INL avoids hype in reasonable result

Friday 8th March 2002

Not many listed company chairmen in New Zealand can have the satisfaction of welcoming shareholders to the company's 94th annual report, as Ken Cowley does in Independent Newspapers' latest edition.

While most other local, well-established companies have been taken over, broken up or moved to Australia, INL has survived and thrived, albeit as a part of global media group News Corp.

Rather than having a selectively upbeat highlights page, INL reflects its media roots by devoting a page in its report to bare "facts at a glance."

This shows revenue rose 5% to $549.8 million while gross earnings (ebitda) kept pace, rising from $118.8 million to $124.9 million. However, its bottom line shrunk dramatically, from $34.6 million to $26.1 million.

Helpfully, the table breaks down revenue from its core publishing and distribution business (up a mere 0.6%) and newly consolidated subsidiary Sky Network Television. Sky contributed one month of revenue - $26.8 million - after INL increased its stake from 47% (when it was treated in the accounts as an associate company) to 66.2% (making it a subsidiary whose numbers go on the books).

Sky's consistent losses underlie the company's low profit, stripping $19.1 million off INL's bottom line last year and $13.1 million the year before.

A note to the accounts points out INL was not able to claim these losses against its tax liabilities because "agreement for the transfer of such losses had yet to be reached."

However, this hurdle looks as if it has been overcome in time for the current financial year.

As chief executive Tom Mockridge says in his review, "the lift in our stake to 66.25% in Sky will allow future tax losses generated by Sky to be transferred to INL to be offset against tax otherwise payable by INL. Management expects this to significantly assist reported earnings in 2001- 02."

INL obviously has considerable faith in its pay-TV subsidiary, despite it clocking up more than a decade of unbroken losses. While a near monopoly in a popular entertainment sector is bound to do well once it has recovered its high set-up costs, Sky still seems some way off reaching that point.

As Mr Mockridge points out, "Sky Network Television enjoyed a year of record subscription growth, the lowest rate of disconnection, the highest household penetration in the company's history and strong and increasing sales of pay-per-view movies."

The end result: Last year Sky lost 56% more than in 2000, partly as a result of having to buy content in US dollars with a weak New Zealand currency.

Analysis of INL's financial statements is complicated by the change of accounting practice with Sky.

For example, as well signaled in the report, INL had to take all of Sky's debts to book at its balance date, despite officially owning the company for just a month, while it could only book a fraction of its earnings.

Pre-Sky figures show why INL has taken such an interest in the TV company.

"Underpinned by continued strong New Zealand situations vacant classifieds and generally robust advertising in other categories, publishing ebitda declined by 1.2% to $117.3 million or, after adjusting for the 53-week prior period, increased by 0.5%," it said.

Considering ebitda is generally the best possible number a company can show, because it does not allow for several normal costs of doing business, this result shows INL is struggling to develop its core operations. Its pre-Sky net profit of $44 million represents a 7.4% decline on the previous year and a margin on sales of 8.4%, which is reasonable without being exciting.

Overall, the report avoids unnecessary hype and spin, as one might expect from a media organisation whose many journalist employees' jobs are to cut through such nonsense.

Mike Robson, journalist turned INL managing director who died suddenly last year and was given a full-page obituary in the report, would have approved.

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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