In this Stock of the Week I am going to look at Mainfreight Ltd [MFT.NZ] a particular favourite of mine because of its superior management and outstanding results over a long period.
While the stock has been substantially cheaper over the last year (see chart above) and it has been at a high of over 8 bucks over the last 2 years, it is still around 40% off that high and that is my overriding reason for including it in this series.
At close of market today the stock was up to $5.13 but has been trading under 5 dollars for the last few months.
The stock is still undervalued in my opinion. Its recent profit announcement wasn't a good one but good management has so far kept the deleterious effects of the global logistics slowdown to a minimum.
Long term the company has grown considerably and once the global recession is over this growth should continue as it has done historically.
Until then prospective investors should see the low share price as an opportunity to make their move.
Please keep in mind the stock can be quite volatile because of relatively low turnover and could of course get cheaper from here.
Sky City Entertainment Group [SKC.NZ] has had a very patchy last 7 years, and as a medium sized shareholder of the company I have obviously followed the fortunes, and mis-fortunes of a company that has; had huge financial write-offs due to overpaying for assets, flagging or stagnant profits, massive debts, a regulatory regime that has been deleterious to say the least and a former CEO in Evan Davies that has been over his head when it comes to operating a casino business in a sustainable and competent way.
Enter Nigel Morrison in March 2008, hired for his experience in casino "turn-arounds", most notably the Crown Casino by the Yarra River in Melbourne and he has had an impact almost immediately.
It is a positive impact to say the least.
Morrison first focused on cutting back costs from the bottom line then looked at ways to improve customer satisfaction and bring in more punters through the doors of its casinos and hotels.
For the last year an almost obsessive pay down of company debt by Nigel will lead to lower interest costs over the next year and beyond, more interest by investors in the company's shares and a better return to shareholders in the long run, and after all isn't that what all investors want?
Morrison achieved this by issuing new capital to existing shareholders and new ones in a highly contentious capital raising some months back, but as shareholders all get dividends out of the business, we sometimes have to put our hands back in.
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.
With this in mind I submitted some questions to Nigel via email and he kindly offered to answer them. This is after he contacted me after something I wrote about company debt levels.
The Q & A
Share Investor(SI) With your FY 2009 result released last week of over $115 million, a 13% increase on last year’s net profit, how sustainable do you think this sort of result will be for FY 2010 and beyond?
Nigel Morrison (NM) We think it is sustainable and we will be aiming for double digit underlying NPAT growth again in 2010.
SI - What are your thoughts on the recession and recent (apparent) recovery - if you want to call it that - are and what effect that will have on the company's overall strategy?
NM -The recession did make it difficult to grow revenues, however we believe our underlying revenues have been good throughout the recession and some return to growth is expected as we come out of it.
SI - Has your time as SKC CEO been what you expected or has the restructuring of the company that you were hired for been more or less of a challenge?
NM - Looking back now, 2009 has been a very pleasing year for me as CEO. I assembled a very good management team and reinvested in the basics that will provide a very solid platform for growth going forward. There was a lot of work that had to be done to improve technology, our human resources and our property management systems.
SI - The SkyCity Cinema division has always been a challenge, to put it mildly. How do you see its fit within your gaming assets given its poor operating history and low to negative returns over a long period?
NM - As I’ve always said since my arrival at SKYCITY, I don’t believe that SKYCITY Cinemas is a core division of our Group. Our Cinemas team, led by Jane Hastings, has done a good job turning around this division in 2009 and we are looking for better performance again in 2010.
SI - You have a core of loyal customers in the Auckland casino that keep coming back. Is that reflected in your other casinos and what are you doing to retain these loyal customers long-term while attracting the new ones that you have already and those that you plan to attract in the future?
NM - As a casino and being a major entertainment destination in all of the cities in which we operate, it is important for us to continually reinvent our entertainment offering. This might include new products, new restaurants, new bars, new value propositions and exciting regular promotions. It is important that we continue to retain our loyal clientele (in Auckland and in our other properties) and all of our casino operations run loyalty membership clubs, but we are also aiming to continually attract new valued customers.
