Thursday, February 28, 2008

Hard times make Great Businesses

Efficiencies gained during economic downturns are good for business long-term. New Zealand businesses need to seize the opportunity now to focus on producing innovative, value added, niche products and services to increase export and business profit margins and stop using the current conditions to moan about their situation.

So the New Zealand dollar is at a post float 23 year high, exporters are hurting financially and moaning about it, petrol and energy costs are crippling, labour costs keep rising, mortgage rates are spiraling, Kiwis are leaving in record numbers and it is due to get much worse should Labour be returned to office come election time and time to back up promises of pre-election spending come home to roost.

There is little we can do about the current government imposed meltdown except push on and continue to try and do business.

I'm continually unimpressed with John Bongard from Fisher and Paykel Appliances, farmers and other exporters coming out in the media every time the dollar goes up another cent, John's energies and expertise would be well better focused on improving efficiencies at his factories-27 people have just got the push from his South Island factory- in whatever way he can.

His push into Thailand is a great idea and clearly his company would well benefit from moving more of the New Zealand enterprise there. Businesses change, as do circumstances, and we must change to fit as things move on.

I'm not sure what John hopes to achieve by moaning and bitching but the days of protectionism from the Government for his sort of business seem over and he cant fall back on his companies history of operating as the bully boy, protected, monopoly it once was.

The reason business owners start a business in the first place is to presumably gain some sort of independence and freedom from working for others. The corollary of that independence is the responsibility to take account for the business and the conditions in which it operates under.

Sure, it is tough when you can see profit walking out the door as the NZ dollar ticks up another cent but these tougher times are good for business in the long run. There is nothing like testing how good management really are when the shite hits the fan. It is hard times like these that really great companies are made. To shave off cost by doing something better or more efficiently or investing in new technology to advance the product you are making.

This cycle of business is important to the long term sustainability of a company. When the fat is trimmed and efficiencies gained the company can lay a foundation to move in a more positive way.

Clearly some companies have always been well managed and there is nary a scrap of fat to trim. When looking for such a company to invest in, try to avoid businesses with an oversupply of superfluous expensive middle management - a really good sign something isn't right in a company structure. One drowning in such an over supply is Restaurant Brands, the fast food operator.

New Zealand is a small market and we produce small volumes of everything we export and we have heard ad nauseum about kiwi business "finding their niche" and it is true that this is the way our economy can really push ahead.

Now is a great time to start. Margins for exporters and local producers and sellers are being squeezed tighter than Michael Cullen's nether regions when the words "tax cut" are used, so to focus on upping that margin makes prudent sense.

We can never compete internationally on a volume basis with our largely commodity based export industry, so we have to process, package and re manufacture our commodities to squeeze more dollars from foreign pockets.

Current conditions are pressing, on business and consumers. We can use these conditions though to finally look at actually doing what our "business leaders" and politicians have been rabbiting on about for years.

Working smarter and more efficiently isn't just a Labour party PC catchphrase, it is an important part of New Zealand's future. A future where we are smarter and more efficient and as a consequence wealthier and therefore healthier and happier.

Lets hope the John Bongards of our business world can be a little wiser, stop moaning and put their money where their mouth is instead of foaming at the mouth.

Lets be a little more proactive rather than reactive to business conditions.

Recent Share Investor reading

Discuss this topic @ Share Investor Forum

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c Share Investor 2008

Wednesday, February 27, 2008

Goodman Fielder hit by high commodity prices

Goodman Fielder's profit, after abnormals, was down
by 26% in the half year to Dec 31 2008 due mostly to
high commodity prices, especially wheat.

Like every business in New Zealand, Goodman Fielder Ltd [GFF.NZ] last half year has been about managing business costs.

Key Indicators

* revenue of $1316.8 million, an increase of 8.3% over 2007
* Normalised net profit after tax was $108.7 million, up by 7.2% (excluding one-off factory
closing costs)
* Operating cash flow increased by 20.9% to $95.3 million
* Dairy revenues exceptionally strong

Full NZX GFF profit announcement

Commodity prices for the Australasian food giant have increased with monotonous regularity and have tested all important margins for the company.

This has been largely ameliorated by production efficiencies, absorbing some costs and as all us consumers are well aware, passing on raw ingredient prices to consumers.

Goodman will continue to focus on cost management as commodity prices are likely to continue to increase, at least in the short to medium term. The Australian drought has impacted wheat prices especially, my favourite Goodman bread Vogels now retailing above 4 bucks, and it isn't clear whether there will be any slow down in that staple any time soon. The drought and consumption by India and China have sent wheat prices to all time highs.

Sustained rain across the wheat belts in OZ recently may bring hope for the next crop however.

The test of future performance for Goodman Fielder will be managing retail price increases so as not to annoy consumers too much and hand market share to competitors.

Having said that, management should be careful not to fall into the trap of gaining market share at the expense of margins and therefore profit.

Management have given a measured indication of future performance and an out clause of increases in the aforementioned commodity prices for indicative profit:

The company confirms previous guidance that it expects to deliver NPAT (pre significant items) for the F08 financial year of around the same level as for the previous financial year, with a sensitivity of plus or minus 5% reflecting the extreme volatility of commodity costs.

Like Goodman Fielder, foreign food makers are
under pressure on two fronts. With record
commodity costs forcing them to raise prices,
consumers are opting for cheaper products
while critics insist that the industry is milking
the situation.

According to the Sydney Morning Herald, Goodman may be interested in the cheese,yogurt and milk maker, Dairy Farmers.

"Clearly Dairy Farmers is of strategic value to us,'' Chief Executive Officer Peter Margin said today on a conference call. "We might take a look".

The company would be a good fit with Goodman's dairy division.

Profit was also hit by factory closing costs, which took NPAT down to $88 million.

The share price recently hit an all-time low of NZ$1.78 due to general market volatility and fears from investors that commodity prices would hit profit hard. It listed 22 December 2005 for approx $2.10 and it has manged to claw its way back to $2.16 today on small volume.

Related Share Investor reading

Goodman Fielder a Hedge against an economic slump
Goodman Fielder pie gets bigger

Related Links

Goodman Fielder Financial Data

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c Share Investor 2008

Tuesday, February 26, 2008

Cullen's move on Auckland Airport Tax plan anti-business

Stand back because I'm gunna blow!!!
Michael Cullen's retrospective tax changes over the AIA sale
effectively removes shareholders property rights

Additional reading on this story - direct links to article

Radio New Zealand

Southland Times

The arrogance, the stupidity, lack of moral and legal right and communist sort of garbage Michael Cullen is up to by retrospectively changing tax law to grab even more of New Zealand citizens and Auckland International Airport(AIA) shareholders money from them is not surprising, because we saw it in 2006 when the Labour government changed law in hindsight to make the theft of taxpayer money by them legal.

