million, compared with $4.1 million in 2001.

The report said the improved financial position was achieved through a combination of asset sales, a fully subscribed right issue and a capital note and share-placement programme "which in the last financial year generated gross proceeds in excess of $17 million."

A clue to the sort of muddles companies can get into and from which Eldercare extricated itself was seen in the statement: "Following this capital restructure, WestpacTrust has been appointed as sole debt funder, replacing four separate banking and financing relationships and forming a banking partnership that will meet all current and foreseeable treasury needs."

Eldercare's share price benefited during the recovery period. It was 18c last Friday, having been at 20c earlier in the week.

The 18c compared with 29c in March and 12.8c last September before a 1:7:5 cash issue at 16.5c a share.

A bit of luck in timing could see an investor with a healthy capital gain now.

There are several ways to describe a recovery or to downgrade a substantial "loss" particularly if the latter arose from a paper writedown.

Media giant News Corporation managed a downgrade when it reported a 2002 deficit of $A11.96 billion, arising from writedowns of investments in subsidiaries and associates.

Equity markets noted the write downs had little effect on News' operational revenues and lifted the share price during last week.

Ansell (formerly Pacific Dunlop) produced figures to explain how "after allowing for interest, borrowing costs, amortisation, taxation and substantial one-off non-recurring items of $A184.6 million" the result attributable to Ansell shareholders was a loss of $A115.8 million, compared with profit before interest, tax and amortisation and non-recurring items of $A195.5 million."

There are many ways to present valid figures.

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