Broker downgrades of Pumpkin Patch lack long term vision

Pumpkin Patch, a children's wear
company with more than 200 stores
in four countries, will open a
6,095-square- foot store at Columbia Mall,
in Baltimore, in the mall's lower level,
near Lord & Taylor, on March 25.
New collections, designed by an in-house
team, are introduced throughout the season.



Broker downgrades on Pumpkin Patch Ltd [PPL.NZX] sent the share price down 9% today, NZ.19c down to a multi year low of $1.97.

Broker ABN Amro has this to say:


... its forecasts for the company's first-half earnings, due out next week, this time by a whopping 19 per cent and down to $NZ12.6 million ($11 million).

Pumpkin Patch's problems centre on the poor prospects for its stores in Britain and the US - the latter no real surprise given the growing likelihood of a recession there. Its many Australian outlets are, by contrast, doing well, thanks to the hot economy, with earnings growth hitting 23 per cent.

However, says the ABN analyst Carolyn Holmes, that won't be enough to offset the declines abroad, which is why she has cut her target price for the NZ-listed shares from $NZ3.13 to $NZ2.53.

It is not clear from analyst Carolyn Holmes how she arrived at her downgrade or the reasons for them but I am going to take an educated stab at it.

Clearly the weak US dollar and stronger Kiwi is affecting repatriated profit back to New Zealand.

Nothing Pumpkin Patch management can do about that and not overly material to the day to day short/medium term running of the company. It is something that could get worse before it gets better.

"...poor prospects for its stores in Britain and the US...", well, I wouldn't go that far, clearly not as good as the long established New Zealand and Australian arms but the bulk of the US stores are trading profitably after a very short time opened and the UK unit has been trading profitably for a couple of years.

When establishing a new retail chain, initial loses are to be expected, due to set up costs and until economy of scale is reached and one would expect those stores that are already operating profitably to pick up margin wise once established for a longer period.

The time frame for analysis of a company by broking houses is notoriously short term and while short term indicators are of definite interest to gauge company health on a half year to 12 month basis, it is the long term prospects for a company that should be the primary interest to an investor. Especially when it is a growth company like Pumpkin Patch.

Directors of Pumpkin Patch commented on their business outlook and strategy when reporting the Full year NZ$27.6 Million 2007 profit last August, down from 28.5 million from 2006:

While interest, store opening costs and local market development costs would continue to have an impact on financial results in the short term the directors and management team were confident current strategies would the best long term financial outcomes...

Something I would concur with.

All listed companies with substantial overseas profit and revenues have been marked down over the last 6 months or so. Two other such notables are Fisher & Paykel Healthcare Ltd [FPH.NZX] and Fisher & Paykel Appliances [FPA.NZX]

Both of these companies are well run and Fisher Health has excellent long term prospects, but their market caps have taken a beating of late.

Pumpkin Patch is currently facing toughish times during a strong growth period but it isn't going to last. How long it will last is hard to say but things are not as bleak as some brokers might have you believe.

ABN Amro and other New Zealand brokers who downgraded Pumpkin Patch today all have shareholdings in the New Zealand Stock exchange and ABN recommended NZX as a "buy" today.

I wonder if they are short on Pumpkin Patch?


Disc I own PPL shares in the Share Investor Portfolio


Pumpkin Patch @ Share Investor

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c Share Investor 20o8

Fletcher Building raises profit through canny management

Fletcher Building Ltd [FBU.NZ] had a profit announcement today that was "inline" with market expectations and given current market uncertainties, the share price was savaged by NZ 28c, down to $8.87 on big volume of over 2.3 million shares.

1d 5d 3m 6m 1y 2y 5y max

Today's FBU chart tells the story after
a positive result out today.


To be fair the proceeding 6 months have been excellent, with a 22% rise in net profit of $235 million and a revenue increase of 19% to just over $3.5 billion. Costs clearly have been contained when you look at those two figures and compare.

Jonathon Ling has done well at his first full year as CEO and the previous head, Ralph Walters, has structured the company in such a way that revenues are diverse and able to push the company forward during economic downturns.

All Fletcher's business units increased profit.

Looking forward, Fletcher Building has over a billion dollars worth of work on backlog in New Zealand and things look positive in the infrastructure arena where governments of both colours look to build more roads and other public works.

The likes of the proposed $2 billion plus tunnel through Helen Clark's electorate of Mt Albert and the Eden Park redevelopment for the 2011 world cup could only be handled by the likes of a company Fletcher's size, so the likelihood of them getting the bulk of those contracts is in their favour.

CEO Jonathon Ling has managed Fletcher
Building well during his first hear. His
challenge now is to try and replicate that
during tougher times.