What is surprising is that Cullen and his mates around the cabinet table haven figured out or don't care about( I suspect they just couldn't give a hoot) the repercussions of their move: for business as a whole in the future, individuals and specifically the 50000 odd New Zealanders with shares in the airport-especially in an election year! Its just mind boggling.

We all know Cullen and his socialist mates hate private property rights and clearly business because here he is again stomping his little legislative pen and clipboard all over these rights.

That is, people have a property right in the shares they own in the airport and they have a right to sell them to whomever they wish, under the current tax laws which exist. Retrospectively changing the tax laws just because you can isn't a sensible way to oversee business because business needs to be able to function with surety of the current laws in which they trade under. They no longer have that in this respect.

By becoming involved in a transaction between its private citizens in this way the Labour Party have effectively wasted the time of all the parties involved. CPPIB , Auckland Airport and the shareholders involved.

Millions of dollars have also been flushed down the bog, because it costs to do these large deals. In this case it has cost shareholders like me money. Lots of it.

The interfering has wiped hundreds of millions from the capital value of the airport- down 13.5% or 38c to NZ$2.45- and therefore shareholders wealth and given notice to other overseas companies thinking about buying businesses in New Zealand to think again-if the government doesn't want it sold they will simply regulate in some way to stop it. It isn't your business anymore if you don't have the ultimate say about what happens to it.

Now investors know that Cullen and his minor party supporters have been against this sale from the beginning, almost 1 year ago. Winston "baubles" Peters has spoken about this many times and so has Cullen, Both early in the sale saga.

My question to Cullen is then, if you were against this sale from the beginning then why didn't you move to stop it at its inception? He certainly knew about the "tax issues" with the airport amalgamation but chose to sit on this harebrained half arsed intention till the very last minute.

He has also been aware that the announcement made today would have been consequential to the sharemarket value of AIA and has kept it secret from the NZX, CEO Mark Weldon's office and therefore the shareholders invested in AIA, and so should have informed the market alot sooner and alot less clumsier than he has.

I wonder if Weldon will be giving the minister a "please explain" letter? Doubt it.

The Canadian Pension Plan Investment board say they will "push on" with the deal and were aware of IRD approval when making their bid. I'm sure they didn't factor in todays turbulence though.

Finally, pissing off 50000 mums and dads when you have been nuked in the polls, your leader is melting down, and in an election year just isn't very bright.

Related Share Investor reading

NZ Herald: Airport Deal not so sweet after tax break blocked
NZX Press Release: AIA directors recommend shareholders sell
AIA profit stays grounded
Softening opposition to CPPIB bid for AIA
Directors of AIA bribe brokers not to sell
What is Auckland Airport worth to you?
Second bite at AIA by CPPIB might just fly
AIA new directors must focus on shareholders
Auckland Airport merger deal nosedives
The Canadians have landed
AIA incentive scheme must fly out the window
Government market manipulation over AIA/DAE deal
DAE move on AIA: Will it fly?

Disclosure: I own AIA shares

Share Investor 2008

NZ Herald: Airport deal not so sweet after tax break blocked

Canadians bidding for 40 per cent of Auckland Airport had offered a type of share that would yield tax breaks. Photo / Dean Purcell

Canadians bidding for 40 per cent of Auckland Airport had offered a type of share that would yield tax breaks.

Additional media coverage of this story - Direct links to story

Radio New Zealand

Opinion piece from Share Investor at end of the day.

By Grant Bradley , 26.02.08, NZ Herald

A multi-million-dollar tax break that would have sweetened a Canadian pension fund's bid for control of Auckland International Airport(AIA) was blocked in a surprise move by the Government last night.

The urgent measure relates to what are known as stapled securities, which allow companies to pay tax-deductible interest to shareholders instead of dividends.

Changes will be retrospective and the announcement was made without prior consultation with interested parties "because it is a matter of urgency since some companies may be contemplating the issue of the type of stapled stock in question", Finance Minister Michael Cullen and Revenue Minister Peter Dunne said.

The Canada Pension Plan and Investment Board (CPPIB) planned to issue stapled securities as a "tax-efficient" device as part of its offer to airport shareholders.

The Inland Revenue Department says hundreds of millions of dollars could have been caught up in the deals if the securities had become popular.

Policy manager Emma Grigg said the Canadian proposal had not been specifically targeted but plans outlined in the company's prospectus would be covered by the changes.

The CPPIB had early yesterday been talking up the chances of its bid succeeding after a change of tack by the airport board. Last night, it said it would not respond to the tax change announcement until today.

The ministers said the change would be included in the next available taxation bill and, once enacted, would apply to stapled stock issued or stapled on or after yesterday.

"If those instruments were to become common in New Zealand the amount of debt deductions against our tax base could increase significantly. The issue becomes particularly acute if the instruments are issued to foreign investors in New Zealand companies."

The change will also deal a blow to potential earnings for Auckland councils. Auckland City Council has a 13 per cent stake in the airport and Manukau City has just over 10 per cent. Although neither is selling its shares, both were hoping to gain tens of millions of dollars a year.

A market source said "anyone who thought they were voting for this to get a tax advantage should think again".

Paul Ridley-Smith of investment company Infratil, which opposed the Canadian bid, said it looked like it was back to the drawing board for CPPIB. It has undertaken to restructure the company by way of an amalgamation process - to unlock capital and make it more tax-efficient for shareholders.

"If the Canadian deal had been done as a single transaction - which is to bring in a new shareholder, new management and change the capital structure - we had absolutely no problem," he said.

"But with the Canadian deal the restructure happens after they've got to 40 per cent. So the question has got to be asked what is the overriding commercial purpose of the amalgamation. If it is predominantly to get a tax benefit, then we would think it wasn't going to get approval from Inland Revenue."

The CPPIB had not sought an IRD ruling on the amalgamation plan before making its offer.

Prior to the ministers' announcement yesterday, the airport's board recommended shareholders sell their shares. That was a reversal of its position in December, when it advised shareholders against accepting the partial takeover bid but by a majority of 4-2 maintained its recommendation to vote against the offer.

Board chairman Tony Frankham said directors wanted to ensure nobody missed out on any premium if shareholders voted yes to the offer.

CPPIB vice-president Graeme Bevans said the change of recommendation was "fairly predictable". "They're ... a relatively new board and this is a very difficult decision."

In August last year, Trade Negotiations Minister Phil Goff dealt a fatal blow to a Dubai Aerospace Enterprise takeover bid when he said the Government did not want to see key public utilities sold off.

Shares in Auckland Airport closed up 3c to $2.83 yesterday, off its year high of $3.50 struck in July last year.