SI - Are the extra bars and food outlets at the Auckland site attracting new gamers and if so is that a strategy that you are or will use at your other casinos to grow revenue and profit?
NM - Casinos are destinations for entertainment. For us it is about providing holistic experiences whereby there is something for everybody from a quick meal to fine dining or from a glass of Champagne to a beer. We want all our properties to have aspirational bars and restaurants and we’ve certainly got that in Darwin. We are looking at further development plans in Auckland and Adelaide.
SI - With a new National Government and the possibility of a more relaxed gaming regime flowing from that, what do you think of any casino expansion in New Zealand, say a casino in Wellington and given the possibility of this what would SkyCity’s chances be in gaining a Wellington location given the company’s dominance in New Zealand ?
NM - I think it is unlikely that this Government would encourage casino expansion in New Zealand. There are currently six casino licenses in New Zealand, including two in Queenstown. I think there are merits to having a casino in Wellington and we would be keen to be a major contender if that scenario was to develop.
SI - In relation to the previous question, how would you respond to any new gaming competitor entering the New Zealand market?
NM - We would welcome competition. Auckland will always be our flagship property in NZ.
SI - You know the Australian gaming market well, what opportunities exist for SkyCity to expand its presence there beyond its existing casinos in Adelaide and Darwin?
NM - Our current focus is to continue to realise the potential of our existing licenses including those in Adelaide and Darwin. In particular, we believe that Adelaide has significant growth potential (if we can un-lock it) as we also do with Auckland. We will monitor opportunities as they unfold in Australia, but we are unlikely to be a catalyst for expansion but will rather continue to invest in our existing businesses.
SI - Are you surprised at the spectacular turnaround of fortunes at the Adelaide casino, what have been the main drivers behind this, is it sustainable and can shareholders expect the level of returns from this casino that are coming from your Auckland casino?
NM - Adelaide was coming off a very low base. By enhancing the table games offering, including a new baccarat room, and introducing rapid roulette and installing the latest technology offerings like shuffle machines and with a renewed focus on customer service we have been able to significantly enhance the earnings of Adelaide. Earnings now from Adelaide are sustainable but to generate significantly better returns from this operation, as we do in Auckland, we would have to significantly expand the Adelaide property.
SI - What are the biggest commercial threats to your businesses in terms of competition and is your reaction to this competition likely to be aggressive or reactive in nature?
NM - Our biggest challenge is to continue to reinvent ourselves on a monthly basis and maintain the attractiveness and levels of entertainment at our casinos for the thousands of people who visit us every day.
SI - Your concentration of debt retirement over the last year has been admirable. Given sufficient payback of debt over time and sustained profit levels would you look at buying additional gaming assets for expansion – given the right price – or would a capital return to shareholders be a more efficient and wise use of shareholder capital?
NM - We believe our existing gaming assets offer good potential for organic growth through focused investment (as opposed to acquisitive growth). Any projected capital investment is critiqued against a required hurdle rate of return. I’m sure if the time came when we could not maintain satisfactory rates of return we would then consider a return of capital to our shareholders or some other distribution.
SI - Who are some of your business mentors/heroes and why?
NM - The late Kerry Packer because he was tough, probing, highly articulate and had an uncanny sense of judgement. Lloyd Williams, Founder of Crown in Melbourne, because of his honed attention to detail, incredible persistence and never accepting “no” for an answer.
SI - Who is your favourite New Zealand business leader/s and why?
NM - Sir Ron Brierley, who was a hero of mine when I was a ‘wet behind the ears’ corporate adviser back in the 80s.
SI - In relation to the 2 previous questions, are there any particular books or periodicals that you have read that you would recommend to Share Investor readers?
