RNS No 9311m
BRIERLEY INVESTMENTS LIMITED
5th March 1998
HALF YEARLY REPORT
FOR THE SIX MONTHS ENDED 31 DECEMBER 1997
31 December 1997 31 December 1996
$thousands
OPERATING REVENUE 1,418,596 1,322,748
========= =========
NET OPERATING SURPLUS
BEFORE TAXATION* 100,889 124,527
Taxation (17,495) (11,927)
--------- ---------
SURPLUS AFTER TAXATION 83,394 112,600
Minority Interests (24,278) (30,319)
Equity Earnings 61,562 33,861
--------- ---------
NET SURPLUS 120,678 116,142
========= =========
* there were no
extraordinary items
Amount absorbed by interim
dividend ($ thousands) 107,167 107,042
Rate of interim dividend
cents per share 4 4
Imputation tax credit
cents per share 0.492537 0.492537
Supplementary dividend
cents per share 0.176471 0.176471
Adjusted earnings
cents per share 4.4 4.3
1. All amounts in New Zealand dollars or cents.
2. This Report has not been audited.
3. This Report should be read in conjunction with the
Company's interim report to shareholders.
4. The dividends will be paid on 8 April 1998. The record
date is 20 March 1998.
5. An interim report to shareholders will be dispatched about
8 April 1998 and will be available to the public from that
date at the Company's office - Stratton House,
1 Stratton Street, London W1X 5FE.
M B Horton
Company Secretary
5 March 1998
STATEMENT OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY
CONSOLIDATED
At end As shown in As shown in
of current last Annual last Half
half year Report Yearly Report
$NZ'000 $NZ'000 $NZ'000
CURRENT ASSETS
(a) Cash & marketable
securities 287,532 401,594 636,865
(b) Receivables 295,323 286,202 214,022
(c) Short-term investments 10,414 7,579 6,878
(d) Inventories 314,034 274,445 295,681
(e) Other NIL NIL NIL
(f) TOTAL CURRENT ASSETS 907,303 969,820 1,153,446
NON-CURRENT ASSETS
(g) Receivables NIL NIL NIL
(h) Investments 6,126,729 5,521,139 5,148,715
(i) Property, plant and
equipment 1,817,377 1,702,170 1,697,565
(j) Intangibles 200,663 137,364 92,427
(k) Other NIL NIL NIL
(l) TOTAL NON-CURRENT ASSETS 8,144,769 7,360,673 6,938,707
(m) TOTAL ASSETS 9,052,072 8,330,493 8,092,153
CURRENT LIABILITIES
(a) Accounts payable 729,919 623,161 783,727
(b) Borrowings 794,140 452,978 516,039
(c) Provisions 8,906 948 (3,102)
(d) Other NIL NIL NIL
(e) TOTAL CURRENT LIABILITIES 1,532,965 1,077,087 1,296,664
NON-CURRENT LIABILITIES
(f) Accounts payable NIL NIL NIL
(g) Borrowings 2,918,357 2,703,934 2,670,486
(h) Provisions 51,892 28,577 18,508
(i) Other NIL NIL NIL
(j) TOTAL NON-CURRENT
LIABILITIES 2,970,249 2,732,511 2,688,994
(k) TOTAL LIABILITIES 4,503,214 3,809,598 3,985,658
(l) NET ASSETS 4,548,858 4,520,895 4,106,495
SHAREHOLDERS EQUITY
(a) Paid in share capital 1,865,413 1,863,633 1,862,643
(b) Reserves (574,335) (571,227) (575,918)
(c) Retained profits 2,192,079 2,178,655 2,116,857
(d) Convertible notes 269,414 269,414 269,414
(e) Outside equity interests
in subsidiaries 796,287 780,420 433,499
(e) TOTAL SHAREHOLDERS EQUITY 4,548,858 4,520,895 4,106,495
REPORT TO SHAREHOLDERS
The first half of 1997/98 has been characterised by mixed
results with good progress achieved in the United Kingdom,
United States and Australia partially offset by the recent
Asian crisis which in turn has flowed through to certain of
our New Zealand companies, in particular Air New Zealand.