Related Share Investor reading

NZX Press Release: AIA directors recommend shareholders sell

AIA profit stays grounded
Softening opposition to CPPIB bid for AIA
Directors of AIA bribe brokers not to sell
What is Auckland Airport worth to you?
Second bite at AIA by CPPIB might just fly
AIA new directors must focus on shareholders
Auckland Airport merger deal nosedives
The Canadians have landed
AIA incentive scheme must fly out the window
Government market manipulation over AIA/DAE deal
DAE move on AIA: Will it fly?

Disclosure: I own AIA shares

Links c Share Investor 2008

Monday, February 25, 2008

Sky City 2008 half year exceptional on cost cutting

The initial reaction by Mr Market this morning to the Sky City Entertainment [SKC.NZX] announcement was to market down the share price to new lows. At current time of writing this, 5.00pm (NZ time) the share price was up 9c to 4 bucks NZ, although it had been up to $4.10 earlier today.

Key figures at a glance

- Revenue up 1.0% to $424.2m (+$4.2m)
- EBITDA up 9.1% to $161.4m (+$13.4m)
- EBIT up 13.1% to $125.6m (+$14.5m)
- Net Profit (before Cinemas write-down) up 36.2% to $61.3m (+$16.3m)
- Net Profit after Cinemas write-down $1.3m.
- Focus on managing operating margins
- Strong results in Darwin and international VIP play
- Auckland steady through refurbishment
- Improving Adelaide performance
- Weak Cinemas result.
-Adelaide Casino no longer for sale
-Profit guidance for full year, $108m to $110m (excluding Cinemas write-down)
-New CEO Nigel Morrison starts on March 3

Full NZX SKC profit announcement

Related Media reports

SKY City Profit Plunges
Cinemas drag Sky City down
Sky City first half plunges - Bloomberg

I think shareholders who hadn't been aware of the abnormal write-off figure of NZ$60 million for the SKC cinema division and saw the 1.2m profit, down 97% from last year got spooked. It pays to do research. Media also wrote headlines like SKY City Profit Plunges. Punters don't seem to want to read further than the headline.

Although profit was impacted in the same comparable period in 2007, so comes off a low base, the NPAT at 37% higher is clearly an excellent outcome. Off a very small revenue increase that result looks even better.

The most encouraging result is a small increase in revenue at the Auckland Casino, the company's main driver of profit. Considering the gaming floor has been interrupted by renovations this is a good sign things are being managed better. Clearly costs have been cut and hopefully that means there will not be any long term impacts from that cost cutting.

The VIP gaming sector looks to have fallen the casinos way this year, last year players cleaned the casino out.

Hamilton has a small increase in revenue and a larger increase in EBIT, so costs have been lowered at this outlet as well.

One of the stars of the show, is my favourite casino in the whole bunch, Darwin.

A Casino unencumbered with too much regulation, that still allows smoking, is situated in a boomtown, and is close to the Asian market. A great recipe for future success.

Revenue has increased strongly over the half by over 10%, but EBIT has soared by almost 30%, indicating a good handle on running costs.

The future looks rosiest at this outlet and wouldn't be surprised if it became the star of the show in the distant future, overtaking the Auckland Casino for group contribution.

Adelaide Casino, looks awful. Revenue and all other profit indicators have slipped. An added factor is that smoking has been totally banned from the premises. As longer term SKC shareholders know, that has a huge impact on profit for New Zealand operations when introduced in 2005.

Quite frankly, I'm not sure if management can turn this casino around, its a drag on company profits and only seems to be there to accumulate tax losses in my mind.

The tiny Queenstown casino achieved a stellar turnaround but is largely immaterial to the group result.

Sky City Cinemas have been written off, so the less said about that white elephant the better. It needs to be sold to some other poor sap. It hasn't done well and contrary to popular belief Hoyts, Sky City Cinemas competition, isn't having the same problem indicated by SKC management that revenue was down because of "bad weather and poor product". Its bad management pure and simple.

Overall the last half year was very pleasing to this shareholder, although parts of the group clearly need working on.

My main worry is that alot of the profit increase has been brought about by cost cutting and I'm not sure whether that is a short sighted thing. Hopefully it is prudent cost cutting. It also will be worth noting whether the costs cuts are one-offs or to be attributed annually.

It is something Elmar Toime, the acting CEO, successfully did at NZ Post and it appears his appointment had the desired effect at Sky City.

It will be up to the New CEO, Nigel Morrison, to drive the revenue and therefore the profit of the company going forward.

Management are "positive" for the coming half year.

: I own SKC shares in the Share Investor Portfolio

Sky City Convention Centre @ Share Investor

Share Investor discusses Convention Centre proposal with CEO Nigel Morrison
Sky City Convention Centre Expansion a Money Loser: Part Two
Sky City Convention Centre Expansion a Money loser
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Sky City Entertainment Group @ Share Investor

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Morningstar Revalues Sky City Entertainment Group
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Failed Sky City bid for Christchurch Casino good news for Shareholders
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Sky City Annual Meeting & 2011 - 2012 Profit Forecast
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Discuss SKC @ Share Investor Forum
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c Share Investor 2008

NZX press release: Sky City Entertainment HY profit to end of Dec 2007

HALFYR: SKC: Summary half year to 31/12/07 $1.3m ($45.0m) -97.1%, 11.0 cps


Name of Listed Issuer: SKYCITY Entertainment Group Limited

For half year ended: 31 December 2007

Current Half Year NZ$'000; Up/Down %; Previous Corresponding Half Year NZ$'000

Total Revenue:
$424,189; up 1.0%; $419,973

$82,616; up 28.8%; $64,123

Unusual items for separate disclosure:
$60,000 Cinemas write-down; $0

$22,616; down 64.7%; $64,123

Less tax on operating profit:
$21,992; up 15.6%; $19,030

$1,287; down 97.1%; $45,045

Extraordinary items after tax attributable to Members of the Listed Issuer:
$0; nil%; $0

$1,287; down 97.1%; $45,045

Earnings per share:
0.3 cps; 10.3 cps

Interim distribution:
11.0 cps

Record Date: 12 March 2008. Date Payable: 11 April 2008

Attachments: Appendix 1, 7 and related documents



Executive Director's Review
Half Year Ended 31 December 2007

1H08 Group Result
- Revenue up 1.0% to $424.2m (+$4.2m)
- EBITDA up 9.1% to $161.4m (+$13.4m)
- EBIT up 13.1% to $125.6m (+$14.5m)
- Net Profit (before Cinemas write-down) up 36.2% to $61.3m (+$16.3m)
- Net Profit after Cinemas write-down $1.3m.

Key Elements of 1H08 Result
- Focus on managing operating margins
- Strong results in Darwin and international VIP play
- Auckland steady through refurbishment
- Improving Adelaide performance
- Weak Cinemas result.

