Kathmandu Holdings: Market Update Misleads

I hate to say it but I warned prospective investors in Kathmandu Ltd [KMD.NZ] before the IPO last year that the pro-forma figures used in their 2009 Prospectus were suspect and it turns out that an announcement today by Kathmandu management indicating that projected figures used in the prospectus were mostly not met by the company.

While revenue was up by more than 13% - on the back of opening 14 more stores - for the year ended 31 July 2010 to NZ$245.5 million, same store sales for the year were up 1.3% and sales from all stores exceeded the forecast issued in the prospectus by NZ$5.5 million. All these figures of course are compared to the inaccurate pro-forma accounting method used in that same prospectus, so these positive figures made in yesterday's NZX release could well be misleading.

Every other key indicator KMD made in the prospectus has been missed, with EBIT for the FY2010 year, which excludes one-off costs incurred from the IPO, to be between NZ$47.0 million and NZ$48.0 million, which will be around 5% to 7% below the prospectus FY2010 pro-forma forecast. Kathmandu’s prospectus pro-forma forecast EBIT for the FY2010 year was NZ$50.6 million. The all important profit margin is expected to be round 63%, this is below the 64% projected in the prospectus.

Please also note that the nearly $17 million cost of the IPO is not included in the $47-48 million EBIT calculation or the interest charged on the large debt (larger now due to 14 extra stores being opened) the company holds on the balance sheet.

Also, keep in mind, once again KMD are using pro forma figures which make things very difficult to accurately compare year to year figures but even these comparisons make KMD look bad.

Using EBIT figures can also be a way of hiding negative news from shareholders and the broad use of them in the KMD release yesterday must also be taken into account when trying to assess the health of the company.

I am not saying there is anything underhand going on but the way the market update was put together means investors are getting far from an accurate picture and shareholders need to either give KMD a call to see what they really mean (because they have the actual raw figures untainted by pro-forma smudging and EBIT covering) or do some calculations of their own.

The reasons for the lower figures are being blamed on the overall retail downturn by Kathmandu management:

“Throughout the final four months of the financial year, in all 3 countries that Kathmandu trades in, the retail environment has been very challenging, and more difficult than we experienced in the first half of FY2010”. Chief Executive Officer Peter Halkett

Well, duh! this was not unforeseen when the prospectus figures were being compiled and projections made. We are currently enduring one of the worst recessions in recent history and every other retailer is having high rotation sales in the hope revenue keeps turning over because people have their wallets shut.

I must repeat what I have said in other commentary made on Kathmandu (see links below). Shareholders will not see an accurate picture for the company until financials can be compared like for like (with non pro-forma figures) in the full year result September 2011.

Until then we can only gauge the health of the company from the inaccurate figures currently used by KMD management and accepted by the NZX as sufficient disclosure to investors (it aint).

The market didn't like this of course and marked KMD shares down 23c or 17% to $1.82. This is below the $2.13 IPO price and a mid April high of $2.56.

There could be value to be found in the company as the share price eases.


Kathmandu @ Share Investor

Chart of the Day: Kathmandu Holdings Ltd
Kathmandu's 2011 Results Under Pressure from Jan Cameron
Kathmandu IPO: Prospectus Analysis
Kathmandu IPO: Jan Cameron lands a blow to IPO
Kathmandu IPO: What is it worth?
Kathmandu IPO: Retail Interest High
Kathmandu IPO: A tough mountain to climb
Kathmandu No.1 but IPO should get the Bullet
Download the detailed Kathmandu Value Cruncher Report - Requires free registration at Share Investor Forum to download
Download Kathmandu IPO Prospectus
KMD Investor Presentation to Macquarie

Discuss Kathmandu @ Share Investor Forum

Download KMD Company Reports


From Fishpond.co.nz



Buy Every Bastard Says No - The 42 Below Story, by Geoff Ross & Justine Troy & more @ Fishpond.co.nz




c Share Investor 2010

Allied Farmers: Rights Issue Decision

News that Allied Farmers Ltd [ALF.NZ] is asking shareholders to dip into their pockets to keep the company from being flushed down the financial toilet (I use this analogy for obvious reasons) is surely going to be a dilemna for them.

If they do put more money into the company they are risking more losses at a time they probably cant afford it but if they don't what is left of their current investment will be further diluted by a 1:3 rights issue at a 50% discount to yesterdays closing price of 4.2c per share. This must be put into the context though that Hanover investors who not only lost most of their dough while involved with that company then lost more than 80% of what remained when they decided to let Allied take over the assets of Hanover.