In this regard it is pleasing to report a profit for the half
year to 31 December 1997 of $120 million, some $4 million
above last year's $116 million*.
The prime focus of BIL's current year business plan is to
improve the underlying operating performance and financial
position of existing assets to enhance their overall value.
This focus, which has been underpinned by key operational
appointments in New Zealand, Australia and the United Kingdom,
is resulting in improved financial performance. When an
acceptable improvement in value cannot be achieved within a
realistic time frame, assets will be sold. While new
investment will not be neglected, and research continues on a
range of new investment opportunities, it remains very much a
secondary focus of the company for the immediate future.
Progress on this objective, together with particular features
of the first half are:
UNITED KINGDOM
Thistle Hotels reported a record hotel operating profit for
the 1997 calendar year of #112.5 million, 9% above the 1996
level of #103.3 million and nearly 90% ahead of the lows of
#60 million experienced in 1992 and 1993. This profit was
achieved after providing for an additional #6 million in
depreciation arising from the adoption of more aggressive
depreciation rates and the continuing capital expenditure
programme. This strong performance resulted in an after tax
profit of #76.3 million, an increase of 48% on the comparable
1996 result.
The buoyant trading conditions prevailing throughout the
United Kingdom were reflected in occupancy levels up by 1.9
percentage points to 68.6% and average room rates up 10.5% to
#60.82. These trends are expected to continue in 1998 and
result in another record profit.
*Unless otherwise noted, all $ references are to NZ$
Last year we expressed disappointment at the sharemarket
rating accorded Thistle Hotels, particularly given the
continuing improvement in the underlying performance of the
group and its unique positioning in the key London market.
Major initiatives and developments since then include:
* the resignation of Chief Executive, Robert Peel in
November 1997. After an exhaustive process, Thistle
Hotels has a short list of quality prospective candidates
and the appointment of a new Chief Executive is
anticipated shortly.
* proposed rationalisation of the hotel portfolio. There
are currently 95 hotels in the portfolio, 40 of which
generate 85% of the profit. It is proposed that
approximately 30 provincial hotels with a book value of
approximately #100 million will be sold. These hotels
together contribute less than 10% of the profit and are
not fundamental to Thistle's overall strategic plan.
* an extensive review of Thistle's information technology
systems has been undertaken. It is proposed to
significantly upgrade these systems with a prime focus of
improving the overall yield management, together with
ensuring that all systems are year 2000 and EMU
compliant.
These initiatives, combined with Thistle's commitment to its
programme of refurbishing and, where possible, adding new
rooms to existing hotels, will collectively provide a sound
foundation for further growth in operating profitability.
This has recently been reflected in an improved sharemarket
rating, with the share price recovering from a low of #1.20
last October to around #1.80 today.
Developments on other United Kingdom investments include:
* Ibstock plc - Although the underlying performance in 30%
owned Ibstock has improved, its share price continues to
languish.
* While it is anticipated that operating results will
continue to improve, the share price is unlikely to
materially increase until the company determines, as a
priority, to focus on its business in the United Kingdom.
This will require divestment of its non-core investments
in Portugal and the United States. BIL has strongly
promoted this view to the company and awaits its response
before determining its future course of action.
* English, Welsh & Scottish Railway - In November, 10%
owned EW&S acquired Railfreight Distribution, the former
British Rail channel freight business. EW&S continues to
perform well with current earnings equivalent to an
acquisition price earnings multiple of only two times.
UNITED STATES
BIL has $648 million invested in the United States of which
$347 million is invested in assets on the mainland with the
balance of $301 million representing the Group's investment in
Molokai Ranch in Hawaii.
In the six months to 31 December, the mainland US assets
contributed a profit of $2 million and Molokai Ranch lost $9
million. This loss principally reflects the write off of
expenditure associated with the accelerated development
programme currently underway.
BIL ceased making new investments in the United States in
1993. While in the five years prior to that date investment
profits of over $550 million had been generated, a few smaller
loss making investments remained. In 1993 consideration was
given as to whether these investments should be disposed of
and the losses recognised or whether better value could be
achieved by retaining the assets and progressively improving
their value.
