Wednesday, August 26, 2009

Michael Hill International: 2009 full year profit commentary

The 2009 full year profit for Micheal Hill International [MHI.NZ] out yesterday was ugly, real ugly.

Summary of Key Points

- Operating revenue of $411.999m up 9.4%
- Same store sales 0.8% up on same period last year
- EBIT of $26.193m down 38% on last year
- Restructure of group in December 2008 resulting in a deferred tax credit of $52.942m
- Restructure consultancy costs of $1.226m expensed in the period
- US acquisition costs of $1.569m incurred in the period
- US segment loss of $5.292m for the period
- Net profit before tax of $20.149m down 46.3% on last year
- Net profit after tax of $69.533m (includes the deferred tax credit of $52.942m)
- Net debt reduced from $64.234m to $36.958m
- Operating cash flow of $47.643m for the period ($7.763m in 2008)
- 30 new stores opened during the twelve months, including 17 in the US, and 1 closed in Australia
- Total of 239 stores open at 30 June 2009
- Final dividend of 1.5 cents per share (no imputation credits attached)
- Total dividend for the year of 2.5 cents down from 3.2 cents in 2008


First the ugly stuff:

Ordinary profit after tax from operations was down by 46% on revenue up by over 9%.

One of the key reasons for this drop in profit was the purchase last year of a chain of bankrupt US jewelry stores that has so far cost MHI nearly NZ$7 million over the last 9 months. A small part of that cost was a one-off purchasing fee related to the acquisition, the rest an operating loss.

Management have indicated that more shareholder money will be spent refurbishing a handful of these US stores and as the retail environment in the US isn't going to recover any time soon it is likely the company will be in for substantial losses for the nest 12 months on US operations.

Michael Hill has said himself that the timing of the US purchase was a mistake (listen to Michael Hill interview - You need to register first) but as he has also said he has always wanted a foothold there, he has it now and holds a long-term view on its future success, as do I.

Pumpkin Patch Ltd [PPL.NZ] has also had recent difficulties with its US operations, incurring significant losses, so this is a very tough market, especially in the current economic conditions.

Michael Hill's Canadian stores have also dropped back into a small loss after being in the black last year.

New Zealand operations were down significantly, and all indications from the man on the street (my good self scoping foot traffic whenever I go past a MH store) are that things are not looking any better as we enter the new financial year.

The not so ugly:

Australian Michael Hill stores were immune from the retail downturn with both an increase in revenue and before tax profit. It is important to note though that Australia has yet to have an official recession, with economic indicators there still looking positive, so that is one explanation for its 2009 success.

Many NZX listed companies have managed their capital well during the credit squeeze and Micheal Hill has been exceptional in this case. They have nearly halved company debt to just over $35 million over the last year, without the use of any capital raising. A move to be admired by shareholders and other CEOs with less frugal spending habits.

The 2009 year has been one of the worst years in business for MHI over the last generation. Most of the indicators have been bad and things do not look any more promising in the coming 12 months. However, Australia has been an exceptional standout.

MHI management don't make predictions for the future but they do stress things will be tough over the 2010 financial year (well duh!) and its expansion into the USA is a long term play that will bear fruit in the future.

I picked up more MHI a few months ago for just this long term play.

9 .5 for effort, 6.5 for results.

Disclosure I own Michael Hill International shares in the Share Investor Portfolio.


Michael Hill International @ Share Investor


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c Share Investor 2009

Monday, August 24, 2009

Freightways Ltd: 2009 Full Year profit commentary

OK, I am back to the wilderness of New Zealand from being ensconced in a hotel room and the back of taxi cabs in Bangkok for two weeks and the NZ stockmarket is smack in the middle of reporting season.

One company's results caught my fancy and I thought I would give you my thoughts on those results.

The full year profit to June 30 2009 that came out last week from Freightways Ltd [FRE.NZ] was a case of steady as she goes, at least at first glance

Revenue was up by 5% to NZ $340 million and net profit after tax up by 7% to just over $34 million. If you exclude the one-off $4 million profit on the sale and leaseback of a property then profit is down by over 12%. Not bad considering economic conditions but considering that revenue is up slightly it is clear that management have let business costs get out of control.

Having said that a large amount of that cost has been attributed to capital expenditure to allow for future growth and management say that this expense will achieve results in the coming year -10s of millions have been spent on many acquisitions over the last few years, which have been purchased with borrowed money.