On the downside though, residential house building is currently facing a slump, while the future for that sector looks bleak in the short to medium term. Fletchers are big residential builders in New Zealand and Australia and supply substantial volumes of building products to other big contractors and small builders alike.

The acquisition last year of American Formica Corp, for close to NZ $1 billion, seems to have folded into the mixture of Fletcher's businesses well but for a slower than expected restructuring of the business and associated costs and a 10% drop in new US housing starts having an affect on laminate sales.

It will be very interesting to see how Formica do if the downturn is as severe and as long as some predict.

In retrospect it wasn't a good time for Fletchers to buy when they did last year. The purchase price and timing of the market would have been such that a lower sticker price would have been the order of the day.

As we know though it is hard to pick markets.

I personally don't think todays announcement warranted the canning the share price took and one would have to say it doesn't bode well for the NZX during this profit season if a company can report a 22% lift in after tax earnings and have "Mr Market" knock more than 3% off company capitalisation.

I give this result a 9.5 out of ten. Good effort, excellent results and great management.


Disclosure: I own FBU shares


Fletcher Building @ Share Investor

Fletcher House built on hard times
Fletcher Building down tools in the short term
Why did you buy that stock? [Fletcher Building Ltd]
A solid foundation for the future
Fletcher's got game


Related Reading

Fletcher Building History - Auckland University

Fletcher Building Financials

• Summary
• Charts
• Dividends
• News
• Announcements
• Price History
• Related Securities
• Half Year Results Presentation.pdf ( 1.00 KB )
  

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The full NZX /Fletcher Building press release:


FBU
13/02/2008
HALFYR

REL: 0900 HRS Fletcher Building Limited

HALFYR: FBU: FBU Half Year Results Announcement

Name of Listed Issuer: Fletcher Building Limited

For Half Year Ended: 31 December 2007

This report has been prepared in a manner which complies with generally
accepted accounting practice and gives a true and fair view of the matters to
which the report relates and is based on unaudited accounts.
The amounts as presented have been prepared in a manner which complies with
New Zealand accounting standards which comply with International Financial
Reporting Standards (IFRS).

CONSOLIDATED OPERATING STATEMENT FOR THE HALF YEAR ENDED 31 DECEMBER 2007

Unaudited

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

Total operating revenue: $3,547m; up 19%; $2,980m.

OPERATING SURPLUS BEFORE UNUSUAL ITEMS AND TAX: $327m; up 11%; $295m.

Unusual items for separate disclosure: 0; n/a; 0

OPERATING SURPLUS BEFORE TAX: $327m; up 11%; $295m.

Less tax on operating profit: $83; down 10%; $92m.

OPERATING SURPLUS AFTER TAX BUT BEFORE MINORITY INTERESTS: $244m; up 20%;
$203m.

Less minority interests: $9m; down 10%; $10m.

OPERATING SURPLUS AFTER TAX ATTRIBUTABLE TO MEMBERS OF LISTED ISSUER: $235m;
up 22%; $193m.

Extraordinary items after tax attributable to Members of the Listed Issuer:
0: n/a: 0.

OPERATING SURPLUS (DEFICIT) AND EXTRAORDINARY ITEMS AFTER TAX ATTRIBUTABLE TO
MEMBERS OF THE LISTED ISSUER: $235m; up 22%; $193m.

Earnings per share: 47.0 cps; up 14%: 41.1 cps

Interim Dividend: 24 cps

Record date: 21 March 2008

Date Payable: 10 April 2008

Tax credits on latest dividend: 100% for New Zealand comprising imputation
credits.

Non New Zealand tax payers can benefit from the partial refund of the New
Zealand tax credits as outlined in the attached press release.

SUMMARY

Directors today announced the group's unaudited interim results for the six
months ended 31 December 2007. Net earnings were $235 million, compared to
$193 million in the previous corresponding period. This is an increase in
earnings per share from 41 cents to 47 cents.

Operating earnings (earnings before interest and tax) and after Formica
restructuring costs of $16 million were $394 million, compared to $340
million in the previous corresponding period. The increased earnings are due
to the Formica acquisition, ongoing operational improvements and some small
acquisitions.

The interim dividend of 24 cents per share is an increase of 2 cents per
share over the previous interim dividend and is the twelfth consecutive
dividend increase by the company. Total shareholder return was negative 4
percent for the half-year, influenced heavily by the uncertainty in equity
markets internationally.

The 22 percent increase in net earnings reflects strong operating
performance, with all divisions recording higher earnings than in the
previous corresponding period. Laminates & Panels' earnings increased on a
like-for-like basis, and also benefited from the acquisition of Formica
Corporation on 2 July 2007.