In the event, the collective value of these investments has
approximately doubled from around half their accounting book
value in 1993 so that today their worth is equal to their book
value. More importantly, it would have been difficult to
find buyers for the assets in 1993, whereas today most of the
assets can be readily disposed of when the opportunities to
add significant further value have been exploited.
Major investments include:
* Graham-Field Health Products (Book Value $202 million)
BIL's largest investment is a 13% stake (22% fully
diluted) in Graham-Field. Since Graham-Field issued
shares to acquire BIL loss making subsidiary Everest &
Jennings in 1996, the underlying value of this investment
has been restored. Graham-Field has continued to
consolidate its position in the US health care industry -
most recently with the acquisition of Fuqua Enterprises,
manufacturer of medical beds, patient aids and other
complementary products. This position is reflected in
record results over the last three quarters. The share
price has steadily appreciated with BIL's shareholding
now having a market value of $66 million above book
value. With Graham-Field financing the Fuqua acquisition
through an issue of shares, BIL's ordinary shareholding
is now below 20%. Accordingly, equity accounting of this
investment ceased during the period.
* Beverly Prescott Hotel (Book Value $51 million)
Acquired 10 years ago as part of the acquisition of the
Associated Hosts restaurant chain, it is only in the last
four years since this Beverly Hills located hotel was
extensively upgraded that its results have begun to
reflect its real potential. Earnings have trebled over
the last three years and a sale of the hotel at around
BIL's book value is currently under negotiation.
* Associated Hosts (Book Value $16 million)
Although a much smaller investment, this chain of
restaurants has lost between $2 million - $6 million per
annum for some years now. Several initiatives to improve
the performance have been pursued, none of which have
proved successful. The company faces severe challenges
because of the age of its stores (20 years), disparate
locations (12 states) and lack of scale (20 restaurants).
BIL has now determined to exit this investment through a
progressive realisation of the individual restaurant
properties. It is anticipated that this will be achieved
in 1998, resulting in a modest loss on book value.
As mentioned earlier, the company has an investment of $301
million in Molokai Ranch. The Master Plan for developing the
54,000 acre estate on the island of Molokai in Hawaii aims to
expand and diversify economic activity on the island and
thereby improve the value of BIL's investment. This is a long
term Plan and the overall Ranch development activities are not
projected to produce a profit for the next two years.
AUSTRALIA
Over the last five years Australia has become an increasingly
important focus for BIL's new investment which, with the
notable exception of the company's investment in Vox Retail
Group, has been particularly successful. The current year
highlight is unquestionably the recent sale of a 7% stake in
Coles Myer resulting in a profit of A$219 million. This is
addressed in more detail in the section on Investment
Activities.
Particular highlights are:
* John Fairfax - The implementation of a new management
structure, circulation revenue increases for all
metropolitan publications and new initiatives such as the
launch of the Australian Financial Review weekend edition
have contributed to a 30% profit increase to A$61 million
before abnormals. During the period BIL successfully
defended a referral by the Australian Securities
Commission to the Takeover Panel and is now firmly
established as the major shareholder in John Fairfax with
a fully diluted shareholding of nearly 25%. John Fairfax
is committed to a range of revenue enhancing initiatives
and cost efficiency measures which, coupled with an
increased focus on the core business activities, will
result in enhanced future profits and a higher underlying
value.
* James Hardie - The recent sale of the pipelines division
represents the virtual completion of a year long
restructuring programme during which proceeds from the
sale of non-core assets have realised A$590 million and
an overall profit of A$105 million. The impact of this
programme, coupled with a substantial increase in the
profitability of the company's US based fibre cement and
gypsum businesses, contributed to an 87% increase in the
company's pre-tax profit to A$64 million for the six
months to 30 September. Considerable opportunities
exist to substantially improve the underlying value of
James Hardie over the next few years.