Financing costs for a sizable company debt have also been considerable but a capital raising from earlier this year has been used to pay down some bank debt so this cost should be lessened for full year 2010.

Interesting that in comments about capital management, nothing was said about the sizable dividend being paid when profit was down. The company is borrowing heavily to fund this dividend and it should have been cut by more than it has. Other companies have done this during 2009 and for Freightway's management not to address this is very poor to say the least.

The courier businesses have been hit the hardest, while the company's purchase of document management businesses over the last several years seems to be paying off as these are achieving growth even when other parts of the the company have slowed.

Naturally management are cagey about company prospects for the coming year given economic uncertainty but I would have to say even if business operations and therefore revenue remain stagnant, the fact that a multitude of costs have been ameliorated in the current year will mean next years full year profit after tax should be substantially better than full year 2009.

The only worry and out clause about that statement is that management have flagged looking at buying businesses this year more than a few times and unless any prospective business is the "bargain of the century" and a great business to boot then such purchases would be folly given the still high company debt and issues surrounding the health of the global economy.

Overall, the full year 2009 result has been unexciting if not a little boring and disappointing from a shareholders point of view because opportunities to pay down more debt have been lost and the hiding of the fact that ordinary profit was actually down a reasonable amount, rather than the headline of a profit up 7% was disappointing management let down.

6.5 out of ten.

Disclosure: I own FRE shares in the Share Investor Portfolio


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c Share Investor 2009

Monday, August 17, 2009

Sky City Entertainment 2009 FY Profit Preamble

With Sky City Entertainment Group [SKC.NZ] reporting its FY 2009 profit this coming Wednesday 19 August, investors are not going to get any surprises.

The dividend ratio has been cut, debt has been paid back and profit is well up on last year.

On July 21 the market was updated with a profit up roughly 15% to around the NZ$116 million mark and since then shares have climbed to as high as $3.45 from about $2.80 before the upgrade. This is in a market where all shares are basically up.

What we need to know is how Nigel Morrison is going to go managing the company in the following 12 months and beyond.

In a sneak preview of an interview coming out in late August early September with Nigel I indicate the importance of this in my preamble:


Sound capital management with a focus on customer service and unnecessary costs stripped out have been the key to Nigel's success so far.

But what of the next 12 months and longer?

How will the business go under his leadership and what new ideas does he have to take this company through the $1 billion revenue barrier and beyond?

Morrison has done well but a further test of his strong management so far will come as Sky City emerges over the next year or so.

Shareholders and the market must see how Nigel will accomplish this and he should indicate the key ways he will achieve this, without revealing competitive secrets of course.

I look forward to Wednesday.


Sky City Entertainment Group @ Share Investor


Discuss this stock @ Share Investor Forum

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Put some questions to Nigel Morrison for the Interview.

You can submit them at the Share Investor Forum here or email them to me here and I will submit the best ones to Nigel.


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c Share Investor 2009

Wednesday, August 12, 2009

Letters from Bangkok: Business is Still Hot

Greetings from Bangkok, I am back here in this very busy city to do a bit of personal stuff and look at the way Thais do business as well.

I have to say from what I have seen so far, the global economic slowdown has yet to dampen the Thai's natural entrepreneurial spirit. Having said that there is political debate over a very large so-called "stimulus" package - you would have thought the Thais would have learnt from the failure of every country's respective bailouts that have thus far pumped trillions of borrowed money into failing economies.

Everything is constantly pumping and everywhere one looks, even in areas of abject poverty, people are selling things; whether it be rice, tyres, cars, rags or tummy tucks.

Bangkok really is a paradise for a healthy capitalist like myself!

The Thai Stock Exchange Index closed at 644.2 this last Friday, according to the Bangkok Post , up more than 50% over the last 6 months alone, and one could expect, like other world indexes, including our own NZX, this kind of market over-exuberance is not a sustainable one given the fragile nature of any perceived global economic recovery.

I am going to visit the heart of bureaucracy tomorrow, Embassy row (the Kiwi Embassy and red tape machine on the 15th floor of a very flash downtown building) in downtown Bangkok and plan on taking a look at the operation of their stockmarket as well.


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c Share Investor 2009

Friday, August 7, 2009

Beware of "Black October"

A recent market update by Kingfish Ltd [KFL.NZ] the listed portfolio management vehicle, got me thinking.

