Pumpkin Patch Ltd: UK Store closure better late than never

PPL Store, Metrocentre Gateshead, UK

News out yesterday that Pumpkin Patch Ltd [PPL.NZX] 36 UK stores are to be put into voluntary administration is no surprise to most PPL watchers but is a surprise to some, like me, who think it should have been done 24 months ago when the writing was clearly on the wall. Management have taken too long to make a decision. Curiously the Ireland operation will continue to operate - how strange.

Apparently it is up to the receivers what happens to the stores now but it isnt clear just what that is yet.


Neil Cowie, Pumpkin Patch Group’s CEO:

"Cowie added “As part of the administration process we are effectively handing over the day to day control of the UK subsidiary to the administrators. As such we cannot pre-empt what actions the administrators may take in the coming days and weeks. However we anticipate that if they cannot find any alternative options some or all of the UK stores will be closed.

Cowie continued “We are confident that there is a place in the UK market for our brands. This is supported by our fast growing UK online operation and the fact that 750,000 customers shopped at our UK stores over the last 18 months. In fact the review highlighted a number of interesting opportunities for Pumpkin Patch and Charlie & Me in the UK and we will be exploring these over the coming months".

Does that mean the stores can continue as Pumpkin stores but the brand licensed to a new owner? That is one scenario but we will have to stand-by to find out.

The ditching of the UK business will of course cost more shareholder money - around 11 million in cash off the first half result coming up in March - but the news is positive given ongoing costs of this turkey will be roasted and over with once the UK business is cut off from the parent balance sheet.

Along with their disastrous foray into the United States, which ended in 2010, Pumpkin Patch management have buried around 50 - 60 million in cash in a hole in the garden somewhere and some dog has dug it up never to return it. Zip, nil, nada, GONE!

We must move on though it is only money after all (stop rolling your eyeballs) and look at what us shareholders still have left. 195 odd stores in New Zealand and Australia (a handful in one of the PIIGS, Ireland) and a good brand slightly dented by a tired image and poor supply chain.

The retail outlook in Australasia doesn't look too cute though but it will see a recovery over the next few years and a slimmed down PPL will be ready to do what it does best. Sell its well known well-loved clothes and brand to the public.

Lets hope we can ditch the few remaining directors and management that have made the last 5 years a pain in the backside.

Disclosure I own PPL shares in the Share Investor Portfolio.

Pumpkin Patch @ Share Investor

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Share Price Alert: Contact Energy Ltd 6

The Contact Energy Ltd [CEN.NZX] share price has bounced around like a cheap K'Rd hooker for the last 5 months and yesterday reached a 5 month low of $4.88.

The CEN share price had support and these levels 5 months ago and rose from a 52 week low of $4.82 on August 9 to $5.50 on the 22 September 2011. An approximate 14% rise. Well, over almost over the same time-frame the share price has done almost the mirror opposite going from $5.52 on 2 December 2011 to finish at the aforementioned $4.88.

The share price drop of around 13% over the last 6 or so weeks appears to be because the margin the company is getting for retailing their electricity has reached -7% in the month of November. They have increased customer numbers every month since introducing a 22.5% discount for early payment of accounts in August but this has of course led to obvious retail losses. October data indicated a-2% retail margin.

December operational data is out next week so it will be interesting to see which way the margin falls for this period.

The company is doing OK in terms of generation volumes and prices received for that generation so I see the share price fall as a little overdone.

The current share price is good value for this company and anything around these levels is a good buy.



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Port of Auckland Dispute: Time to move on

Nevile Sidney Lodge, Evening Post 1976.

Whatever side you are on over the Ports of Auckland (POA) employment dispute, what would be agreed by most is that the impasse must be ended and it must be ended quickly.

The striking union workers have cost the port millions in lost revenue, cost it its reputation as an easy and reliable place to do business, cost Auckland City in terms of business from related industry and cost New Zealand in terms of its competitiveness and with other markets.