* The Austotel Trust - In the 1997 Annual Report we
reviewed the foundations laid for future growth which
revolves around the appointment of an experienced
management team, the completion of a property
rationalisation programme and the development of a
comprehensive three year capital expenditure programme.
* These measures are designed to double the earnings before
depreciation and interest (EBITDA) from A$24 million to
A$48 million over the next three years.
* Good progress has been made towards this objective with
sales for the half year up 8.5% to A$157 million and
EBITDA increasing by 13% to A$17 million. A major
contributor has been from gaming machines - at 31
December there were 1,636 gaming machines in the
portfolio which is forecast to progressively increase to
2,400 by 2001. This is more than double the number of
machines currently installed at Sky City in Auckland and
virtually the same number as operated at the Crown casino
in Melbourne.
* Vox Retail Group - Vox incurred a trading loss of A$20
million in the six months to 31 December, a A$6 million
deterioration on the same period last year. An abnormal
loss of A$10.7 million was also incurred which
principally related to the introduction of new computer
systems (in particular point-of-sale) and the write off
of redundant systems. The performance of Vox since it
was acquired by BIL in 1994 has been dismal. While each
year we have endeavoured to improve the underlying
business, the steps taken in the past have largely proved
to be ineffective.
We have carefully reviewed the future prospects for this
investment and taken a number of actions including:
- appointment of a new Chief Executive (January 1998)
and Chief Financial Officer (February 1998). In
addition BIL's recently appointed Australian-based
Operations Director, Jonathan Pinshaw (previously
Managing Director of Freedom Furniture) has been
appointed Chairman;
- a new point-of-sale system has been installed in
every store which will allow proper control over
expenses, margins and inventory;
- an increased focus on competitive positioning,
especially in relation to product range and customer
convenience, together with after sales service;
- a 100 day action plan is underway, the principal
objective of which is to achieve an expense
reduction of A$20 million per annum by 1 July 1998.
On a more positive note, comparable store sales for the
first six months increased by 12%, albeit that this
required increased expenditure on interest free offers
and higher levels of advertising. While hesitant to make
any predictions, we believe Vox will recover and that the
process is now well underway.
As highlighted in the introduction to this review, good
progress has been made in the United Kingdom, United States
and Australia. This has not been solely a function of more
buoyant market conditions but directly reflects BIL's
heightened focus on improving the value of each individual
asset. This has also been the case in Asia and New Zealand,
notwithstanding that current market prices have been impacted
to some extent by the recent Asian economic crisis.
ASIA
The implications of the unprecedented value deterioration that
has occurred in several Asian markets since mid 1997 are only
now starting to be fully appreciated. In some markets, the
combination of currency and equity market declines, together
with the almost total lack of liquidity, has resulted in a
virtual paralysis in terms of undertaking or completing
transactions. Under these circumstances, and in the case of
the relatively long lead times associated with a number of our
investments, we will have to accept a longer time horizon and
will "weather the storm" in order to extract value. At 31
December, the book value of BIL's investments within Asia was
$575 million.
BIL's largest investment is a 75% stake in AsiaPower, with a
book value of $174 million. AsiaPower has a major commitment
to the Wayang Windu geothermal project in Indonesia; currently
the economy most affected by the Asian crisis. Stage 1 of the
project, the construction of a 110 megawatt unit, has reached
financial closure and construction is underway with the
required steam under the wellhead. Additional equity of US$80
million is to be provided by AsiaPower which, together with a
US$250 million underwritten debt facility, will complete the
first stage of this world class project. All financing for
this project is in US dollars, as is the power sales contract.
Subsequent stages of this project will be progressed as and
when conditions allow.
Our joint venture in Seabil Pacific, 49% owned by BIL, with a
book value of $119 million, owns property developments in
China. The two major developments are proceeding to
completion, with discussions well underway in respect of pre-
sales and leasing. Both developments are expected to be
completed within a year and recent independent valuations of
the projects support BIL's book value.
