There's gold in them thar landfills

Friday 11th April 2003

In a market like the current one in which prices generally are heading south, making a decision to buy is difficult: you can't help suspecting you could get the stock cheaper if you wait a bit, says Rickey Ward, equities manager at NZ Guardian Trust.

But he has taken the plunge recently with Waste Management. Recent rate increases at landfills have highlighted "this company's got good fundamental opportunities for growth," Ward says.

Waste Management recently reported a 15% rise in net profit to $15 million for calendar 2002.

"Most people's valuations are well north of $3 and some are close to $4," he says. The shares were trading at $3.07 in late March and had traded between about $2.90 and $3.15 in the previous three months.

One potential concern is the company's plans to expand into Australia, although "to date, they've done nothing stupid in that direction."

Waste Management began investing in Australia in mid 2001 when it paid $NZ28 million for two companies in Brisbane and Melbourne which handle liquid wastes. A month later it paid $A1.2 million for a Melbourne-based business involved in the collection of residential and commercial solid waste, mostly using wheelie bins. A year later it bought another "tuck in" liquid waste business in Melbourne.

The company currently has an option until 30 June to purchase properties and consents for a transfer station and landfill in the Adelaide market. It is currently conducting due diligence.

But for the most part, Ward has been running "a very defensive portfolio" and "trying to avoid those hand grenades".

Nevertheless, he hasn't been rattled by the market's savaging of casino operator Sky City on the news that the government plans to ban smoking in all workplaces including bars and casinos.

Sky City shares plummeted from $8.76 to $8.15 in two days on the news and by late March were trading at $7.95. Ward says Sky City remains a core part of his portfolio.

The smoking ban "should have been no surprise to anybody." While it will hurt the share price in the short term, it doesn't affect discounted cash flow valuations, he says.

"We're meant to be long term investors. If you're buying for the long run, you shouldn't be concerned about a short term price movement."

With a forecast slowing of the domestic economy, Ward is staying away to consumer oriented stocks. Disappointing results from retailers such as The Warehouse Group, Briscoes and Pacific Retail Group highlight that such stocks are starting to fell the pinch.

That slowdown should also affects stocks such as Fisher & Paykel Appliances which Ward sold out of at $10 and above over the last couple of months. The stock has fallen from $10.60 in early February to $9.40 in late March. "We're very happy with that decision," Ward says.

For every seller there has to be a buyer and Anthony Thyne, chief investment officer at BNZ Funds Management, has been happy to pick up The Warehouse shares from those who sold after its disappointing results.

"It's so hard to resist buying what you perceive to be quality stocks when the price comes under pressure," Thyne says.

BNZ had been underweight The Warehouse, and had even sold a few at the higher levels, which gave it room to buy when the stock began to crash. The shares fell from $7.33 before the sales results were released in early February to as low as $5.31.

They have since recovered to $5.70.

"History has been on the side of those who have bought The Warehouse in times of extreme weakness," Thyne says.

Whenever BNZ buys a stock, Thyne sets a "loss referral" on it, a price at which BNZ will seek to sell if breached so any potential losses can be minimised. "All the time I'm thinking about how much we can afford to lose," he says.

"I think of myself as the A&E department rather than the driving instructor and A&E has been a bit busy." Credit information company Baycorp Advantage and AMP have been two of his recent casualties, both now eliminated from BNZ's Equities Discovery Trust portfolio.

Both companies have repeatedly shocked and disappointed investors and, in Thyne's view, both sets of management "didn't have a good handle on the business."

With Baycorp, "we finally decided enough's enough and we sold quite aggressively" between 9 January after executive director David Grafton resigned and 28 February, the day after the company announced yet another $A11.9 million loss for the first half. The previous year's loss was $A300 million.

Baycorp's shares plunged from as much as $2.40 in late January to as low as $1.04 immediately after the latest results, although they have since recovered somewhat to $1.39. They have fallen from almost $9 before the September 11, 2001 terrorist attacks. A year ago, BNZ held 6% of Baycorp.

AMP is almost as sorry a story. It's shares have dropped from the $25 mark in mid-2001 to as low as $6.30 in mid-March.

The stock had already sunk below Thyne's "loss referral" when he came back from his Christmas holidays, so when in late February AMP announced a $896 million loss for 2002, BNZ was already in sell mode.

AMP has already been bitten badly by the ailing British share market and investors are worried about the impact on it of the sinking Australian and New Zealand markets. - Asset magazine

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