Getting balance right between equity and debt

Friday 17th August 2001

Utilities are popular with investors because they have near-monopolies, reliable earnings and dividends and conservatively geared balance sheets.

Northland Port manages to outdo most other utilities for conservatism. Its annual report shows that, of total assets of $51.5 million at March 31, its liabilities amounted to just $4 million. That is an equity ratio of 92%.

Of its $47.5 million in equity, $23 million is cash. That healthy position persuaded the company to make a post-balance date announcement of a 15c per share special dividend to return $6.2 million.

The strong balance sheet is a reflection of asset sales as the company has discontinued or sold loss-making and non-core businesses.

Thanks to costs associated with this, such as $2 million in severance payments, the company made a modest net profit of $955,000 on sales of $27.5 million. This compares with a $4.8 million profit on $57 million last year. The latter are unaudited figures because the company has changed its balance date.

Commendably, the report shows figures for the year to March 2000 to help readers make sense of the latest numbers.

This year, net operating cash flow was negative $598,000 against a $4 million surplus last year.

Despite this, the company paid out $2.9 million in dividends, which is not something companies can afford to do too often.

In this case the company had no problem because it pulled in $31 million from investing activities, mainly asset sales and a repaid advance from an associate company.

In his review of the year, chairman Mike Daniel refers to the restructuring of the company but doesn't touch on the reasons behind it.

However, he notes contributions to the latest profit included well performing port operations, asset sales, tax credits and interest "less the daunting loss from Northport Engineering."

This Achilles' heel of the company was closed last year and its assets sold to a luxury yacht business.

"Your company's engineering activities have provided employment and income for many Northlanders either working for, or contracting to, the company over the years, not to mention the provision of high quality product at very competitive prices.

"This has come at huge cost to shareholders and I am very pleased to report that this is all now hopefully at an end and we can concentrate on our remaining investments," he says.

These include 50% interests in coolstores, tugboat and stevedoring businesses and Northport.

The latter is the largest investment by far and is a joint venture with Port of Tauranga which is building a new port at Marsden Point.

A note to the accounts shows each partner has contributed $15 million in equity and the joint venture has taken on $37.5 million in debt.

Shareholders should note that it also says "Any shortfall in funding is to be met by equal equity contributions."

A five-year summary at the back of the report shows a company that has been shrinking, at shareholders' expense. Revenue has slipped from $62.3 million in 1997 to $27.3 million and net profit from $7.1 million to a little under $1 million.

Despite this, shareholders' funds have grown slightly. As a result, Its equity ratio has risen from 56% to 92% while the return on shareholders' funds has slumped from 16% to 2%.

Northland Port no doubt expects its new port to boost returns but its special dividend shows it has recognised that it has too much capital. Getting the balance right between equity and debt is not an easy matter but Northland Port appears to have learned that even utilities can have too much of a good thing.

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

Comments from our readers

No comments yet