Dorchester Pacific builds up steadily

Friday 24th August 2001

Finance company Dorchester Pacific was once a penny dreadful with patchy returns. However, in recent years it has steadily built itself into a substantial financial services group.

Its annual report shows total assets have gone from a little over $50 million in 1997 to nearly $170 million at March 31. Revenues and profits have trebled in that time to $32 million and $3 million respectively. Unfortunately, although the report contains bar graphs showing these figures and others, there is no comprehensive five-year review of the company, which most annual reports carry these days.

An organisation chart at the front of the document shows six divisions; funds management, immigration, finance, investment banking, financial planning and insurance. Chairman Murray Radford in his report consolidates those into three broad classes, financial services, consulting and insurance.

Meanwhile, segmental information in notes to the accounts show a different delineation again, finance, investment advisory and share broking plus insurance.

However one cuts the cake, it is clear that core borrowing and lending activities continue to drive the business in revenue and profits. The finance division produced a $3.1 million gross profit on revenue of $24.5 million, a margin of 12.7%. The other businesses are much smaller but more profitable. Investment advisory and share broking managed $567,000 on $4.3 million, or 13.2% profit, while insurance delivered $787,00 on $2.2 million for an impressive 36%.

However, this latter result appears to be the result of good luck. A note to the accounts shows three sources of profit from insurance activities. The "planned margin of revenues over expenses" amounts to a mere $14,000 while the "difference between actual and assumed experience" contributed $666,000. Investment earnings on assets above policyholder liabilities made up the remaining $57,000. These ratios were fairly similar in 2000, but there is no indication that such fortunate results from insurance policy "experiences" can be relied upon to deliver future insurance profits.

Another note shows the company's bottom line has been enhanced by a small tax credit compared with a $1.2 million tax bill in 2000. Profit before tax was down 19% to $3 million. The $1.3 million in tax credits are described as permanent differences arising from the treatment of insurance income and restructuring of subsidiaries. More information on this topic would have been useful.

Managing director Brent King starts with a standard review of the business in a two-page report but surprises with a pithy and informative description of the company's objectives for the coming year. Many companies treat such information as confidential and keep it away from shareholders. It is refreshing to see a company that understands that stating a set of objectives is not the same as letting competitors rummage through its strategic plans.

Rather than growth for its own sake, Dorchester is focusing on maintaining its excellent 19-20% return on shareholders' funds. It intends doing this by retaining clients, integrating newly acquired businesses and seeking better synergies between its many differing businesses. "We will continue to review acquisitions as they are presented to us as we believe that geographic spread allows for a diversification of risk as well as enhancing earnings for shareholders," he concludes.

According to detailed tables of the geographic location of borrowers and debenture holders, the company is heavily concentrated in Auckland with around half its business there. Where finance receivables are concerned, this has grown in the past year from 48% to 52%. Where customer types are shown, personal finance and property developments account for the bulk of Dorchester's finance business.

It is a shame there is not more information presented about directors' shareholdings at the back of the report. Of 21 share transactions by interests associated with directors, not counting those related to a director and employee share purchase scheme, 18 show "n/a" under consideration paid or received. Surely it cannot be so hard to find this information out and give shareholders their only chance of the year to see whether directors are backing the company with their own money.

David McEwen is an investment adviser and author of McEwen's Investment Report. Internet; www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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