What is at stake now though from this ongoing dispute is the future of the port and they way it will do business in years to come.

The port is a highly inefficient one and makes a poor return on capital invested compared to its peers, especially Port of Tauranga Ltd [POT.NZX] which is a least 20% more efficient in terms of container movements.

The unionised workforce at POA has been thus far unable to get efficiencies that ports like POT have because the union is grounded in past employment practices that date back decades and are no longer relevant in this fast-paced competitive global market we all now compete in.

The Maritime Union and its head, Gary Parsloe, were unwilling - or unable - to come to the party and let go of perks. In one glaring example that would have them being paid for work they didn't do and as a consequence the union workforce at the POA site are in jeopardy of losing heir jobs to workers who are now in the process of being employed on an individual contracting out basis. Their rates of pay are also pretty spectacular for semi-skilled work.

It would have been much better for the union and its members to agree that they must become more efficient of course but that looks unlikely to happen now that their strikes and stoppages have brought the company to its knees and the issue to a head.

We must look at Port of Tauranga for a solution.

Unlike POA, POT has a totally different structure in terms of its workforce, management and organisation as a business.

POT has a non-unionised workforce that is open and flexible in its outlook towards how its employer runs its business and they are fully aware of their need to be competitive in a global environment. As such its efficiency is far higher and its ability to gain business at the expense of competition like POA is clearly obvious.

This doesn't mean that POT workers are short changed though. A large number of the ports workers own shares in the company so are incentivised in that respect to work with the company, rather than just as employees. One cannot underestimate the value of ownership and if POA workers had this incentive available to them you can bet they would be keen work rather than keen to work their employer.

If we compare the financial performance of the two, as Brian Gaynor has in a Herald piece on Saturday we can see a yawning chasm between the two:

"As the accompanying figures show, POA has been hammered by POT in recent years: POA's ebitda has fallen from $92.6 million in 2003 to $74.4 million, whereas POT's has increased from $69.5 million to $95.0 million; POA's ebitda margin has fallen from 55.3 per cent to 40.5 per cent while POT's has increased from 47.6 per cent to 51.2 per cent; most importantly, POA's dividend has declined from $34.5 million to $17.6 million while POT's has increased from $22.8 million to $40.2 million.

This is a huge concern to Auckland ratepayers as the $17.8 million POA dividend represents a return of only 2.1 per cent on POA's $848 million 2005 takeover value.

The biggest difference between the two companies is in terms of costs as they both have fairly similar total revenue, but POA has had total June 2011 year costs of $109.4 million compared with POT's $90.3 million.
This is where the argument about internal employees and outsourcing comes in, the issue at the heart of the current industrial dispute.

In 2010, POA had total employee expenses of $51.9 million compared with only $18.5 million at POT and last year employee benefits plus pension costs were $54.9 million at POA compared with POT's $25.3 million".

Emmerson, NZ Herald, Jan 2012

Never underestimate how much negative pressure politicians have put on the likes of POA as well, one in particular has had a big impact on the port.

Mike Lee, former head of the Auckland Regional Authority (ARC) and now semi-retired on Waiheke Island but still muddling through local politics, lobbied to buy back the partially listed POA in 2005 and put a $858 million value on it and as of today the company is returning just over 2% based on that sale value. Clearly that is not acceptable and something needs to change.

Mr Lee also milked  hundreds of millions of dividends from the port to pay for mostly transport related spending and left the POA balance sheet seriously laden with debt which is still a millstone around its neck today.

In 2006 -7 when POT started discussing merging with POA, Mike Lee and his ARC put the kibosh on the merger because not only was it an ATM for spending for the council, Mike has a philosophical and political view that this kind of asset should be publicly owned and dirty private enterprise should keep their mitts off it, never mind that the merger would have brought economies of scale to the port, economic stimulation for Auckland and Tauranga and jobs for union and non-union workers alike. Shame about politics huh? Especially the left.