Distribution to Shareholders
- Interim 1H08 11 cents per share (9cps 1H07)
- Entitlement/record date 12 March, payment date 11 April
- Distribution continues at 90% x Net Profit after adding back Adelaide casino licence amortisation and excluding Cinemas write-down
- Distribution by way of non-taxable bonus shares with fully-imputed cash buyback alternative continued for 1H08
- Strike price for the bonus share issue for the 1H08 distribution will be the weighted average SKC price on the NZSX during the 5 day period 13-19 March
- Advice of the number of bonus shares to be issued in respect of the 1H08 distribution to shareholders on 26 March
- Shareholder elections (to elect the cash/buyback option) are due to the share registry (Computershare) by 9 April.

Underlying Net Profit
- Reported results include several elements that need to be separately identified to enable a like with like comparison of 1H08 core asset performance against 1H07
- Key elements adjusted for are:
- International VIP play above theoretical win rate
- Cinemas and Cinemas write-down
- Indirect expenses to cover one-off restructuring costs, due diligence costs involved in the takeover activity which has now ceased, and the Cinemas sale process
- Tax at the company's normalised rate of 28.5%
- Excluding these items show underlying operating earnings (EBITDA) growth at 3%, up from $148.2m to $152.7m and NPAT growth at 15%, up from $48.0m to $55.2m.

Cinemas Write-Down and Sale
- During 1H08 SKYCITY invited bids from parties interested in acquiring the Group's cinema assets
- Based on disappointing operating figures for 1H08 and negotiations with potential buyers, a $60m write-down in the carrying value of the Cinemas assets (market announcement 12/2/08) has been made in the FY08 interim financial statements
- The write-down includes all goodwill relating to Cinemas and a provision against non-performing cinema assets and potential sale or restructuring costs
- Negotiation with potential buyers continues. If a satisfactory price and sale structure is not able to be achieved the company will evaluate restructuring and revenue regeneration options
- Further information will be provided once negotiations are concluded and the final position determined.

Funding and Capital Management
- Control of capital expenditure and earnings retained under the profit distribution plan have reduced debt and lowered funding costs, down $4m (9%)
- SKYCITY's funding is not affected by the worldwide 'credit crunch' with long-term debt in place and no current refinancing requirements
- 1H08 average interest-bearing debt and average interest rate are $1.09 billion and 7.7% respectively.

Other Announcements/Updates
- The Company advises that the Adelaide casino will be retained as a core gaming asset
- performance in the half year has been encouraging
- cost control improved operating margins
- key focus remains on increasing market share in the competitive gaming machine market

Takeover Activity
- All discussions with interested parties have now ceased
- Directors and management remain focused on generating value for shareholders through improved performance
- due diligence costs (advisors, other) are provided for in the half year results

CEO Appointment
- New SKYCITY CEO Nigel Morrison commences on 3 March.

Profit Guidance FY08
- SKYCITY reaffirms its FY08 NPAT guidance as previously provided, namely in the range of $108m to $110m (excluding Cinemas write-down)
- Based on the half year result the company expects to be at the upper end of this range
- Factors to consider in the guidance include:
- international business performance for 2H08 budgeted at theoretical win levels
- customer reaction to the full opening of the Auckland main gaming floor
- ongoing effect of no smoking on Adelaide performance
- continued management focus on operating margins
- excludes Cinemas write-down.

Business Unit Results: 1H08
- Total Revenue up 0.8% to $205.3m (+$1.6m)
- EBITDA up 0.4% to $107.7m (+$0.4m)
- EBIT up 1.6% to $91.2m (+$1.4m)
- Gaming revenues flat with a 4% decline in gaming machines, as a result of the main gaming floor refurbishment, offset by table games growth of 7%
- All non-gaming activities achieved modest revenue gains on 1H07
- Cost management held direct/indirect expenses to 1% increase, effectively absorbing inflationary wage and cost increases
- The new baccarat area, one of the early stages of the main gaming floor refurbishment, contributed to the improved local table games performance
- The main gaming floor refurbishment includes the redesigned Aces Bar and Deli, each achieving revenue growth of more than 60% over 1H07 and the new Baccarat Bar has also performed well
- SKYCITY Grand Hotel occupancy up from 44% to 50% for the half year
- Conventions revenue up 4.6% with number of events and delegates up 4% and 3% respectively over 1H07.

- Total Revenue down 2.2% to A$62.5m (-$1.4m)
- EBITDA up 7.1% to A$12.0m (+$0.8m)
- EBIT up 19.4% to A$7.4m (+$1.2m)
- SKYCITY board has confirmed retention of the Adelaide casino as a core gaming asset
- Smoke-free regulations introduced in South Australia from 1 November 2007. November/December 2007 revenues were down 8% on November/December 2006. Table games revenues were favourable by 1% but gaming machine revenues were unfavourable by 13%
- Smoke-free impact reduced in January 2008 with gaming machine revenue down 8% compared to January 2007
- Table games not significantly impacted as smoking restrictions within one metre of gaming tables have applied since December 2004
- Effective cost management with direct/indirect costs down 4%
- EBITDA/EBIT contribution and margins moving in the right direction with work still to be done.

- Total Revenue up 10.9% to A$54.9m (+$5.4m)
- EBITDA up 25.7% to A$23.5m (+$4.8m)
- EBIT up 29.9% to A$20.0m (+$4.6m)
- Strong growth momentum continues with significant EBITDA/EBIT growth and improved margins
- Good overall performance with growth from gaming machines, food and beverage and hotel
- Gaming machines up 14% on 1H07 and 24% up on 2H07 due to increased visitation from lower to mid-range players
- Food and beverage revenue up 11% and convention revenue up 5%
- Strong hotel performance with occupancy of 88% (1H07 85%) and average room rate up 10% to A$189. Hotel was joint winner of 2007 AHA National Awards for Excellence "Best Superior Accommodation"
- Increased revenue and cost management lifted EBITDA margin from 38% to 43%
- A$30m stage 1 expansion of the Darwin property commenced October 2007. Includes an indoor/outdoor restaurant, destination bar and balconies with sea views, improvement of back of house support facilities and additional car parking. Completion estimated December 2008
- 2H08 growth not anticipated to continue at same rate with some disruption expected from the gaming floor expansion through peak season.

- Total Revenue up 2.6% to $20.0m (+$0.5m)
- EBITDA up 2.0% to $10.0m (+$0.2m)
- EBIT up 4.1% to $7.7m (+$0.3m)
- Gaming revenues up 3.1% with growth flowing through to EBIT
- New gaming machine product, plus the opening of the new Vue Bar in December 2007, has improved gaming floor visitation and average spend.

