Brian Gaynor: High interest to be found in low-flying firms

The Northland Regional Council should make a takeover offer for Marsden Maritime because the company's property expansion does not seem to be paying off.

Annual reports, meetings give view into little-covered firms on the NZX

There are a number of interesting listed companies that receive little media attention. This is a great time of the year to have a look at some of these low-profile organisations, particularly those that have recently released annual reports or are holding annual meetings.

The Colonial Motor Company
The Colonial Motor Company, which listed in May 1962, is a locally owned car distributor with a sharemarket value of $180 million.

Its unique characteristic is that it's still largely controlled by the Gibbons family. The company is also very successful and has a refreshing approach to shareholder communications.

The 50 largest shareholders listed at the back of Colonial Motor's recently released annual report show that the Gibbons family continue to dominate the company 96 years after it first gained control in 1918.

There have been a number of potential takeovers along the way. Brierley Investments built up a 14 per cent stake in the 1970s and 1980s but sold out after the 1987 sharemarket crash.

Sir Ron Brierley's Guinness Peat Group made a takeover offer in October 1995 and acquired a 33.9 per cent holding, including some of the original Gibbons family-held shares. GPG unloaded its stake to a Malaysian company which sold its remaining 24.9 per cent stake in 2003 to New Zealand investors, including members of the Gibbons family.

John Gibbons is the current chairman, Graeme Gibbons is chief executive and Stuart Gibbons has recently joined the board. At least one other Colonial Motor director is connected to the Gibbons family through marriage.

The strong family shareholding is unique in New Zealand as original shareholders in other family-originated NZX businesses have sold out and invested in other non-related companies.

The tight control by the Gibbons family has restricted the number of shares traded and discouraged institutional investors. Only 908,994 shares - representing 2.8 per cent of Colonial Motor's capital - were traded in the twelve months ended September 30.

By comparison, 5.7 per cent of AP Eagers, Colonial Motor's closest equivalent on the ASX, was traded in the same 12 months period.

This higher level of share trading activity has encouraged institutional investors and they own 21.4 per cent of the ASX company, whereas institutional investors own only 3.5 per cent of Colonial Motor.

The Wellington-based company is highly profitable - it reported a net trading profit after tax of $18.2 million for the June 2014 year - and has a refreshing approach towards shareholder communications.

A recent letter to shareholders stated: "It is the growing practice for listed companies to offer their shareholders the option of receiving either printed or emailed versions of their shareholder communications. It is usually an "all by email" or "all by mail" option."

The letter want on to say Colonial Motor "has for a long time prided itself on ensuring that shareholders are mailed full, printed copies of all results announcements as soon as they are released to the market (NZX).

"The main reason given by other companies for encouraging shareholders to adopt electronic communications is cost savings. Regardless of the proportion of shareholders choosing email, the company is obliged to prepare and print its reports.

"Colonial Motor has around 1500 shareholders. The potential for cost savings is therefore small because the majority of the cost lies in the preparation".

This is a long overdue statement from a listed company because one gets the clear impression the standard letter encouraging shareholders to switch from paper to electronic communications is based on share registries wanting to save money rather than a genuine attempt to improve shareholder communications.

Just Water International
Just Water International, which has a market value of only $12.5 million, was established by Tony Falkenstein in 1989.

In mid-2004 it issued 16.5 million new shares to the public at 50c each and listed on the NZX in June 2004.The company had a sharemarket value of $33.2 million at the 50c a share IPO price with Falkenstein owning 74.5 per cent of the newly listed company.

Just Water's share price reached an all-time high of $1.22 in early 2007 but it has been on a steady downward slide since then as the company has faced increased competitive pressure.

The company's June 2014 annual report, which was released in mid-September, showed it achieved net earnings of $2.146 million for the year compared with $1.718 million for the previous year.

The chairman and chief executive said the market remained very competitive "in both New Zealand and Australia [with] continued price discounting from competitors".

On October 9, Just Water released a letter received from Falkenstein with the following main points:

• Two parties had made non-binding similarly priced indicative offers for the company in May 2014, with one of the parties subsequently undertaking extensive due diligence of the NZX company.

• The due diligence party had made a conditional offer of 14.3c for each Just Water share (14.6c after adjusting for the correct net debt figures).

• Falkenstein, who owned 70.8 per cent of the company through varying interests, was now proposing to make an offer at 15c a share.

The October 9 letter was quite extraordinary because it required a letter from Falkenstein, in his private capacity, to reveal that a potential bidder had been allowed to undertake extensive due diligence of Just Water over the previous few months.

What about the NZX's continuous disclosure requirements?

Abano Healthcare was highly criticised last year for not disclosing an indicative offer from Archer Capital.

However, there is a big difference between the two situations because Abano rejected the Archer offer and did not allow the latter to do due diligence whereas Just Water allowed one of its bidders to have extensive access to its operations.

Shareholders were told at Just Water's annual meeting on Thursday that a formal 15c a share takeover offer was expected from Falkenstein next week and Korda Mentha had been appointed to prepare an independent valuation report.

The 15c a share offer values the company at $13.4 million compared with its IPO valuation of $33.2 million a decade ago.

Just Water International has not been a big winner as far as minority shareholders are concerned.

Marsden Maritime
Marsden Maritime's annual report reveals once again that the company has a confusing business strategy and there are serious question marks over its asset values.

The company, formerly known as Northland Port, has a sharemarket value of $114 million and is 53.6 per cent owned by the Northland Regional Council and 19.9 per cent by Ports of Auckland.

Marsden Maritime has two distinct operations

• A 50 per cent interest in the cargo terminal at Marsden Point - this contributed net earnings of $8.4 million to Marsden Maritime in the June 2014 year with the 50 per cent holding valued at $46.1 million by the NZX-listed company.

• The company's property holdings recorded a net loss of .2 million on total assets valued at $76.7 million.

The company's port operations assets are either undervalued and/or its property holdings are totally overvalued.

To make matters worse, Marsden Maritime has acquired marina assets for $6.95 million since balance date and has drawn down $5.5 million of debt to fund this acquisition.

Thus, the NZX-listed company is adding to its property holdings which in my opinion have proven to be very poor performers in recent years.

The best option for Northland Regional Council would be to make a full takeover offer for Marsden Maritime because the company's aggressive property expansion doesn't seem to be working and could have a negative impact on dividends.

There is a strong possibility that Ports of Auckland would accept an attractive offer from the council because Marsden Marine is purchasing marinas while the Auckland-based company has been selling non-core assets, including marinas.

• Brian Gaynor is an executive director of Milford Asset Management.