The market capitalisation of Hong Kong based Paul Y-ITC
Holdings, 14% owned by BIL with a book value of $142 million,
has been significantly impacted by the regional economic
crisis. Nonetheless, the company holds record levels of work
in progress with a principally "blue chip" client base. The
current share price capitalises the company at $315 million
(equivalent to a price earnings multiple of around 4) and
values BIL's shareholding at $43 million, some $99 million
below book value. Paul Y-ITC is currently undertaking a
number of initiatives to improve value transparency and over
time we expect its market capitalisation to improve.
BIL's 50% partner in GF-Brierley, our Thailand based natural
resources joint venture (book value $11 million), is one of
56 financial groups placed under administration as a result of
the currency and capital markets crisis in Thailand. As a
result BIL is now restructuring the ownership of this
investment, which will result in some loss in value.
In addition to the above assets, BIL holds a number of smaller
listed equity positions in the region, both through 70% owned
BIL Camerlin and in its own right. These investments have a
total book value of $129 million and a current market value of
$83 million. These investments have been impacted to varying
degrees by the economic crisis and while there has recently
been some recovery in market values, a further level of
provisioning may be required at year end.
While we did not foresee the extent and severity of the Asian
crisis, we have consistently taken a medium term perspective
in respect of our Asian investments, characterised by a
cautious investment approach. We have maintained a fully
hedged currency position in all our Asian investments which
has helped to minimise the overall diminution in value. Given
the uncertainties within the region, we ceased equity
accounting Paul Y-ITC and Seabil Pacific during the period and
did not bring to account BIL's share of AsiaPower's profit.
This more conservative approach resulted in a reduction of the
trading contribution from this region of $17 million.
NEW ZEALAND
Air New Zealand, 42% owned by BIL, recorded a profit of $82
million for the six months to 31 December, an increase of $5
million over last year. The recent Asian crisis impacted upon
both load factors and yields in the second quarter. With this
trend expected to continue through the second half, the
company has reduced its full year profit forecast to $150
million. Despite the current difficult market conditions,
Air New Zealand is in a strong financial position and is well
placed for the future, with significant benefits arising from
its commercial alliances with Ansett Australia, United
Airlines and Singapore Airlines, as well as from Project Save,
a cost reduction programme which is expected to deliver
savings of $80 million this year.
Notwithstanding Air New Zealand's sound positioning and likely
future performance, the sharemarket has over-reacted in
marking down the shares. Air New Zealand's market
capitalisation based on the "A" share price, has reduced by
$600 million to $1,150 million since 30 June. This is
equivalent to 62% of the underlying book value, a price
earnings multiple of 7.7 times (around half the present
market) and a gross dividend yield of 14.8% on the A shares
(9.9% net yield). As with Thistle Hotels last September and
Coles Myer a year earlier, Air New Zealand shares are now
significantly mispriced in the market, trading well below
their long term underlying value. Somewhat paradoxically,
this is occurring concurrent with a major sharemarket rerating
of United States airline stocks.
Auckland casino operator Sky City, 63% owned by BIL, reported
a pretax profit of $25.2 million for the half year to December
- an increase of $1.8 million on last year. Due to its first
full tax charge in the half year, the after tax profit reduced
by $1.4 million to $16.8 million. The highlight of the half
year was the opening of Sky Tower which has rapidly become a
"must see" attraction in Auckland. Initiatives taken last
year to improve financial performance through rigorous cost
controls, elimination of theatre losses and lifting food and
beverage performance, have paid immediate dividends. While
the Asian crisis will result in a softening of the full year
profit to around $33 million, Sky City is now well placed as
New Zealand's premier entertainment destination. Its unique
market position, strong financial performance and quality
defensive characteristics distinguish it from its Australian
counterparts. These characteristics, together with its 90%
fully imputed dividend pay out, provide excellent investment
fundamentals which, over time, will lead to a premium market
rating.
BIL's resource and commodity based businesses - Central North
Island Forest Partnership (25% owned), Sealord Products (50%
owned) and Tasman Agriculture (57% owned) - are all
experiencing subdued trading conditions. While each has sound
long term prospects, the immediate outlook is for only modest
profit contributions in the current year.