Group International Business (IB)
- Group total win net of commissions, comps and taxes $15.6m (1H07 $2.7m), theoretical $4.1m (1H07 $12.1m), above/(below) theoretical +$11.5m (1H07 -$9.4m), Group total EBIT contribution $12.6m (1H07 -$1.2m)
- Auckland win net of commissions, comps and taxes $5.4m (1H07 -$2.9m), theoretical $2.1m (1H07 $10.0m), above/(below) theoretical +$3.3m (1H07 -$12.9m), EBIT contribution $3.9m (1H07 -$5.0m). Auckland 1H07 saw significant commission programme play turnover, resulting in higher commission costs.
- Adelaide win net of commissions, comps and taxes A$4.1m (1H07 A$4.4m), theoretical A$1.2m (1H07 A$1.5m), above/(below) theoretical +A$2.9m (1H07 A$2.9m), EBIT contribution A$3.2m (1H07 A$3.2m)
- Darwin win net of commissions, comps and taxes A$4.6m (1H07 -A$0.3m), theoretical A$0.2m (1H07 A$0.2m), above/(below) theoretical +A$4.2m (1H07 -A$0.5m), EBIT contribution A$4.2m (1H07 -A$0.5m)
- IB EBIT comprises gross revenue $21.9m (1H07: $18.0m) less commissions, complimentaries and taxes $6.3m (1H07: $15.3m) equals net win after commissions complimentaries and taxes $15.6m (1H07: $2.7m) less IB expenses $3.0m (1H07: $3.9m) equals IB EBIT $12.6m (1H07: -$1.2m)
- The International Business model has been reviewed with improved/increased marketing bringing in a greater range of players across all programmes
- Significant individual and group play can produce volatility in International Business performance. The intent of marketing initiatives is to diversify and spread this risk across a broader customer base
- 1H08 experienced growth in visitation from key Asian markets, which has continued into 2H08 with group visits into Auckland and Darwin over Chinese New Year
- Win was $11.5m above theoretical compared to $9.4m below theoretical in 1H07.

SKYCITY Queenstown Casino (60% shareholding)
- Revenue growth of 20% over 1H07 with gains from gaming machines (+12%), table games (+22%) and food and beverage (+18%)
- Additional marketing activity has driven visitation and revenue with positive improvement to EBITDA and EBIT
- Strong January/February Queenstown tourist activity has seen a positive start to 2H08.

Christchurch Casino (41% shareholding)
- 1H08 contribution up $0.2m to $2.7m.

- Total Revenue $32.5m (1H07 $35.0m)
- EBITDA $2.0m (1H07 $4.6m)
- EBIT -$1.3m (1H07 $1.7m)
- Cinemas 1H07 includes revenue of $2.0m from SKYCITY Metro which was sold in June 2007. Adjusted, Cinemas revenue is down 1.5% on 1H07. Cinemas EBITDA is down 28.6% on 1H07 after excluding SKYCITY Metro 1H07 contribution
- Cinemas revenues continued to disappoint being flat against 1H07 with no uplift being achieved from a full six months operation from Chartwell, Hamilton (opened May 2007)
- Flat revenue compounded by increased costs and depreciation has led to a decline in profit and margin
- Poor performance during 1H08 has affected value which has led to the decision to write-down the Cinema assets by $60m.

- Revenue of $2.7m relates mainly to interest received
- Indirect expenses of $17.3m include $3.1m of costs relating to takeover activity and the process to sell Cinemas, and $1.7m of restructuring costs
- After allowing for non-recurring costs, indirect expenses are down $2.9m, 19%.

Capital Expenditure
- 1H08 capital expenditure was at reduced levels as business plans and major projects underwent further review
- Material projects during 1H08 have been the Auckland main gaming floor refurbishment, Hamilton entertainment bar, commencement of Darwin Stage 1 expansion and new cinema developments
- Guidance provided with the FY07 result included the SKYCITY Adelaide redevelopment and car park project which is on hold pending a review of the Adelaide business plan
- Plans for the proposed SKYCITY resort and the associated Little Mindil site reclamation are yet to be finalised
- Main items of capital expenditure expected during 2H08 are completion of the Auckland main gaming floor refurbishment, Darwin Stage 1 expansion and purchase of the Little Mindil land
- Group (excluding Cinemas) maintenance capex for FY08 expected to be below or at the lower end of previous guidance of $37m-$45m
- FY08 depreciation and amortisation guidance (excluding Cinemas) is reduced from $72m to $68m.

- Looking past the disappointing Cinemas outcome, 1H08 has delivered more acceptable results given:
- the disruptions of management change, takeover approaches, and asset sale reviews
- work on the Auckland main gaming floor.
- Looking forward, the company anticipates continuing positive trends in performance, based on:
- appointment of Nigel Morrison
- completion of the Auckland renovation
- Adelaide opportunity and expansion in Darwin
- ongoing focus on the core gaming business.

Disclosure: I own SKC shares

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Sky City Management: Blind, deaf and numb
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Sky City Casino: Underperforming
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NZX press release: AIA directors recommend shareholders sell
Auckland International Airport directors are split on the merger with CPPIB.
Previously they have been recommending shareholders hold their shares.

Media comment:

Board says sell to Canadians
Directors recommend Canadian bid for Airport

Watch Video: Tony Frankham on why he opposes the bid

AIA, 8.57 am NZ time, AIA board recommends shareholders sell

The directors of Auckland Airport today unanimously recommended that shareholders should sell their shares into the takeover offer from the Canada Pension Plan Investment Board (CPPIB) for $3.6555 per share (less the 5.75 cents per share interim dividend to be paid next month ).

However directors are not unanimous on whether shareholders should vote in favour or against CPPIB acquiring up to 40 per cent of the company.

A majority of the Airport board, comprising Tony Frankham, Keith Turner, Lloyd Morrison, and John Brabazon, are maintaining their recommendation for shareholders to vote against CPPIB acquiring 40 per cent of Auckland Airport as they believe the shares in the company are likely to be worth more longer term without CPPIB involvement.

Two directors, Richard Didsbury and Joan Withers, believe that shareholders should vote in favour of the offer as the price offered by CPPIB is unlikely to be available to shareholders in the foreseeable future.

For the transaction to proceed, the Takeovers Code requires a majority of shareholders who vote to approve CPPIB acquiring a 40 per cent stake. If this approval is not gained, the bid cannot proceed, regardless of the number of shares offered for sale.

Chairman of the board, Tony Frankham, said all the directors had carefully considered whether to revise their advice to shareholders on both elements of the transaction in light of the change in financial markets.

"All directors acknowledge that the market conditions have changed significantly since this bid was announced and this key factor has given rise to the need for directors to update their earlier recommendations.

"We all agree that shareholders would be unwise not to realise part of their holding at the favourable partial offer price if the partial offer receives approval to proceed.

"Each director has also carefully considered a wide range of other relevant factors in reaching their own decision in relation to the "voting" element of this bid.

"Directors who continue to recommend that shareholders should object to the takeover are of the view that the long term value of Auckland Airport has not fundamentally changed.