NM - In short, no. I’ve come up through the school of hard knocks and have been very fortunate to work alongside some great inspirational leaders. I find it bemusing that analysts sometimes recommend “sell” at $2.60 and then shortly after “buy” at $3.30. My advice would be find an industry (and companies) you understand and stick to them.
SI - In my investing experience I have found the level of business leadership in New Zealand wanting – with a few very notable exceptions - when it comes to making good long-term decisions based on sound business skills, the basic understanding of running a business and accountability when it comes to making mistakes and this is often reflected in businesses hiring from an overseas talent pool. What are your views on how we can get good shareholder representation in the boardroom?
NM - SKYCITY has a very strong Board which numbers some very successful New Zealanders including Chris Moller, Brent Harman and Peter Cullinane, who all have strong international business backgrounds. Also, I’ve certainly found the counsel of Elmar Toime (former CEO of NZ Post) for example, who was acting CEO before me, and Sir Dryden Spring incredibly valuable.
SI - I have recently become a dad for the first time and am now aware of higher demands on my time. I am sure the life of a CEO is very busy. How have the demands of SkyCity impacted on your family and what skills as a dad have you used in your business life and where and how do you find the balance between home and work, is it just good time management?
NM - Unfortunately, if you want to be a CEO there are serious sacrifices to be made. Looking back, I probably have focused too much on my career and in balance that has probably cost me dearly. For me there still is not much balance it is mainly work. I have grown-up children now who are 18, 20 and 21 years and I’m very proud of all of them. They live in Melbourne and I try to get back to see them at least once a month. I do enjoy photography and bike riding and I hope to get fitter because of it.
SI - Any business has inherent risks and gaming businesses possibly more than others. How do you manage those risks in the normal business operating environment that changes due to economic cycles and other outside and inside influences?
NM - Casinos invariably have great systems in place. We track risks actively daily, hourly and analyse that data. We have strong security and surveillance systems and we set a tight limit on our gaming parameters though a rigorous application of probability theory. We have found that our core casino operations are relatively resilient through all economic cycles so our daily cash flows and related issues are somewhat different to other industries in a recessionary environment.
SI - What do you see as the strongest and weakest quality of your leadership style?
NM - Weakest – I can be quickly intolerant of poor performance and it’s readily apparent when I am not happy about how things are going. Strongest – developing a sound organisational structure incorporating an experienced and loyal management team together with a preparedness to make decisions.
SI - Do you like to gamble and if so what is your favourite game and are you allowed to have a flutter at your own institutions?
NM - No, we can’t bet in our own casinos. It wouldn’t look good if one of our employees won a jackpot. I do like to gamble, but in measured amounts. I enjoy playing roulette and the gaming machines. Im looking forward to the opening of our newest bar “Twentyone” on Thursday this week, where we have “free play” tables that even I’ll be able to play at! I have no doubt many of your readers will enjoy that bar and I look forward to seeing them there.
SI - Where do you see yourself and the business you run over the next five years?
NM - I’d like to think that when we look back on the next five years, we will have seriously maximised the potential of our existing casino licenses. Adelaide would be a significantly larger facility; we would own 100% of Christchurch; I’d like to see Auckland as a larger and more diverse property from what it is today……and I’d like to see a $10 share price……at which point I think we would be able to say we have delivered satisfactory shareholder returns……and then hopefully at that stage I’ll be on the verge of retirement.
Thank you for your time Nigel.
About Nigel Morrison - Supplied by Sky City
Nigel Morrison joined SKYCITY Entertainment Group as Chief Executive Officer in March 2008. Mr Morrison has over 18 years experience in the finance and gaming industry throughout Australia and most recently in Asia.
Prior to being appointed CEO of SKYCITY, Mr Morrison was the Group Chief Financial Officer of Galaxy Entertainment Group in Macau, a leading publicly-listed Hong Kong-based group operating and developing casinos in Macau. Before that he was Chief Executive of the Federal Group, Australia’s largest private gaming group and prior to this Chief Operating Officer of Crown Limited, (operator of Melbourne’s Crown Casino) where he played a key role in restructuring the business and increasing revenues to over A$1 billion.