In this document they wax lyrical about how well share prices for the companies they hold have done well over the last quarter and they are right, they have done well.

Ryman Healthcare [RYM.NZ] Freightways Ltd [FRE.NZ] Mainfrieght Ltd [MFT.NZ] Sky City Entertainment Group[SKC.NZ] and many others have stacked value on their share prices.

Sky City alone has gained over 40% since its recent $2.51 lows.

Kingfish have all these companies in their portfolio bar Sky City. I own them all in the Share Investor Portfolio.

But rather than reason to get excited if you are an investor with a shorter term horizon you are likely to get a bit of a shock in the back pocket, if stockmarket history is anything to go by.

The month of October is notoriously bad for global markets, the 1929 crash happened in October and so did the 1987 crash - the 2008 crash likewise. Even if you discount those three historical events October is just a bummer month for stocks, it is probably a psychological thing where historical events have self perpetuated into a down month.

Nevertheless it does happen and that month could be the time to start buying again. My wallet is firmly closed, for now.

Take care of yourselves, be careful when deciding to buy and make some money why don't ya.

See you soon.

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c Share Investor 2009

Thursday, August 6, 2009

Bruce Sheppard's debt debate points the finger at you


Bruce Sheppard's crusade on NZX listed companies and their debt levels has apparently come to an end but what has it achieved?

Well, it is always good to get frank and open debate about our listed companies, because if you have been reading my comments over the years the NZX and their mates are almost a closed shop as far as communication and disclosure are concerned.

Bruce also highlighted several companies that have either collapsed or a sailing very close to the wind in terms of their debt levels; Cadmus-Provenco, Nuplex Ltd [NPX.NX], Fisher & Paykel Appliances [FPA.NZ] and more.

The non-reply's to Bruce's letters from Sky Network Television [SKT.NZ] and Team Talk reveal more about respective company management and poor attitude to shareholders apart from a possible debt problem.

Nothing substantive in terms of conclusions were made by Bruce but he quite rightly puts the responsibility back on individual investors to do their own homework:

Just as I and the SA are prepared to be judged by what we do, right or wrong, well or badly, so too should companies be judged. So rather than me analysing the responses in detail or providing you with any guidance on the strength or weakness of the companies written to, you must do this for yourself by reading our letters and their replies.

The companies were on my list because I thought, and still think, they have too much debt and are at risk in an economy such as this. That is my prerogative, you will each have your own risk profiles and you will each analyse the prospects and debt profile of these companies for yourself. It is my view that debt is the number one risk faced by equity investors today and that is why I did this work. Read the full conclusion @ Stirring the Pot

Why am I interested in Bruce's opinion so much on such matters?

Well, I mostly like what he says, he stimulates debate and he is an influential person.

The main point of Bruce's debt exercise? Looking at issues like debt, company management and company performance are essential when investing and should be done by you dear reader.

Oh, and he also finally disclosed ownership of shares in a couple of companies.

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c Share Investor 2009

Market Quickie: Sky TV Worth Watching




I have given Sky Network Television [SKT.NZ] a very wide birth over the years, I have never really understood a company that spent more than 10 years losing money and has only been making it for the last 3 or 4.

I guess they were building up a business?

I don't like its business model; a company that relies on continuous large amounts of capital to keep competition at bay doesn't make for a good long term return.

Sky is also at the mercy of Government regulation, currency fluctuation, product quality and large capital depreciation.

What I do like though (I am such a negative bugger) is that it is a virtual monopoly-in Pay TV terms -but even that is under threat by new technology (which SKY is trying to take a punt on) via the Internet and satellite TV and product.

It hasn't done well over the last year, with a more than 16% drop in profit to just over $NZ42 million in the half year to 31 Dec 2008 on higher revenue of nearly $350 million. This is due to higher capital costs, which I outlined above.

Why the hell then do I mention the company today if I see little redeeming about it in its day to day operations?

I kinda like its share price.

The shares are well off their low of $3.15 during the last 52 weeks but the corollary to that is that they are off their 52 week high of $5.10 and well off their all-time high of $6.75 in late 2006 (see 5 year chart above)

I reckon this company is worth a good short-term to medium term punt.



Sky Network Television @ Share Investor

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Buy Toughen Up: What I've Learned About Surviving Tough Times

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c Share Investor 2009