Nuplex confident drop is short-lived

Friday 26th October 2001

To pay or not to pay dividends can be a difficult decision for companies to make.

In theory, dividends should rise and fall with a company's fortunes as they represent a share of profits. However, shareholders love their regular cheques and often invest in a company because it pays large and reliable dividends. Some companies therefore feel obliged to maintain dividends when profits are down, simply to retain investor support.

Of course, a temporary interruption to an otherwise sound earnings record doesn't warrant a knee-jerk slashing of dividends and many boards are tempted to maintain payments during an off-year to demonstrate confidence in the future. The danger comes when that optimism is misplaced.

Resins group Nuplex Industries' latest annual report shows the company is demonstrating confidence for the second time in five years. Although it recorded a net profit of just $2.2 million for the year to June, down 93% on last year, it has decided to leave its dividend unchanged. In dollar terms the payout is higher than last year at $8.6 million because it issued more than two million new shares in 2001.

Although the company was hurt by higher raw material costs and lower demand, chairman Fred Holland is optimistic in his report. "We view this past year as a low point in the business cycle and believe that the fundamentals for the future are generally positive.

"Directors are pleased to be able to keep faith with our loyal shareholders, despite the drop in net surplus ..."

The last time the company kept the faith was in 1998, when it turned in a net profit of $1.1 million, down 87% on the previous year. This proved a sound decision as 1999 showed a strong turnaround to a net profit of $11.6 million followed by $16.7 million in 2000.

The 2001 year shows many signs of being a similar short-lived dip.

The net profit comes after a $11.9 million writeoff in goodwill. This followed the loss of a major contract by a recently acquired Australian company that has hurt its value.

Since this is an abnormal, non-cash item, the underlying earnings strength of Nuplex has not been hurt as much as the bottom line would suggest.

Revenue was up 6% to $408 million and gross earnings (before interest, tax, abnormals and goodwill amortisation) fell 15% to $35.6 million. Its gross profit margin has slipped from 11% to just under 9%. Its cash flow statements show net cash flow from operations is down 11% to $23 million from $26 million last year.

Another calculation, dividend payments over net surplus plus non-cash items, gives a payout ratio of 47%. This is more conservative than three years earlier, when the payout was 56%. Net return on equity is lower at 1% rather than 1.2% but gross return is higher at 28.4% against 17.35%.

The balance sheet looks solid with net interest-bearing debt of $137.2 million offset by $270 million in tangible assets and $314.7 million in total assets. This results in ratios of 51% and 44% respectively.

Nuplex has joined the growing list of companies that call Australia home, even if the head office is still officially based in New Zealand. Newly appointed managing director, John Hirst, formerly head of the company's Australian operations, "will continue to reside in Sydney, as it is logistically a more convenient base from which to manage our operations spread throughout New Zealand, Australia and Asia."

This makes sense considering New Zealand makes up only 39% of the group's gross earnings these days.

The report says Mr Hirst's vision for the company is "one of continued growth through diversity of markets, technologies and products" but this is a catch-all statement that is short on specifics.

This report does a good job of communicating its business and its culture, which is unashamedly conservative - an approach bound to be more in demand from investors these days. However, it falls short in giving details about where and how it is going to deliver on the optimism that this year has led to a dividend payout six times larger than net earnings.

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

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