The Shoeshine Column: The more it changes the more it's BIL

Friday 18th May 2001

The share price fortunes of Brierley Investments are a curious affair. Back around Christmas, the end of BIL's financial first half, the shares, taking into account the recent two-for-one consolidation, were trading at around 64c.

At that time the net tangible asset backing a share (NTA) was, according to BIL, 100c, so the discount to NTA was a hefty 36%.

By the time BIL announced its first-half results on March 15 the shares had risen to 70c so the discount had shrunk to 30%. By Shoeshine's calculations the NTA is now around 79c, so at a share price of 56c the discount has shrunk again - to 29%.

This looks like good news for BIL chief executive Greg Terry. The shrinkage presumably reflects a market view the quality of the asset base is rising and the risk of nasty surprises is falling.

BIL still likes to kid itself, to quote the last annual report, it's an "active investment manager" adept at "extracting and maximising shareholder value."

In reality it has for many years been priced like a unit trust. The difference is that pricing unit trusts is a science - so many shares in such and such companies multiplied by their current share price.

Pricing BIL is more like a black art. The easy bit is the listed investments, which have had a patchy year.

Assuming a constant exchange rate (which it has been by and large), since the half year the value of the Thistle Hotels stake has risen 8.5% to $951 million, UK-based Findel is up 12% to $81.4 million and Singapore's Fraser & Neave has added 6% to $335 million.

The big movers have been Australia's James Hardie Industries and our very own Air New Zealand.

JHI has been the star performer. BIL's holding has risen in value by $139 million to $708 million with a recent spurt fuelled by signs of recovery in Australia's bombed-out building sector and speculation the ailing US gypsum business may soon find a buyer.

Countering that has been the slump in Air NZ's A shares, which has sliced the value of BIL's holding by $133 million to $248 million.

Moving down the balance sheet the next item is "other listed investments." At balance date these were worth $US47 million ($112 million) but BIL has since sold stakes in Tasman Agriculture (for $46 million), Cedenco Foods ($11.5 million) and Californian savings bank PBOC ($45 million). That leaves $9.5 million - possibly a residual stake in Gold & Resource Developments left over from the days when it was Macraes Mining.

Next up is unlisted investments and it's here BIL has always had the most latitude to bamboozle investors and tinker with asset values.

The half-syear report values these at $US372 million ($886 million), a figure that raises analysts' eyebrows.

Last year the value of Molokai Ranch in Hawaii was written down $US89 million ($212 million) to $US170 million. Analysts reckon a residual holding of long-dated units in Bass Strait Oil Trust could be worth around $247 million but that's not disclosed.

Nor is the precise whereabouts of the remaining $234 million.

An unspecified dollop of capital was shunted into BIL Camerlin, a joint venture with BIL's controlling shareholder, Quek Leng Chan.

BIL still has a quarryside site at 1 Lunn Ave in Auckland's Mt Wellington among "New Zealand properties" valued in the annual report at $26 million.

Some $48 million was last year pumped into an "e-commerce and new economy" strategic alliance with Madrona Group and a new division, tech@BIL, was set up at undisclosed cost.

Just as tricky are BIL's cash and debt positions. At December 31 it had $390 million of cash.

The proceeds of the Tasman Agriculture, Cedenco and PBOC sales take that to $493 million but dividend receipts have to be added and interest and principal payments deducted.

Term debt and capital notes were $2.61 billion, from which principal repayments, if any, have to be deducted.

All up the balance sheet looks in reasonable shape. So why has the share price been falling?

The answer is probably that investors are worried about the cash-flow squeeze Air NZ's ever-mounting problems will inflict on BIL.

Its funding costs for the December half year were $US45 million. Corporate costs added $US10 million for a total of $US55 million, or $122 million.

But "income from associates and subsidiaries" (dividends) dived from $114 million to $38 million as Air NZ slashed its payout. As the airline is expected to book a $100 million-plus loss for the full year it's unlikely BIL will be getting any more cash from that source, maybe for some years.

It will have to dig into the kitty, which will in turn have to be replenished by further asset sales.

This year James Hardie looks a possible bacon-saver. Macquarie Equities reckons the gypsum business could fetch $US364 million to $US420 million ($1 billion). With a little judicious board-level arm-twisting BIL might persuade JHI to return that to shareholders, netting it up to $290 million to book as "returns from investment activities."

Things will have to happen fast, though, to make BIL's June 30 balance date.

Windfalls aside, selling stuff to fund dividends and pay the bills is nothing new at BIL - it's been cash-flow negative for many years. But if JHI doesn't come through Air New Zealand's woes will probably mean BIL books another loss this year.

And that's not the great new expansionary BIL Greg Terry and chairman Sir Selwyn Cushing heralded in the last annual report.

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