The Chief Executive Officer, Mr Jonathan Ling, said: "This is a pleasing
performance which reflects the group's ability to deal with variable and
sometimes difficult operating conditions. Across our businesses, commercial
and infrastructure markets are still strong, which is best exemplified in New
Zealand with a construction backlog of over $1 billion. While there is some
weakness in residential markets and provided there is no significant change
in economic conditions, we remain comfortable with our earnings prospects for
this financial year".

Key Points

- Group net earnings up 22 percent to $235 million
- Operating earnings up 16 percent to $394 million
- Cashflow from operations up from $227 million to $245 million
- Earnings per share up from 41 cents to 47 cents
- Interim dividend of 24 cents per share with full New Zealand tax credits -
the 12th consecutive dividend increase
- Acquisition opportunities being evaluated

Contact:
Jonathan Ling Bill Roest
Chief Executive Officer Chief Financial Officer
Phone: +64 9 525 9169 Phone: +64 9 525 9165
Fax: +61 9 525 9032 Fax: +64 9 525 9032

Sky City Cinemas no Blockbuster

Sky City Entertainment's share price took a 9c drop today on news that it was writing
down its cinema division by NZ$ 60 Million.



The announcement today of a write down in the value of Sky City Entertainment Group [SKC.NZ] division has been a long time coming and is probably the only positive decision that management have made in a long while.

The loss has finally been realised-a NZ$60 million write down- and an extremely bad decision years back to buy this pig of an asset for an over inflated sum has been dealt with. A shame though that the only casualty of that bad decision was Evan Davies, the CEO who was sacked last year. Members of current management clearly need to fall on their swords over this latest waste of shareholder cash.

That ain't going to happen in this day and age of buck passing though.

I have been bitching and moaning about the cinema business since it was bought many years ago.

I loathe the cinema business, long-term it doesn't make money and is subject to continual capital expenditure due to changing technology and fierce competition, from not only other cinema operators, in a saturated multi-screen race to build more seats, but from many other sectors of the entertainment industry.

Those faceless suits at Sky City should have known these facts and run kicking and screaming along with shareholders checkbooks, from any such wrong headed deal.

The cinema business must be sold, it has over 100 screens and has 10 screens in limbo at the moment at the new Albany Westfield Mall, pending a possible sale.

The write down today values the cinema assets at around $50 million but it is highly unlikely that it is worth that much to a potential suitor.

There has been talk of Hoyts buying the cinema company but I don't think that could possibly happen given the dominance it would give a combined company in the current market.

It is more likely a company like Berkely or Reading Cinemas would be a better fit given their relatively small sizes.

Sky City have had a turbulent preceding 12 months and still have a number of issues to deal with in the future. The company have just started proceedings against the South Australian State Government, in tandem with the TAB, because the State has reneged on a contractually agreed limit in charges and taxes when they sold the Adelaide Casino to Sky back in 2000.

The 2008 General Election in New Zealand is also likely to be of great interest to shareholders as well, If the Labour/Green nanny statists get re-elected, further regulation against perceived "harm" to casino customers and higher gaming taxes are a likely scenario.

All this turbulence makes the job of new CEO Nigel Morrison all the more challenging when he takes up his position at the end of March 2008.

The half year profit is announced on 25 Feb and will include the cinema write down in its figures. Dividends will not be affected.

Sky City Entertainment shares were down more than 2% today (FEB 12, 5.00pm NZ time) on low volume.


Disclosure: I own SKC shares in the Share Investor Portfolio

Sky City @ Share Investor

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Sky City Entertainment 2008 Full Year profit results , NZX release, 2008 full year presentation, result briefing webcast, financial statements
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NZX Press release: Sky City profit to HY end Dec 2007
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c Share Investor 2008

Labour buys Tim Shadbolt's silence

c Blanch 2008


News out today that the Labour Party have caved in to the protestations of Tim Shadbolt over his promise to campaign against the anti democratic Electoral Finance Act should be no surprise to those of us with morals and standards.

Labour cut funding to various Southland education facilities because they didn't think anyone would notice or care.

Shadbolt, a former Auckland University colleague of a large number the current crop of Labour Socialists, including Aunt Helen herself, would have focused attention on the controversial Electoral Finance Act by publicly protesting, up until the general election, towards the end of 2008, so the fuse had to be short circuited and Labour backtracked by reinstating some of the funding. Something that Labour said at the time wouldn't happen.

It is a clear message to voters that the Labour Party are highly embarrassed over the Electoral Finance Act and will do anything to stifle the much warranted negative publicity over its introduction and inception on Jan 1 2008. An act that has already had a number of causalities, most notably the young man, Andrew Moore, who was threatened by the Electoral Commission to effectively close his website down because it criticised the Government-something those that voted for the Bill also said would never happen.


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C Political Animal 2008