Tranz Rail slams into buffers

By PAM GRAHAM

Tranz Rail shareholders had a ride down the investment equivalent of a big dipper yesterday when the stock plunged 19 per cent.

The trigger was the company's release yesterday of preliminary results for the third quarter indicating its businesses have taken a significant hit.

Tranz Rail cited drought, the Kinleith strike, congestion at Lyttelton port, problems with the Otira Tunnel, Cook Strait competition, cheap airfares, the heated track issue and reduced subsidies for failing to meet profit targets in the three months to March 31.

It revealed negotiations to sell the upper floors of Wellington Railway Station and said that could boost full-year profit. But the market was in no mood for promises.

The shares plunged 19 per cent to 77c, a fraction of the $3.60 to $3.70 paid by big and small investors when Fay Richwhite and Wisconsin Central exited a year ago.

The share price fall came as members of the New Zealand Shareholders' Association were preparing for a day out with the company tomorrow, including a train ride to Huntly.

Association chairman Bruce Sheppard said the current management team had received a hospital pass and high fixed costs were a problem.

Tranz Rail said revenue for the quarter was $157.2 million, $11.3 million below forecast. The shortfall went straight to earnings, which were $10.2 million short of forecast.

The preliminary figures indicated earnings before interest and tax would be $19.1 million in the third quarter instead of the $29.3 million expected. The full-year ebit forecast was cut to $47 million from $53.1 million.

Tranz Rail said it was keeping to continuous disclosure rules by informing the market that it would not achieve its forecasts before releasing its third-quarter report next month. The company sees disclosing information to the market as a key factor in its effort to build trust in its strategy.

One fund manager said management credibility was now an issue, he was disappointed problems were not signalled earlier and said sentiment would improve only when assets were sold.

Another said he would wait for a briefing by the company today to understand the shortfall from forecasts.

The plunge in the stock price shaved $38 million from Tranz Rail's market value, increasing its vulnerability to a takeover, although anyone interested would be mindful not just of market value but also of the liabilities to be assumed.

Cook Strait competition and the dry conditions were understood to be the most influential factors in the third quarter.

Infratil, a 7 per cent shareholder, was not selling its shares and has said it will write them to market from cost in its next accounts. Its average entry price was $2.40 a share.

Tranz Rail's woes accelerated last year when Standard & Poor's cut its credit rating to below investment grade, triggering a clause in the sale and lease back of the Aratere ferry. The $65 million rights issue provided capital to support that lease and allowed the company to reduce its bank loan facilities. S&P has been concerned that the company had no "headroom" with lending facilities and has the company on review with a negative outlook.

Tranz Rail has been focusing on freight and selling passenger businesses and is mindful of the return on capital spending it argues was unsustainable in the past.

It is under pressure from fund managers to shut uneconomic lines but it is also trying to sell its network to the Government or reach an arrangement that subsidises uneconomic lines. The sale of the passenger business in Wellington has been the subject of public spats over the sale process, and the trucking and service business has been put up for sale.

Still, the company is making money. Its earnings for the nine months before interest and tax will be $30.3 million, $6.5 million below forecast.

Tranz Rail said yesterday that sales of specialised rolling stock, inventory, other assets and Wellington railway station could boost the full-year profit to $60 million.