No-frills approach but sitting pretty

Friday 5th October 2001

Some companies actively dislike being listed. They appear to begrudge the necessary reporting requirements, media enquiries and costs associated with informing shareholders.

Pacific Retail Group is in this category, judging by its latest annual report. Its imminent takeover by major shareholder Eric Watson and his Logan Corporation may come as a relief to all.

Pacific Retail has annual sales of more than $400 million and a market capitalisation of nigh on $90 million. That makes it a pretty big company by New Zealand standards. However, one wouldn't guess that from its annual report, which is no-frills to the point of being spartan and delivers a minimum of information.

Its corporate governance statement extends to no more than two paragraphs while its description of principal activities, which include some of the country's largest and best-known retailing brands, stretches to one sentence. Considering the public profile of many of its businesses, it seems odd that no information is given about the driving forces and strategies of each.

If nothing else, this report shows Pacific Retail can't be bothered with gaining any of the communication, investor relations or marketing benefits that a well-produced annual report can achieve.

In their two-page review, chairman Maurice Kidd and chief executive Peter Halkett touch on the year's activities but devote most of the space to "future plans and outlook." This is fortunate as it is future benefits that will be piquing Logan Corporation's interest.

Written in June, the report offers a number of pointers as to why Mr Watson and friends are so interested in taking over the company and why small shareholders might want to hold out for a better offer.

For a start, the company "anticipates achieving further efficiencies from several projects, the benefits of which will start coming on stream over the next few months."

This includes opening or expanding many of its retail stores, offering incentives to staff to sell more and boosting its e-commerce applications.

How times change. Where once online selling was the brightest way to make the most money, companies are almost apologising for it and Pacific Retail stresses its development of internet sites for all its chains "will be phased, cautious and low key." Of course, this makes sense following the debacle that was FlyingPig.co.nz, in which Pacific Retail owned a large stake. The online retailer was renamed Orion Ventures and sold last year.

More clues are given in the report's five-year financial review. This shows Pacific Retail's performance has taken off in the past couple of years, far outstripping its performance of the late 1990s. The report generally seems to be hinting that more is to come.

Despite boosting its equity ratio from 44% to 47.5%, the company in the year to March delivered a return on equity of 35%. This compares with a mere 23% in 1997. A more significant improvement in the ratio was achieved over 2000's 43% equity and 30.3% return.

In the past two years its operating surplus has risen from $15.5 million to $20.2 million, an increase of 30%, while sales rose a mere 11.5%. Its statement of cash flows indicates it has benefited from keeping a lid on payments to suppliers and employees, which rose just 5%.

Earnings per share have risen from 6.1c in 1997 to 15.3c in 2000 to 20.5c this year. This is remarkable considering the economy has hardly been firing on all cylinders and the declining New Zealand dollar is making imported consumer electronics ever more expensive.

All that money is retained in the company rather than paid out in dividends, which is a classic private company approach.

At 20.5c a share in earnings and a takeover offer price of $1.76 per share, Logan Corporation gets a minimum annual return on investment of 11.7%, which looks set to increase substantially over time. That sure beats keeping the money in the bank.

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

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