The company has a market capitalisation of almost $82 million as of close of market yesterday and this rights issue will add nearly 700 million shares to the current nearly 2 billion outstanding.

The market value of the company is less than 20% of what Allied management valued Hanover assets at in the latter part of 2009.

Investors in Allied must decide whether they are going to put good money after bad and this decision shouldn't be hard given the track record of CEO Rob Alloway and his company thus far.

The risk of investment dilution is far outweighed by the risk of losing even more money and investors, most of whom are 50 plus, should not feel pressured by the company or others to risk more of their money in this pig swill of a company.

The only hope you have of getting a return is for you to either sell now or hang on for a recovery at a undermined point somewhere in the future.

This will not be the last request for more money from shareholders as the company is cashflow poor and will need to bolster its balance sheet again least the banks decide to liquidate.

You must of course make your own decision of you are a ALF shareholder but if you are and have read this, please make the wise decision.

Allied @ Share Investor

Allied Farmers: Prosecutions should be on the cards
Allied Farmers Fraud passes with little fanfare
Allied Farmers: What's it Worth?
Hanover, Allied Farmers deal more of the same


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Hanover collapse: It was just a matter of time
Money Managers Saga: 3 Story wrap
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Greed is bad: Geneva Finance Folds
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Kevin's Blog

Discuss this topic @ Share Investor Forum - Register free


From Fishpond.co.nz



Buy Every Bastard Says No - The 42 Below Story, by Geoff Ross & Justine Troy & more @ Fishpond.co.nz




c Share Investor 2010

The path to the failure of Feltex lined with good Intentions

The finding in the district court yesterday that 5 former directors of failed company Feltex Carpets, Tim Saunders, Peter Thomas, Peter David Hunter, John Michael Feeney and , Hagen were found not guilty of charges under the Financial Reporting Act is not surprising, simply because laws surrounding possible breaches by them under the act specify intention rather than the actual results of any perceived misconduct by directors and management at Feltex. Lawyers for the prosecution, engaged by the Registrar of Companies, clearly took the wrong tack here, if there was any tack to take at all.

The charges laid against the "Feltex Five" related to information provided in the company's December 31, 2005 half-yearly financial statements in that they failed to disclose a breach of its banking covenants and did not properly classify its debt.

The judgement by Judge Jan Doogue, in the Auckland District Court today indicated lack of intention to mislead might be a leading factor in the not guilty decision and that Feltex Accountants, Ernst & Young were solely responsible for informing the Feltex Five of the company's financial reporting breach's:

"There is overwhelming evidence that these directors are all honest men and that they conducted themselves at all times with unimpeachable integrity. There is not one skerrick or evidence to suggest any intention by them to mislead the regulatory authorities, market, shareholders, potential investors or any other person.

If E&Y had performed the review to a proper professional standard as the directors were entitled to expect they would have identified and advised Feltex and the directors of the need to classify the bank debt as a current liability and to refer to the covenant breach in the explanatory notes.”

I would argue though that although intent to mislead was not the case, this lack of intent was on a lesser part of the roles of the Feltex Five to take responsibility themselves to make sure investors knew the true nature of what they were investing their money in and that possible irregularities or perceived risks were made known to the investing public as part of being responsible and experienced directors and professional managers.

For very experienced business people to not have the responsibility of informing investors of the true nature of a companies books cannot be mitigated by placing blame for non disclosure of financial breaches on Ernst & Young, even though the accountancy company clearly needed to disclose such breaches and seriously erred by not doing so.

Interestingly, after the 2004 IPO the Securities Commission also concluded that the 2004 Feltex Prospectus was not misleading but that:

• FTX failed to disclose certain material information to the market concerning changes to its facility agreement with ANZ in October 2005;
• FTX failed to disclose the breach of its banking covenants in its 31 December 2005 half-year financial statements; and
• FTX did not properly classify its debt in its 31 December 2005 half-year financial statements.

I would argue that pre the 2004 IPO and Prospectus issuance and during the 2 short years the company traded there must have been inaccurate numbers presented to Feltex investors. Often talked about (by my good self) Pro-Forma figures used in IPO Prospectus and subsequent comparisons in bookwork made after an IPO, do not give investors a clear picture of the financial health, or otherwise of any business - debt levels at the Prospectus issuance were very high but were they clear? This debt ultimately led to the demise of the company. A class action is being taken against the Feltex Five for poor disclosure in the 2004 Prospectus.

