Can Tranz Rail ride steam of profit?

By Yoke Har Lee

If Tranz Rail's first-quarter profit rise this week is anything to go by, the New Zealand economy is recovering steadily after being battered by Asia's financial crisis.

What is less clear is whether the economy, particularly the export sector, will generate the head of steam Tranz Rail needs to drive its profits.

Mark Bloomer, its chief financial officer, is optimistic it will. One sign is that business in the first two months of its second quarter (October and November) has been solid.

Tranz Rail's net profit for the first quarter, typically its slowest of the year, more than doubled to $5.5 million from year earlier levels when the economy suffered its brief recession.

For the full-year, analysts' forecasts of earnings range from $33 million to $54 million. Even if profits met the top end of forecasts, they would still be 20 per cent off last year's $70.2 million.

For Tranz Rail to get interesting for investors, two key performance indicators have to improve.

The first is freight revenue per tonne kilometre, a measure of the rates Tranz Rail charges. According to figures from the annual report, this has fallen from an average of 12.29c in 1996 to 11.55c in 1997 and 11.16c in 1998.

The company has stopped providing this figure, viewing it as commercially sensitive. But the first quarter data did not look too promising.

Tonnage carried increased by 24 per cent but revenue tonne kilometres was up only 19 per cent, indicating further downward pressure on its freight rates. As the economy picks up speed, exports should broaden out from commodities into higher value goods which command higher freight rates but the competition remains intense.

The second performance indicator is costs. Tranz Rail has worked hard to tighten operations, trying to push down costs as a percentage of revenue. But the ratio has deteriorated from 85.1 per cent in fiscal 1997 to 85.8 per cent in 1998 and 88 per cent in the last financial year, stripping out abnormal items.

Reflecting its weak market and patchy operating performance, Tranz Rail's shares have fallen from a peak of 900c two years ago to a low of 260c in October last year. Yesterday, they closed up 10c at 348c but they are still a long way south of their glory days before the Asia crisis.

Further recovery of the global economy and thus New Zealand exports and business for Tranz Rail would provide some boost to Tranz Rail's share price. But the real driver is costs. The company will have to work even harder at containing expenditure. In this regard, Tranz Rail has done well, but not enough.

The verdict came loud and clear yesterday from Moody's, the credit agency, when it cut its rating on the company's senior unsecured debt from Baa1 to Baa2.