The O'Brien Column: Fletcher Challenge keeps fingers firmly crossed on Forests issue

Friday 10th November 2000

Air New Zealand chairman Sir Selwyn Cushing said the first quarter was budgeted to provide only 10% of the year's profit.

Fletcher Challenge will be hoping the results of Air New Zealand's rights issue aren't a sign of things to come.

Air New Zealand's 14.4 million share shortfall was at least less serious than that of Otter Gold Mines whose issue closed 10 days ago.

Otter is a goldminer and therefore in a different category from the airline and the forestry organisation. The miner went to the market with a 2:5 share issue at 39c a share. It said last week that the offer of 31.62 million shares closed on October 27 with subscriptions for 5,575,749.

That left a whopping shortfall of 26,045,851 shares which the underwriter, GPG subsidiary Sabatica Pty, has to take up at a cost of $10.18 million.

Otter's issue was designed to strengthen the company's capital base and to maintain a substantial exploration programme on new and existing ground in the region of the Tanami gold mine in Australia's Northern Territory.

Guinness Peat Group will increase its stake in Otter Gold as a result of the shortfall. So the miner will get the full amount of the issue, a rather ironic situation, given last year's arguments between the two over Otter Gold's gold hedging programme, although there was an amicable outcome.

Otter Gold's share price closed last week at 40c, just one cent above the issue price, and so far there has been little in the issue for the shareholders who took up the offer, although time might show they were on to a good thing.

Air New Zealand's issue was 1:3 at $1.50, a price set in late September when the A shares sold at $1.80 and the B shares (which overseas shareholders can hold) at $2.60.

The issue was to help the company pay for its acquisition of the 50% of Ansett Australia it did not already own. The head shares closed last week at $1.47 (A) and $1.85 (B).

Principal shareholders Brierley Investments with 30% and Singapore Airlines with 25% had said they would take up their entitlement and the issue was underwritten, so any shortfall will be covered.

There was a bit of a flurry last week when the airline's annual meeting heard the first quarter profit was well behind budget but chairman Sir Selwyn Cushing said the quarter was budgeted to provide only 10% of the year's profit.

Sir Selwyn said the year's results depended significantly on trading for the rest of the year, which fuel prices, exchange rates and competition would affect.

The first half would be disappointing but the second six months should benefit from a number of initiatives the company had under way.

Sir Selwyn said the company estimated the group's trading profit would be substantially lower than last year.

That got a "please explain" response from the Stock Exchange because the apparent level of the downturn seemed at variance with the share issue prospectus.

The company replied that the prospectus said it was difficult to make a highly accurate profit forecast for the current year.

Sir Selwyn also made a similar point at the annual meeting when he said it was not possible in the industry to quantify the earnings in dollar terms.

It seemed to be a heavy week for Sir Selwyn in Christchurch.

He chaired a briefing for Brierley Investments shareholders on the Monday and then had to front up with the Air New Zealand news on Wednesday.

The Fletcher Challenge meeting last week approved a $427 million issue of Fletcher Challenge Forests preference shares in a 2:1 ratio at 25c each.

Preference shares will convert (on a 1:1 basis) Fletcher Forests ordinary shares on the fifth anniversary of their issue.

Taking $427 million out of the market, assuming the issue is fully subscribed, is big money when the investment scene is dull and unlikely to improve much before the end of the year.

The issue is part of the restructuring under way throughout the Fletcher Challenge stable and is designed to strengthen the Fletcher Forests balance sheet.

It will be interesting to see how many individual shareholders take up their rights, given the recent performance of the head shares, which have fallen in price steadily all year and closed last week at 35c, just four cents higher than the year's low of 31c, also reached last week.

The paradox is the rights issue is needed to shore up the company's finances and enable it to operate on a financially stronger basis, a move that should - other things being equal - eventually give some impetus to profitability and the head share price.

Fletcher Paper has been sold, Fletcher Energy seems on the way out and Fletcher Building is also being prepared to stand alone.

That leaves Fletcher Forests to carry the flag for what was once the leading force in New Zealand industry.

Its share issue will be a good test of the sharemarket as 2000 comes to a close.

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