Investment companies continue solid growth for shareholders

Friday 1st June 2001

By Peter V O'Brien

There was a solid turnaround in the share prices of three of the five listed investment companies compared with their performance between the end of 1999 and May 2000.

The table shows share prices at the end of last week, in May last year, percentage movements over the period and this year's highs and lows.

"Investment company" in this context means a group acting as a holding company for operating entities involved in the provision of goods and services, as mentioned when the sector was last examined in The National Business Review (June 2, 2000).

It excludes the listed company/fund dealing in equities as such, without being involved in the underlying.

For the purpose of this discussion it also excludes several companies in the internet/e-commerce sector which may hold majority or minority stakes in similar organisations.

That group, with a few exceptions, has struggled since the technology company spurt went dry last year.

Companies in the sector regularly announce reorgan-isations, asset sales and the other technologies employed to keep them operating.

The share price movements of the five companies in the table between December 1999 and May 2000 were: BIL, -12.5%; Dorchester Pacific, -15.0%; GPG, -5.9%; Hellaby, -21.4% and Infratil, -15.0%.

The NZSE 40 capital index fell 9.8% in that period.

BIL's current situation is considered in the O'Brien column (page 41) so there is no need to traverse that ground again.

Dorchester Pacific's preliminary report for the year ended March 31 was imminent at the time of writing and may have been issued by now. The company earned $1.3 million in the six months ended September 30, compared with $1.25 million in the corresponding period of the previous year and $2.42 million for the 2000 year, a figure which was 33% ahead of 1999.

Dorchester differs from the other companies in the sector because it specialises in financial services in the broad sense.

A segment breakdown in the last interim report gave the company's businesses as finance, investment advisory and sharebroking, insurance, and "other businesses and corporate costs."

The finance operations had 85% of group assets, 73% of revenues and contributed 84.9% to the surplus before tax.

Although the report showed a 4% increase in net profit over the previous corresponding period, exclusion of an extraordinary item from the 1999 half-year result meant operating profit increased 16%.

Dorchester's finance business is based on instalment credit-repayment transactions which usually generate high gross revenues but a disproportionate pre-tax profit.

That situation is not usual because loan finance operates on much lower margins than industrial organisations, as seen in the accounts of banks where "turnover" is massive but the overall return is a small percentage of the asset base.

It is generally accepted a bank, for example, should aim for at least a 1% return on gross assets in its loan portfolio. Dorchester's pre-tax return on assets in the finance segment was 1.37% in the six months ended September compared with 1.98% in the previous corresponding period.

GPG's May 2000 share price in the table was adjusted for a 1:10 bonus announced in the preliminary report for the year ended December and now in effect. There was also a capital reorganisation last year.

The company's philosophy was summed up in a comment by chairman Sir Ron Brierley in his traditional sardonic manner: "Already, in the current term we have initiated various avenues of 'shareholder activism' which have been on the drawing board for some time ... Without an unlikely first-round 'knockout' these initiatives are invariably characterised as 'failures' by the media and analysts, but this is a necessary part of the process where sensible and supportable role proposals to enhance shareholder value are seldom unrewarded in the longer run."

Sir Ronald has the advantage of letting results speak to back up his comments. Shareholders have done well from their investments.

Hellaby Holdings' string of industrial and commercial investments had mixed results in the six months ended December, with the majority having strong trading results, but two - Levana Textiles and footwear company R Hannah & Co - being affected by the value of the dollar, and R Hannah also came under pressure from low consumer spending.

Net profit rose to $4.31 million for $4.15 million in the first half of the previous year.

Infratil's involvement in "planes and ships and trains" (the "ship" through investment in port companies) and power companies is well known and has produced reasonable results, although profit in the year ended March was affected by lower asset-realisation gains, higher interest costs and lower dividend receipts.

While having only a handful of companies, the sector offers investor interest, being soundly based, unlike similar companies of days gone by.

Investment companies' share prices (c)
Company	Price 25.5.01	Price 26.5.00	% change 2000-01	2001 high	2001 low

BIL⁽¹⁾	70	70⁽¹⁾	-14.3	80	54
Dorchester	105	136	-15.4	115	100
GPG⁽²⁾	160	130⁽²⁾	+23.0	168	127
Hellaby	204	165	+23.6	210	175
Infratil	141	119	+18.5	148	118
NZSE40 capital index	2052.72	1989.22	+3.2	2120.39	1875.18

⁽¹⁾ Adjusted for share consolidation

⁽²⁾ Adjusted for capital restructuring and bonus issue

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