"They regard Auckland Airport as a strategic asset with long term horizons and consider ownership should not be determined by shorter term market fluctuations.

"They believe that over the longer term the value of Auckland Airport shares is likely to be greater without CPPIB having a 40 per cent stake which gives it effective control."

Mr Frankham said those board members have consistently said that the partial offer does not fully reflect the longer term value of Auckland Airport and despite further presentation from CPPIB do not accept that their introduction as a significant minority shareholder will assist the company in any material manner.

"As a result they maintain their view that, when considered on a longer term basis, on balance the CPPIB partial offer is not in the best interests of shareholders."

He said that Richard Didsbury and Joan Withers believe that the price offered by CPPIB to shareholders for some of their shares is unlikely to be available for the foreseeable future.

"They believe that the partial offer of $3.6555 per share (less the 5.75 cents per share interim dividend to be paid next month) is even more attractive today, at a time when shareholders are faced with uncertain global conditions that may continue for some years to come.

"The impact of those conditions does in their view put downward pressure on the valuation of the company and given global economic conditions, a more favourable offer in all aspects is unlikely to be available to shareholders in the near term.

"Therefore on balance, they feel that the certainty of selling 40 per cent of the company for significantly more than its current trading price outweighs the disadvantages of bringing on board a significant minority shareholder without material aeronautical or tourism connections.

"These directors therefore recommend that shareholders vote to approve the offer and sell their shares".

As already advised, the directors consider it is not possible to identify an appropriate party and present an alternative proposal to shareholders before the expiry of the CPPIB bid period on 13 March.

Mr Frankham said that if the CPPIB bid fails, the board will continue to seek a suitable cornerstone shareholder to take a smaller stake in the company however that process may take some time given the current state of financial markets.

"We envisage that it will continue to be challenging to meet all of the variously stated objectives of shareholders in relation to percentage holding, capital restructuring and non dilution of the Council interests," he said.

- ends -

For further information, please contact:
Lucy Powell
Head of Communications
+64 9 256 8866
+64 21 995 710

Auckland Airport has declared a fully imputed interim dividend of 5.75 cents per share payable on 12 March 2008 to shareholders on the register as at 7 March 2008. As the interim dividend will be paid prior to the close of the CPPIB offer, decreasing the equity value of Auckland Airport by an equivalent amount per share, the offer price will be adjusted in accordance with the terns of the takeover offer by the amount of the interim dividend. Accordingly, the offer price will be reduced by 5.75 cents per share from $3.6555 per share to $3.5980 per share. It is expected that the final dividend will be reduced by an amount of 2.00 cents per share, reflecting the increased interim dividend paid to shareholders now.

Related Share Investor reading

AIA profit stays grounded
Softening opposition to CPPIB bid for AIA
Directors of AIA bribe brokers not to sell
What is Auckland Airport worth to you?
Second bite at AIA by CPPIB might just fly
AIA new directors must focus on shareholders
Auckland Airport merger deal nosedives
The Canadians have landed
AIA incentive scheme must fly out the window
Government market manipulation over AIA/DAE deal
DAE move on AIA: Will it fly?

Disclosure: I own AIA shares

Links c Share Investor 2008

Money Managers Saga- 3 story wrap

Since I have been following this evil genius for years now and reporting on him, I see it only prudent to re-post here 3 stories out over the same weekend.

Incidentally the 2nd story from the Sunday Star Times is about Dougie selling up the company.

A smooth transition of clients money to his back pocket then out the door huh Doug?

You should be in the slammer mate.

c Share Investor 2008

Out of step?

The Dominion Post | Saturday, 23 February 2008

Investors in First Step are getting worried about their money, says Jon Hoyle.

After a year with their savings locked up, investors in Money Managers' former flagship - the Australian unit trusts scheme First Step - are becoming increasingly worried they won't get all their money back.

Some argue Money Managers owner and founder Doug Somers-Edgar should cover any investor losses in the scheme.

The company admits the global credit crunch has affected the cashing-up of First Step's assets.

First Step's trusts were closed in November 2006 with $457 million of 7000 investors' money on the books. Of this amount, $330 million was investor capital and $127 million was in effect accrued interest. By December 2007, $186.5 million had been returned to investors in dribs and drabs, based on how much money, how long and in which trusts they had invested.

Another payment was made last week, but The Dominion Post understands it was $8 million less than the expected $25 million. A Money Managers spokesman said he did not know the latest payout's amount but "could" find out. Follow-up calls were unanswered by press-time.

First Step was launched in 2000, taking advantage of a loophole in Australian and New Zealand tax law. Investors began withdrawing in increasing numbers after Finance Minister Michael Cullen changed tax legislation in 2004.

The Dominion Post has spoken to nine mainly elderly First Step investors either considering or planning to take court action against those involved in the scheme to recover claimed losses. One says he had $15,000 written off in December and predicts he is at risk of losing a further $65,000, the way the funds' liquidation is going.

He said he had tried to get his money out before the funds closed, but after three months of delays, the money was locked in till liquidation could be completed.

David Peach, owner of a public relations company representing Mr Somers-Edgar, said when originally asked about investor losses: "What's been lost? No one knows if there will be losses or not." Long-time First Step critic Chris Lee, a Kapiti Coast financial adviser, was unconvinced. "Read the last accounts. You can't argue that nobody has lost money - that's just horse manure," he said.

In December, the funds' trustee Calibre Asset Services warned that $38 million was unlikely to be returned to investors and a further $109 million was classified as being under "fundamental uncertainty".

In the fundamental uncertainty basket was $79 million owed by Geotherm Group (now in receivership) for the development of a geothermal power plant near Taupo.

Mr Peach said stress on credit markets had had a negative impact on cashing up the trusts' assets as it was more difficult for potential buyers to get capital.

The lawyer for one group of investors, James MacFarlane, said the global credit squeeze or any other "adjusted macroeconomic events are not an effective defence". The money invested in First Step passed through several entities owned or controlled by Mr Somers-Edgar and Aucklanders Russell Tills and Gerald Sidall. Mr Tills and Mr Sidall resigned from companies related to the funds in the months after their closure.

Both Mr Lee and Mr MacFarlane said the profit made on these transactions should be used to cover any investor losses.

One investor noted the NBR Rich List had estimated Mr Somers-Edgar's personal wealth had doubled to $120 million between 2006 and 2007.

All investors spoken to asked that their names not be published, citing fears over possible litigation.

Money Managers has been quick to hit back at critics. In 2005, it and Mr Somers-Edgar sought $500,000 in damages from Mr Lee for articles on his website. The claim was discontinued.

The same year, the Consumers Institute published a report critical of Money Managers and First Step. The institute's then chief executive, David Russell, said Mr Somers-Edgar called for his resignation and then wrote to the institute's board demanding he be sacked.