The Feltex Five are defiant in their innocence after the verdict but can we really trust 5 men who after an IPO and two short years they run a business into the ground costing investors a quarter of a billion dollars and the only people who made serious money from the IPO were these five?
What conclusions can we make from this not guilty verdict?

Well what we can clearly say is that the Financial Reporting Act lacks a broader umbrella that allows abdication of responsibility for those that are charged with having it when they manage and operate a public company. We can also assume that specifically the act also lacks the ability to hold individuals accountable for sloppy and careless operation of a business that might unintentionally lead to the loss of that business and the loss to investors of their moola.

This decision also opens a loophole for other directors that will or are about to go before the courts for similar charges and that surely puts investors on the back foot yet again where they cannot trust company management to operate a business in a prudent manner because the penalties for financial misdemeanors are either non-existent or meaninglessness.

Related

Analysis of 2004 IPO & Prospectus
Securities Commission
Financial Reporting Act 1993
Timeline of Feltex Decline

Tim Saunders/Feltex @ Share Investor

Tim Saunder's independence in question
2004 Feltex Prospectus




c Share Investor 2010

Long Term View: ANZ Banking Group Ltd

In this series of posts I am going to be looking at stocks listed on the NZX in relation to their returns to shareholders over the life of their listing -what shareholders would now see in their back pockets if they had invested in the company IPO. The calculation of returns includes dividends and tax credits.

ANZ Banking Group Ltd [ANZ.NZ] has been a stellar investment for shareholders since its September 1969 listing* on the ASX at AU $2 per share and 1988 listing on the NZX. With $19.66c in net dividends, (see NZX chart above and ASX chart here ) and numerous share splits, bonus issues and rights issues; 1:10 bonus issue 1984 ,1:10 bonus issue 1985, 1:5 bonus issue 1986, 1:2 bonus issue 1987, 2:11 rights issue in 2003 (see prospectus) a 2004 capital raising, a 2007 capital raising a convertible preference share issue in 2008 (see prospectus) a public and private capital raising in 2009, gives ANZ an 2100% return (see chart below for the share price percentage gain against the average of all NZX indexes - does not include dividends, tax credits and the share split in its calculation) and over the nearly 41 year listing of ANZ an annual net return of 51.21 %**!.

This is the best return of any stock in the Long Term View series.


* We will look at the full history for this Australian stock that listed in 1969 on the ASX and December 1988 for a New Zealand listing on the NZX.

** For holders of New Zealand listed shares the annual return has been just over 39 % since available data based on a 1996 share price of NZ$7.00. This is approx 400% better than the return from the average of all NZX indexes.

! This compares to a 51.21% return for WBC Bank over 40 years.




Long Term View Series

Auckland International Airport
Air New Zealand
AMP Ltd
Briscoe Group Ltd
Cavalier Corporation Ltd
Contact Energy Ltd
Delegats Group Ltd
EBOS Group Ltd
Fletcher Building Ltd
Fisher & Paykel Appliances
Fisher & Paykel Healthcare
Freightways Ltd
Goodman Fielder Ltd
Hallenstein Glasson Holdings Ltd
Hellaby Holdings Ltd
Kirkcaldie & Stains Ltd
Kiwi Income Property Trust Ltd
Mainfreight Ltd
Michael Hill International Ltd
Metlifecare Ltd
Methven Ltd
New Zealand Refining Ltd
New Zealand Stock Exchange Ltd
Nuplex Industries Ltd
PGG Wrightson Ltd
Port Of Tauranga Ltd
Postie Plus Group Ltd
Pumpkin Patch Ltd
Restaurant Brands Ltd
Ryman Healthcare Ltd
Sanford Ltd
Skellerup Ltd
Sky City Entertainment Group Ltd
Sky Network Television Ltd
Steel & Tube Ltd
Telecom NZ Ltd
Telstra Corp Ltd
Tourism Holdings Ltd
Turners Auctions Ltd
Turners & Growers Ltd
The Warehouse Group Ltd
Wakefield Health Ltd

ANZ Banking Group Ltd @ Share Investor

View 10 Year Summary for ANZ
ING & ANZ duped "investors" can take their own action

Discuss ANZ @ Share Investor Forum
Download ANZ Company Reports




c Share Investor 2010