Prior to embarking on a career in casinos in 1993, he was a Corporate Finance Partner with Ernst and Young, specialising in the gaming industry.Over the past year, Mr Morrison has concentrated on turning around the fortunes of SKYCITY. With a strong financial and analytical background along with proven leadership skills, he has made the necessary organisational and management changes and appointments to implement a new structure that is working well for the Group. The secret to success, he says, is having a strong management team in place, bringing people with you on the journey and making sure you have access to all the information needed to make successful decisions.Mr Morrison is a member of the SKYCITY board as Managing Director.
Due to the popularity of the Q & A this week with Nigel Morrison, CEO of Sky City Entertainment Group [SKC.NZ] I have decided to make these things a semi regular thing at the Share Investor Blog.
One individual I have always wanted to put some questions to is Mainfreight Ltd [MFT.NZ] Managing Director Don Braid.
I have requested his time and he has kindly obliged to answer your questions.
So, now is the chance dear readers to put some questions to Don.
You can submit them at the Share Investor Forumhere or email them to me here and I will submit the best ones to Don.
Look at the result from Mighty River Power out this week, profit up by over 40% and retail customers up by over 30000 for the last year.
Contrast that with Contact Energy Ltd [CEN.NZ] FY 2009 profit release out in August. Profit down by more than 50% and retail customers lost, more than 40000.
Reason?
Well according to David Baldwin, CEO , it was "overconfidence" (see arrogance in the dictionary for possible explanation) that led to the spectacular drop in profit and associated loss of customers and reputation:
"There's a fair amount of reflection over what we've done in Contact and it has to be said hubris had been building up over several years."
The 45-year-old is urging his staff to re-adjust their thinking.
"If we assume that everything good that happens to us is all good luck then we won't carry that confidence [forward] and we'll start afresh." NZ Herald Sept 5 2009
Of course if you accept that arrogance is the reason for the slump in profit you would have to sheet the responsibility for that arrogant attitude down to the company leader/s, after all we know that company culture is fostered by its leadership right?
Well, apparently not. David was nice enough to share the responsibility for his muck up with his staff.
Weather plays an important part in company fortunes and boy oh boy meteorologically speaking David has had a bitch of a year with that.
Of course that is understandable, weather is crucial to running an electricity utility company and that is plain to the average Joe but I have rarely seen David blame the weather when it is in his company's favour, it seems to be down to his good management. Boy David has some great connections there - as opposed to the 40000 connection lost over the last 12 months.
Many of you reading this will be thinking, what is your problem Mr Rickard, any company can have a bad year?
Very true and there can be many reasons for a bad year, some of them out of leaderships hands but these reasons are universally known and should be accounted for when running a business.
The big problem that I have though with Origin Energy Ltd [ORG.ASX] appointed David Baldwin is that he and his board of directors were almost single-handedly responsible for Contact's bad year.
They raised electricity prices (probably validly) at a time when they doubled directors fees while in the same week having an expensive lunch at a posh restaurant on the shareholder tit. The shite then hit the fan and they waved bye bye to more than 40000 customers and what they had left of their reputation.
Very few individuals will put their hands up and criticise such a monumental stuff up and put the blame on where it lies, with David.
The piece that I quoted from in the NZ Herald was so soft soap I have to rub myself down (control your excitement) again with dettol just to feel clean again.
The fact that David and his board are still employed after their stuff up is hard enough to stomach but his PR exercise of apportioning blame to everyone else rather than solely on himself is a business slight of hand often used in New Zealand to bury ones mistakes as time passes and it should not be accepted by Contact Energy shareholders.
David, the board, his executives and the puppet masters at Origin Energy should be ashamed, but it is clear that they are not and that is the cutting part.