To this point, selling down a minority stake of say 49% share in POA and re-listing it on the NZX  (as will be done with New Zealand's state electricity monopolies) will help make politicians more honest and businesslike in what they do rather than political and move the port ahead competitively. A hybrid ownership structure is the best model to achieve this with a ratepayer/taxpayer owed business entity and has been done quite successfully with Air New Zealand Ltd [AIR.NZX] Auckland International Airport Ltd [AIA.NZX] and of course POT itself which has been a stunning success under hybrid ownership.

The Productivity Commission came out with a report last week not only critical of unions and their role in the ports demise but also recommended a part sale of New Zealand ports to help logistics and competition in this area move into the 21st century rather than stuck in the time warp of the 1951 port strike that was only resolved when the military moved in.

I have some sympathy with critics - including some a few comments in the Productivity Commission's report mentioned above - who say management share blame over this employment dispute, and I would have to agree, but only in terms of the length of time this dispute has drawn on - 11 months and counting. Management should have taken a tougher stance with the inflexible union and its head months ago and so they can, in this respect only, be held partly responsible for losing valuable customers like Fonterra and shipping line Maersk.

Because of the delays in resolving this bitter dispute, jobs have and will be lost directly within the port and in related industry and reputations tarnished.

It is important that this situation be resolved as quickly as possible for all the reasons outlined above and more. In a way, perhaps the stubborn, implacable union stance has been positive in a way as it has brought the dispute to a head. The port will be able to restructure in a way that will protect its long-term future. For the Port of Auckland to remain status quo in terms of its employment and business structure will mean that eventually it will become irrelevant and the Port of Tauranga will be the first port of call for importers and exporters.

Unions must keep this in mind, this is not 1951 when we had full employment, guaranteed markets and  a very rosy economic outlook. The 1951 Strike had 22,000 (compared to just few thousand today) wharfies striking for a 15% pay rise when they were offered a very generous 9% and the militant union held New Zealand to ransom for almost 6 months.

In 2012 there is no place for similar militancy and intransigence on the part of the Maritime Union. Like 1951 it is and was a turning point for unions in this country. It was the first major blow to its power in 1951 and in subsequent years unions have negotiated their way to less than 10% of employees who remain in a union.

As in 2012 the majority of the public were opposed to the 1951 strike. On public support alone we need to sort this dispute out and do it quickly but of course you cannot ignore the economic opportunities that will arise if striking workers are just a little bit more flexible in their attitudes to their employer and ultimately NZ Inc.

This is no time for self protection and grandstanding by Gary Parsloe and the Maritime Union, the country and its economic future are at stake.


POT @ Share Investor

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Is Goodman Fielder a Takeover Prospect?

Above is the Goodman Fielder Ltd [GFF.NZX] 6 year chart. Quite frankly it looks like the trajectory of a kamikaze pilot on speed and in fact it shares similar traits with its management - it seems destined to want to destroy the company that it manages.

I have crapped on over many years about this company and how boring it is but how it is a solid company that will do OK in hard times and better in the good times. Well it is but poor management have been unable to steer it through tough economic times.

I also said that its value remains in its core group of brands that Australasians love to eat everyday and that is still the case.

I think that at a share price of 54c - 10% of a loaf of their vogels bread - those brands have been undervalued after investors have completely discounted any value and faith they have in management.

In my last look at GFF back in August 2011 its shares were trading at 91c and I thought they had further to fall but a loss since then of around 40% seems a little overdone to me.

There is value in the company with these brands and I believe that it is a takeover prospect given its relative cheapness and dominance in various sectors of the supermarket shelf.

It is a risky investment, even at these prices, because the share price could fall further but I think Goodman Fielder is a good fit for the right company. Even GFF think so because they are going to sell off parts of the business that don't fit its core brands and we can be rest assured anyone else will do a far better job.

Be patient and wait for some bad macro news to drop the share price a bit.

Goodman Fielder @ Share Investor

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c Share Investor 2012