Special Report: Ocker Shocker

By Phil Boeyen, ShareChat Business News Editor

Friday 2nd March 2001

A quick scan of company results over past weeks will confirm what some investors may already have been thinking - if a company is operating across the ditch, keep a close watch.

For New Zealand companies looking to grow, Australia has always been the obvious choice. Same culture (more or less), same language, similar laws, geographically close.

Australia also has closer ties to Asia than New Zealand, often meaning it is a safe first port of call for a company to expand before looking to move further afield into the much larger markets to the north.

Telecom (NZSE: TEL) is a perfect example.

Having realised that the New Zealand market can only get tighter, it picked Australia as its major growth driver in the shape of telecommunications company AAPT, which it bought last year.

If Telecom's latest interim result is anything to go by, it appears a wise choice. Although its New Zealand businesses continue to provide most of the profits, their growth figures looked limp and dejected compared with AAPT.

New Zealand revenue, for example, only grew 2.3% overall compared with the previous year, while revenue in Australia rose more than 50% with growth across nearly all divisions.

But the jury is well and truly out on whether AAPT is going to be the success story Telecom is hoping for. Companies like Telstra and Vodafone aren't going to sit and let AAPT gobble up market share at their expense if they can help it.

Air New Zealand (NZSE: AIRVA) is also looking rather glum after biting off what appears rather more than it can chew in the shape of Ansett Airlines.

The airline is rumoured to have been in gradual decline both in terms of staff morale and investment for the past decade, and unfortunately Air New Zealand has come into the Australian domestic market just when it's at its most competitive.

Both Impulse and newcomer Virgin Blue have been re-writing the fare structure in Australia, forcing Ansett to match their low prices.

This at a time when fuel costs are surging has left Ansett gasping for breath on the nation's airport runways.

Luckily for Air NZ it has a chief executive who knows all the tricks of the Australian domestic trade in the shape of former Qantas staffer Gary Toomey, but even he must be wondering what he had done to deserve such a mighty challenge.

One of the problems Air NZ has cited is the effect of the Sydney Olympics, which depressed demand for flights. The 'Olympic effect' has also been cited by Tourism Holdings (NZSE: THL).

In the past few months THL has lowered its profit targets twice and a lack of bookings on its motor homes rental business in Australia has taken much of the blame.

"The indications are that the disruption to normal visitor flows caused by the Sydney Olympics, particularly to our key German market, has had a definite impact on this year's trading performance," said chairman Keith Smith

Even jeweller Michael Hill (NZSE: MHI) complained of losing sales to the Olympics, as people stayed inside watching TV rather than going out for a spot of retail therapy. However the company certainly has no plans to level off its Australian growth and says there are opportunities to open another 40 stores there in the next four to five years.

Beverage company Frucor (NZSE: FRU) is also placing considerable future growth hopes in Australia, where it has recently bought a sales and distribution system.

Although the purchase should position the company positively for medium-term growth, it wielded an unwelcome surprise this week when Frucor revealed it had to spend $3.5 million buying back stock as a result of the purchase - more than double the original estimate.

That kind of figure hit the company where it most hurts, its bottom-line, which has now been pared back to $17.5 million for the full year compared with a prospectus target of more than $20 million.

Australia has also recently been blamed for biting into profit for a number of other New Zealand companies, including resin maker Nuplex (NZSE: NPX) and rural services company Wrightson (NZSE: WRI).

Nuplex said in its half-year result that it had been hit by lower than expected demand in the second quarter in Australia, while Wrighston was forced to dramatically prune its profit because its Australian operations lost $5.4 million.

Surprisingly enough even market-favourite Baycorp (NZSE: BCH) also had some of the gleam taken off its latest interim result when it announced its much-touted Australian joint venture, Alliance Holdings, had made a small loss.

"We expect Alliance will make a positive contribution to Baycorp's profit in the second half of this year," said Baycorp chairman Rosanne Meo.

Another Aussie victim is Bendon (NZSE: BEN), which issued a revenue warning this week on the back of a flat trans-Tasman retail sector. It predicts the deadly Olympics-GST combo could push EBIT down by 10-15%.

Transport company Mainfreight (NZSE: MFT) has readjusted forecasts too after its third quarter result.

For the three months ended December the company's net surplus more than halved compared with the previous year, hit especially hard by a $2 million loss on its Mainfreight Distribution business in Australia.

One stock which has been riding the choppy wave of Australian retail data since it expansion there last year is The Warehouse (NZSE: WHS).

The successful retailer is hoping for more than a touch of trans-Tasman magic through its Clint's Crazy Bargains and Silly Solly's purchase, and has been one of the few companies in recent times to post some good news from Australia.

For the three months to the end of January sales at Clint's and Solly's rose 14% on the previous year to $130 million. Same-store figures were not given.

Although there has been speculation that Australia is over-stocked at the discount end of the retail scene these results could show that no matter the economic climate - or Olympics or GST - people will still search out a bargain.

The Warehouse is due to announce its full interim results this month which should spill more light on its overseas expansion.

While Australia is not the only overseas trouble spot for New Zealand companies, and there are often as many good news stories from across the ditch as bad ones, the latest results have some timely lessons for investors.

Key among these is that when a company expands its operations, investors too need to widen their horizons.

This means not only keeping a close eye on regular company announcements, but also watching out for information on such dull-but-worthy details as building consents and retail sales figures in the countries where a company operates.

Like buying shares in a number of countries, buying a stake in a company which operates in a number of countries effectively offers investors a spread of risk.

The difference is that rather than investors managing the risk directly, the job is handed over to a company's management. And, as the latest results from Australia show, the risk can have as much downside as upside.

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