INVESTMENT ACTIVITIES
The major highlight to date in the current year has been the
sale of the 7% stake in Coles Myer for A$584 million. This
has resulted in a profit of A$219 million of which A$16
million is accounted for in this half year with the balance
coming to account in the full year. This is the largest
single profit on a transaction in the company's history.
BIL's investment in Coles Myer has been well chronicled.
Suffice to say that at the time BIL acquired its shareholding
in 1995/96, the shares were materially mispriced by the market
and the substantial re-rating accorded to the company over the
last year was a resounding endorsement of BIL's assessment of
its true value.
Other investment highlights are:
* sale of 10.8 million income units in Bass Strait Oil
Trust for a profit of A$28 million. BIL has now sold all
the income units but retains the residual units which
have a book value of A$133 million and an independent
valuation of A$164 million.
* sale of 8 million shares (2%) in James Hardie Industries
at A$5.15 per share for a profit of A$18 million. This
sale does not reflect any change in our view of the
underlying value and long term prospects for James
Hardie, but rather our expectation that a sharp price
increase late last year was unlikely to be sustained in
the short term. This has been borne out by our recent
purchase of 6 million shares at $4.18 per share.
* sale of 20 million shares in Fletcher Energy for $103
million realising a profit of $39 million and the sale of
a portfolio holding in Asia for $66 million with a profit
of $15 million.
FINANCIAL POSITION
The half year profit of $120 million was conservatively struck
after a provision of $23 million was established against
BIL's Asian investments and $17 million in Asian trading
profits were not brought to account. Equity accounting of
Graham-Field also ceased during the period.
Due primarily to a material reduction in the value of the New
Zealand dollar during the period, total consolidated assets
increased by $722 million to $9.05 billion. At the same time,
as the company remains fully hedged on its offshore
investments, net debt increased by $669 million - $444 million
of which relates to foreign exchange movements and $228
million additional non-recourse project debt in AsiaPower.
The recent sale of the Coles Myer shareholding has reduced
debt by $600 million, which will be reflected in the full year
accounts.
BIL continues to maintain a strong financial position and its
Standard & Poor's rating was increased to BBB in August 1997.
While the parent company has good liquidity with cash on
deposit and undrawn funding lines exceeding $1.2 billion,
BIL's prime focus remains on improving the value of existing
assets and retaining a strong financial position rather than
on new investment.
INTRINSIC VALUE
The Group has two principal objectives:
* to grow the underlying intrinsic value of the company,
and
* to ensure that such growth is reflected in shareholders'
hands through increased returns.
During the period under review, growth in value was achieved
in Australia, United Kingdom and the United States. There
were significant reductions in the current market prices of
the company's investments in Asia and New Zealand (principally
Air New Zealand) which, in turn, have impacted negatively on
BIL's own share price. The extent to which these reductions
are temporary and result from mispricing or are to some extent
more permanent value reductions, remains to be seen.
Provided there is no further deterioration in the economies in
which we operate, we expect the Group's underlying value at
30 June to be maintained at least around the June 1997 levels
- equivalent to $1.2 billion or 11% tax paid per annum growth
over three years. In that event, the company's overall
objective to grow value by $2 billion over the three years to
30 June 1998 will obviously take longer to achieve.
DIVIDEND
The Board has declared an unchanged interim dividend of 4
cents per share of which 1 cent will again be fully imputed.
Foreign shareholders will receive a supplementary dividend in
lieu of imputation credits. The interim dividend will be paid
on 8 April 1998.
OUTLOOK
We anticipate that the trends experienced in the first half
will continue for the balance of the financial year:
* the company's investments in the United Kingdom, United
States and Australia, where BIL has invested $4.5 billion
or two-thirds of its assets, will continue to perform
strongly;
* Asia and New Zealand, regions in which one-third of the
company's assets are invested, will continue to
experience difficult operating environments.
Overall, while it will be difficult to achieve significant
value growth in the current financial year, reported profit is
expected to be ahead of last year's $311 million.
Paul Collins Bob Matthew
Chief Executive Chairman
Wellington, Thursday 5 March 1998
END
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