Lawyers for Money Managers and First Step's (Mauritius-registered) trustee Calibre Asset Services have said they are considering a complaint to the Press Council over a Dominion Post report published this month.

Money Managers has described Mr MacFarlane's talking to the paper about his plans to sue the Money Managers and other parties on behalf of investors in First Step as having a "sinister implication".

Mr Somers-Edgar would not comment when contacted earlier this month. But a statement from Mr Peach attacked Mr MacFarlane for not revealing the identities of those he is acting for, what the claims of action are and when papers will be filed with the court.

Mr Peach said: "If his implication here is some impropriety over management of the funds, then he should employ a lawyer capable of sifting fact from fiction and speculation." He compared Mr MacFarlane's approach to an "American-style touting strategy".

Mr MacFarlane said he would not provide details on causes of action as it would help Money Managers' lawyers prepare their defence, but his clients' cases had been fully analysed and the causes of action clearly identified.

He alleges that Money Managers had run "an elaborate funding, marketing and fiduciary and sales structure to raise funds from non-low-risk investments", which included lending money to companies associated with Mr Somers-Edgar and other principals in First Step. "This operated outside the continuous disclosure and insider trading regimes imposed by the Securities Markets Act," he claims.

He has also suggested Australian regulators have an interest in First Step, though Money Managers has dismissed this.

Mr Peach said all practices relating to First Step had been in accordance with the law and that the majority of investors had made "very good" returns.

A key concern of First Step investors was the degree of related-party lending.

First Step accounts for the 2007 financial year showed significant losses attributed to related-party lending, whereby loans are made between groups and companies that are closely linked. During 2007, the trusts wrote off advances and loans worth $400,000 to Quadrent Finance and $394,000 to CTT Finance Holdings (in receivership).

In 2006, $1.375 million of Quadrent loans were written off.

More than $60 million of loans were made to Club Finance, a used-car loan company. It is half owned by Mr Somers-Edgar.

Last year, Club Finance settled out of court with the Commerce Commission, agreeing to refund $788,000 of redundancy insurance premiums it charged 1500 unemployed borrowers.

Jonathan Glass, an adviser for Gareth Morgan Investments, said related-party lending was considered a high-risk game. It should generally be a red flag for investors looking at investing with any company.

Change afoot at Money Managers

By ROB STOCK - Sunday Star Times | Sunday, 24 February 2008

Money Managers founder Doug Somers-Edgar is selling up, releasing the iron grip he has held over the firm since it was launched in 1986.

The Star-Times understands Somers-Edgar is selling stakes in the financial planning business to Money Managers' chief executive Alasdair Scott, franchisees, and NZ Funds Management owned by long-time Somers-Edgar business associates Gerald Siddall and Russell Tills.

Money Managers' franchisees are telling clients the Money Managers model, involving the marketing of products from related parties, will be watered down, with the firm recommending more products from unrelated companies.

Related parties currently providing products and services to Money Managers include Orange Insurance, Orange Finance, Heritage Trustee Company, Dominion Funds and Matrix Funding Group, all ultimately 100% owned by Somers-Edgar.

Some of these products involved multiple layers of related party connections, such as the First Step products which are now being wound up with some Money Managers' clients facing losses. Money in the trusts was lent to various businesses, including Club Finance (now in receivership), a used-car dealer in South Auckland which Somers-Edgar half-owns.

Because Money Managers is such an effective sales channel, the unrated Orange Finance can offer investors a two-year rate of 8.55%, just 0.1 percentage point higher than a similar investment at the safest New Zealand bank, and 1.45 points less than South Canterbury Finance.

Scott would not confirm details of the deal, which is due to be signed in early March, or whether Somers- Edgar would retain a stake in the business. He said an announcement would be made when it was concluded.

Scott told the Star-Times in August 2006 that he was championing change in the business, although sources within the company say franchisees frustrated by stalled growth at Money Managers have been agitating for change.

On its website, Money Managers claims to have 35,000 clients and $2 billion under advice. They are the same figures Money Managers was giving in mid-2004.

Currently four of the 100 shares in Money Managers are owned by Somers-Edgar in his own name. The other 96 are owned by Edgar Holdings, a company with 30,000 shares, all owned by Somers-Edgar and his wife Anne.

In recent years Somers-Edgar has taken a low-profile role at Money Managers.

He is a polarising figure who grew to fame through tirelessly fronting seminars around the country and self-promotion on radio.

Discussions around the future of the firm include operating a flat-fee model where all commissions on products are rebated entirely to clients.

National Business Review

First Step: Where did the money go?

by Helen Malmgren

NBR Doug Somers-Edgar
Doug Somers-Edgar
Late last year, a strange thing happened at Money Managers, the financial advisory company owned by Doug Somers-Edgar. One of the company’s franchisees – someone whose entire business consisted of selling Money Manager’s investment products – suddenly went on a campaign against them.

This franchisee was particularly critical about what he called “Money Manager’s latest failure,” the First Step trusts, which have been closed and winding down since December 2006.

He began his campaign by texting at least one reporter at a major newspaper, anonymously. Then he sent letters to media and finance outlets, again anonymously. Then he sent out copies of First Step’s financial statements for 2007 – and that’s when he got a reaction.

A number of news outlets, including NBR , ran stories about how First Step expected to lose about $38 million of investors’ money because of bad debts. About a third of its investors’ original capital, $108 million, was in loans and advances that couldn’t be evaluated because of a “fundamental uncertainty.” About $63 million of investors’ money was in a used-car loan company that was being investigated for possible illegal activities.

The articles all ran in the same week in mid-December, just after investors received a letter from First Step’s trustee confirming the expected loss of the $38 million and the questions about the car loan company.

According to First Step, the franchisee who sent the information to the media has since sold his Money Managers business and moved on. But the revelations about the trusts’ accounts continue to infuriate investors.

“I told them to get stuffed,” said 79-year-old Lindsay Taylor, who together with his wife invested about $270,000 in First Step. Mr Taylor said he’d always thought their money was being invested in property mortgages.

“And they put our money into a finance company lending to unemployed people to buy second-hand cars?” he said. “How many other companies associated with this scheme are screwball?”

Write your own rules

Go to Money Manager’s website and you’ll find a dreamy-looking picture featuring what appears to be the company’s motto: “write your own rules.”

And that’s just about what Mr Somers-Edgar did when he started the First Step trusts.

Unlike most financial investments which advertise their independence and objectivity, First Step was built on a series of inter-related companies and related-party deals which the trusts’ promoters not only disclosed, but used as a selling point to investors.

According to First Step, related-party deals are a means by which the trusts can control projects they’ve lent money to.

