Report Card: NZ Refining signals less robust future despite good result

Friday 22nd June 2001

An abnormally good result can often pose as many difficulties for a company as a particularly bad one.

Discouraging investors from bidding up the shares amid a burst of enthusiasm becomes a significant investor-relations issue.

The New Zealand Refining Company makes such a dampening a prominent element in its annual report.

Shareholders would have been jumping for joy to learn the company made a pre-tax profit in the year to December 31 of $103.9 million compared with a mere $9.2 million in 1999.

However, in his report chairman Ian Farrant quickly makes it clear more of the same cannot be expected.

"Despite the strong result this year, perceived expectations are for less robust margins in the future," he warns.

Chief executive Alan Davey adds his own water to the fire: "Looking towards the future we envisage a return to less attractive margins than we experienced this year but still at a level that should sustain the business."

Another set of figures that would have proven of equal cheer to investors was the level of shareholders' funds. These more than doubled from $135.6 million to $302.3 million, taking the net asset backing per share from $5.65 to $12.60.

Once again, this is nothing to get overly excited about.

The gain has come from an accounting change in anticipation of a new financial reporting standard on the treatment of "expansion assets."

Mr Farrant says a consultant's report on the matter concluded that the future value decline in these assets would amount to $339.6 million from a present value of $497 million. The net value of assets has traditionally been dealt with by having a "loan settlement payment account."

Last year, the company closed this account and transferred the net value of these assets, $157.3 million, to shareholders' funds. Sorry shareholders but this is merely an accounting item.

Another issue facing the company also indicates profits are likely to come under more pressure.

This is the need to produce more environmentally friendly fuels, something the government appears to have made plain NZ Refining should treat as a priority.

Although laudable, the need to change and upgrade the refinery to produce such fuels won't come cheap.

"The project work to carry out the required changes will not adversely upset refining operations but will involve considerable expenditure which we anticipate discussing with government and our customers," Mr Davy says.

Generally, the NZ Refining report is a spare, no-frills document. It presents an image of a company that is technically oriented with few of the dynamics of other listed companies.

That's because it has a single asset with huge market share and minimal growth opportunities. Even the board meets only six times a year, its corporate governance statement reveals, instead of the 11 or 12 that most other companies have.

Its five-year performance table at the back of the document shows a company that is not growing. Revenue of $297 million last year is not a world away from 1996's $280 million. However, profitability has been enhanced because its costs have shrunk from 75% of revenue five years ago to 65%. That difference means its net profit has ended up 50% higher.

Curiously, the company made a habit in 1997/1999 of paying out more in dividends than it booked in net profit. This extravagance is hard to fathom.

For the 2000 year, the company has retained $9.4 million, saying that with high levels of capital expenditure to come, "some funds should be retained with regard for the future." Even so, more than 87% of the bottom line was paid out in dividends, meaning funds retained in the past five years amount to a mere $4.2 million.

This may not stand the company in good stead when it "discusses" its substantial capital spending requirements with the government.

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

Comments from our readers

No comments yet