Transport sector trucks along though Tranz Rail slows down

By Peter V O'Brien

Friday 28th June 2002

TRANSPORT COMPANIES' SHARE PRICES (CENTS)

Company	Price 24.6.02	Price 11.6.01	% change 6.01-6.02	2002 high	2002 low

Mainfreight	135	115	+17.4	168	120
Owens Group	105	95	+10.5	146	96
Tranz Rail	311	365	-14.8	430	325
NZSE 40 cap	2100.23	2060.56	+1.9	2161.26	2041.98

Share prices of two of the three listed transport companies outperformed the NZSE 40 capital index over the past year.

Mainfreight and Owens Group had reasonable gains but were not among the Stock Exchange's best gains.

Tranz Rail fell 14.8% from the level of June 11,2001, the last time the transport sector was considered here.

Share prices as at Monday are in the table and compared with the situation a year ago.

Tranz Rail's share-price decline probably reflected the market's assessment of a drop in revenue from five of the company's six freight categories and the costs of restructuring over the nine months ended March 31.

The rail company issues quarterly but only the half-year and full-year statements follow the Stock Exchange's standard layout.

There is nothing wrong with that, particularly as investors and sharemarket observers get to see progress every three months, rather on a six-monthly basis.

The reporting procedure can make annual comparisons of first and third-quarter information difficult.

Tranz Rail reported a net profit of $2.8 million for the three months ended March 31 and a cumulative profit of $46.1 million for the nine months.

Corresponding figures last year were respectively $13.1 million and $6.4 million.

Managing director Michael Beard said the costs of restructuring the business in accordance with the company's strategic plan affected the latest quarter.

The year-to-date profit included $64.1 million income from the sale of the Tranz Scenic passenger operation and the Auckland rail corridor. Reorganisation costs for the nine months hit $26.6 million, with $2.9 million coming in the latest quarter.

Mr Beard's report indicated the company had problems with the restructuring programme: "The cost of the change programme is also proving to be greater than anticipated, not only in terms of direct costs, but also indirect costs associated with disruptions to operational performance and service levels.

"Management will continue its focus on a quantum improvement in service levels to both mitigate these costs and improve its revenue line."

Referring to the coming financial year, Mr Beard said it was possible to anticipate the benefits of the debt reduction programme and outsourcing of support services.

"Other initiatives are proving more difficult to fully implement and, therefore, the benefits of these changes will not be seen until the 2003 financial year."

That corporate song had a familiar melody. There must be something in the office airconditioning that creates optimistic assessments of restructuring operations.

Any restructuring is, by definition, disruptive to "normal" activities and affects stability, but boards and executives often resist adoption of a "worst-case" situation when considering costs.

The phenomenon is not confined to companies. Public sector organisations have been notorious for overruns in restructuring costs in recent years.

Mainfreight and Owens Group went through the reorganisation process, particularly with operations outside New Zealand.

That was also familiar and not confined to the transport sector. New Zealand companies have an unfortunate record, dating back to excesses of the 1980s, of underestimating difficulties overseas.

It would be interesting to get an assessment of the extent to which vendors of foreign companies "see them coming" when dealing with New Zealanders, some of whom fancy themselves as sophisticated international operators.

The transport sector's immediate future depends on the general economic outlook, locally and on the international stage.

New Zealand is in election mode, so political parties have opposing views of the outlook. Some "professional" economists are not above issuing politically biased "analyses" at such times.

That comment aside, any decline in export volumes arising from appreciation of our dollar and easing of commodity prices would affect transport companies and their cohorts at the ports.

Conversely, a rising dollar should eventually improve import volumes, subject to the interest rate structure and consumer confidence, the latter apparently still strong.

Consumer confidence is fickle, often based on unwillingness to face reality.

The transport sector has a case for being treated within analyses of broad "utilities," based on the fact that goods must be moved, irrespective of economic conditions.

A lack of transport infrastructure results in economic decline and, the worst case, collapse. Listed transport companies will therefore attract support from conservative investors.

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