DB Group's cunning plan lifts returns on shareholders' funds

Friday 25th January 2002

The longstanding joke that the best way to let a Kiwi run a small business is to give him a big one hasn't been so funny in recent years. Some of the nation's largest companies have virtually imploded and destroyed billions of dollars in shareholder wealth along the way.

A casual reader of DB Group's latest annual report might also wonder if that company was on a similar course. It shows that shareholders' funds have plummeted from $246 million in 1998 to a mere $139 million by late 2001 and total assets from $397 million to $183 million. Revenue has fallen from $661 million to $278 million in the same period.

However, unlike most other companies, DB Group's diminishing size is part of a deliberate crafted and well-managed plan to improve the return on shareholders' funds. Single-digit returns of the past were obviously inadequate and the company has responded by divesting non-core assets and returning surplus capital to shareholders.

The results can be seen from the report's highlights page, which shows return on equity from continuing operations has jumped from 10.8% in 2000 to 15.8%. The total return, which included the proceeds of asset sales, was 37.6% last year against 9.8% in 2000 and a mere 4.9% a year earlier. At the same time, the percentage of shareholders' equity to total funds has risen from 58.4% four years ago to more than 70%.

This report has an appealing no-nonsense approach. It states its purpose without resorting to engravings in mock marble or brass and a high faluting title such as "vision statement" or "our mission."

"We will continue to focus on growing brand value and investing in our people," it says, while pointing out that "the point of any challenge is not how big it is but how well we respond to it."

The use of the term "brand value" deserves more explanation. Presumably it means encouraging people to drink more of a DB product because they identify with its brand positioning (yuppies drink Heineken, farmers drink DB Draught, for example). However, brand value can also be a number on the balance sheet.

Curiously, the value of DB's brands is not shown in the report, although they must be worth a substantial amount. This is a departure from the treatment by other major brewing companies where brand values can make more than half their asset base. DB in the past has tended to show a nominal value of a few hundred million dollars for its brands but kept them off the balance sheet. In recent reports it hasn't even done that.

This is a measure of the company's conservativism and an indication of the quality of its finances (it has no long-term debt). Take away the brand values of other brewing companies and DB Group's balance sheet looks considerably stronger. There is a case for saying the absence of brand valuations understates DB shares' asset backing.

While the report spends the usual several pages talking up the success of its brands and marketing campaigns, it devotes less space to the more important information about its business strategy and growth expectations.

What there is comes in a two-page "summary of results" commentary by managing director Brian Blake and chairman David Sadler.

They indicate that DB's long period of internal focus, both on restructuring and on serving solely the New Zealand market, is coming to an end.

"DB Breweries continues to explore new opportunities to grow its brands within New Zealand and offshore. Earlier this year the company began exporting Monteith's to Singapore," they say. Investors will be watching the export opportunities closely as DB has traditionally been seen as a low-growth company.

Low growth does not necessarily mean static profits. A note to the accounts shows revenue from continuing activities rose 0.8% to $278 million but net profit rose 12% to $20.2 million. While it is possible non-recurring items are involved (the gross profit was up a less robust 4% to $29.8 million), this performance offers some hope that returns on equity could improve still further in the future.

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

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