The man who would appear to have the most control over First Step’s projects is Mr Somers-Edgar. He’s the sole director and shareholder of Money Managers, the exclusive promoter of the First Step trusts. He’s the sole director and shareholder of Financial Trust Ltd, which administers the trusts and makes decisions about what loans to make with investors’ money. He’s the sole director and shareholder of Matrix Funding Group, which manages the First Step loans.

And, through a series of related-party transactions, he’s a director and shareholder at several businesses that have gotten some of First Step’s biggest loans.

It was a surprise, then, when NBR asked for an interview with Mr Somers-Edgar and was told that “he’s simply not involved in the winding down of the First Step trusts.”

With all of those directorships, shouldn’t Mr Somers-Edgar be involved in the winding down of the First Step trusts? Shouldn’t he be involved in his own companies that owe money to the First Step trusts?

Yes he should be, according to Rob Rendle, senior solicitor at the Companies Office.

Under section 128 of the companies act , Mr Rendle said, “you can’t just walk away and say you don’t know anything about [your company.]” A director “can’t delegate the overarching management function” to someone else.

But it’s easy to see how Mr Somers-Edgar might be tempted to delegate some of his many directors’ roles to someone else. Because at this point, some of the related-party deals he made during First Step’s early days have become sore points for investors during its wind-down.

Take CTT Finance Holdings, the parent company of CTT Financial Services, CTT One, Paragon Factors and Dental Finance. Mr Somers-Edgar is a shareholder in all five of these companies and until 2002 he was also a director of all of them.

In 2004 they all failed, owing about $21 million to the First Step trusts.

By last December, CTT had only paid back about $9.5 million of those loans and appeared to be nearly out of assets.“There will be insufficient funds realized from the receivership to repay the secured debt in full,” wrote CTT’s receiver Murray Allot .

In a written comment, Phil Epps, CEO of the Edgar Family Trust and a key player at First Step, said that First Step investors didn’t lose any money when CTT failed to pay the remaining $11.5 million of its debt to the trusts. Instead, he said, that loss was mostly covered by “retained earnings” that First Step directors might otherwise have taken as dividends.

But that’s not the case with Club Finance, a company which First Step admits will probably cost investors millions.

It wouldn’t be the first scandal for Club Finance, a used-car loan company located in Mt Wellington, Auckland.

In September 2006, the company was the subject of a newspaper article entitled “Solo mum owes $35,260 on $9,000 car .” The article told the story of a young woman with a sick child who’d allegedly been tricked into signing an unfair contract with Club Finance.

In May 2007, the company got more unwanted attention when the Commerce Commission made it repay $788,000 worth of redundancy insurance which it had sold to unemployed car buyers.

One article about the repayments noted that more than half of Club Finance’s customers were unemployed.

Mr Somers-Edgar has been a director and 50 per cent shareholder of Club Finance since it started business in 2003. But when the story about the Commerce Commission broke, representatives of Money Managers told TV reporters he “had nothing to do with the running of the business .”

And today, when it looks like Club Finance won’t be able to repay the $63 million it owes First Step, Mr Somers-Edgar has all the more reason to distance himself from his car finance company.

In a written statement, Mr Somers-Edgar’s spokesman Phil Epps told NBR the accounting firm KordaMentha is now overseeing Club Finance.

He added that “we are in the process of providing further information to the appropriate [regulatory] bodies.”

He also pointed out, somewhat cryptically, that “following the appointment of KordaMentha, [Club Finance’s] managing director and CEO, Philip Markwick, relinquished stewardship” of the company.

Meanwhile, Mr Markwick says he can see which way the wind is blowing.

“They’re looking for someone to blame,” he told NBR, “but there was full disclosure at board meetings, governance meetings and regular meetings with Doug Somers-Edgar.

“I also met informally with Doug on a regular basis, and with Phil Epps.”

Mr Markwick blamed Club Finance’s problems on Mr Somers-Edgar’s decision to cut off its sole source of funding, the First Step trusts.

He also said he made Mr Somers-Edgar “fully aware of the ramifications” of that decision – namely, that it could potentially ruin Club Finance.

Sour deals

Mr Markwick isn’t the only one who’s accused Mr Somers-Edgar’s team of mismanagement.

“I’ve got to get these guys out of our business!” Alistair McLachlan shouted into the phone, when NBR called him about his company Geotherm.

In December 2006, Mr Somers-Edgar’s managing company, Matrix, put Geotherm into receivership after it defaulted on a First Step loan repayment. Two years later, the company still owes First Step investors about $76 million.

When it went into receivership, the company was working on a geothermal energy project near Taupo.

Last June, the receivers reported that while “the only asset realized to date is a motor vehicle sold,” they were “actively pursuing a recapitalization or sale of the company.”

But Mr McLachlan, who was the founder and driving force behind Geotherm, insisted the project had only been “held back” by Matrix.

“Once I can get them out of here, then it’ll go ahead,” he said.

Levels of Risk

According to Mr Epps, the problems with Geotherm and Club Finance are what forced First Step to set aside $38 million for expected losses.

But the question many investors say they want answered is how their money ever got into those deals in the first place.

The First Step trusts were designed and marketed on a graduated-risk model. According to First Step’s investment statement, the highest level of the four trusts would invest in mezzanine finance and subordinated debt projects, “suitable for investors who accept a high degree of credit risk to enhance returns.”

But the statement describes the lowest level trust – the Secured Mortgage Trust – simply as an investment that “include[s] property development loans supported by a first or second mortgage over the development site.”

So why did all four levels of trusts invest in Club Finance’s car loans, Geotherm’s energy project and CTT’s financial services?

According to a public relations representative for First Step, the trusts’ managers invested in those projects to diversify the trusts. He pointed out that, until First Step closed, no investor ever lost money in the trusts.

As for Club Finance, he said, back in 2003 car loans were considered an excellent investment.

Which raises another, more difficult, issue for investors.

As First Step winds down the market is turning sour – and that makes it harder to recover their money.

Just take a look at the property development at 19 Birdwood Crescent in Parnell, which currently owes the First Step trusts about $19 million. The building is complete, the units in it are sold, and the project is simply awaiting paperwork from the council.

Nevertheless, First Step’s administrator has taken the developer to court . Why?

According to the trustee for the project, “the court case is hot wind…They’re taking action to be seen to be doing the right thing for investors.”

When it’s time to repay the loan, it will have to be renegotiated.

“Everyone’s going to get hurt a bit,” he said. “The whole market’s in the same position. It’s a mess.”

Related Share Investor Reading

The "New" Money Manager's Investment Vehicle still tainted by its past
Don't forget Money Managers
Orange Finance collapse should turn investors red, with rage

Related Amazon Reading

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Madoff: Corruption, Deceit, and the Making of the World's Most Notorious Ponzi Scheme by Peter Sander
Buy new: $10.17

Links c Share Investor 2007-2009