Brian Gaynor: BIL's inflated share price defies logic

What is going on at BIL International? Its share price has more than doubled this year; the Singapore Stock Exchange has made several inquiries into its price movements and on Monday the company made an important announcement to the New Zealand Stock Exchange.

This notice advised that an investor has "expressed an interest in making an investment in certain of BIL's assets" and "the same investor has also approached a substantial shareholder to buy a block of BIL shares".

BIL has almost no relationship with New Zealand these days, except its 5.5 per cent stake in Air New Zealand, but there is still considerable interest in the company because 60,000 shareholders live here.

The investment group moved to Singapore nearly three years ago and left behind a large and weary bunch of shareholders.

Thistle Hotels continues to be BIL's largest investment and a big millstone around its neck. The UK hotel group has not been able to gain any momentum and reported a pre-tax profit of £49.1 million ($150 million) for last year compared with £68.2 million in the previous year.

The poor result was blamed on the September 11 attacks, which "led to a significant reduction in international business and leisure travellers, particularly from the US".

In April the company sold 37 hotels for £600 million but the deal was greeted with little enthusiasm. Analysts were concerned that the sale came at the low point of the earnings cycle and that the purchasers were given profit guarantees.

Thistle shareholders were told at this week's annual meeting that revpar (revenue per room) for the company's 18 owned or leased hotels, largely based in London, had fallen 14.4 per cent for the first 20 weeks of this year.

Revpar for the 38 managed hotels, which are predominantly outside London, declined by 4.8 per cent. The London hotels have been adversely affected by the downturn in international travel.

The good news is that some of the £600 million from the hotel sales could be returned to Thistle's shareholders but other than that BIL's UK hotel investments are nothing to get excited about.

The Fraser & Neave shareholding is a mystery as far as New Zealand shareholders are concerned. This stake was acquired in mid-2000 and according to Singapore press reports a large number of the shares were bought from interests associated with Tan Sri Quek Leng Chan, the Malaysian tycoon who now controls BIL.

Fraser & Neave, which has interests in soft drinks, dairying and brewing, reported a 10 per cent rise in net operating earnings for the six months to September 30. Analysts have a cautious attitude towards the company because they believe that BIL is a seller and its shares overhang the market.

The stock rose 6 per cent to S$8 on Thursday, indicating that the most likely outcome from BIL's announcement to the stock exchange on Monday is that its Fraser & Neave stake will be sold.

Molokai Ranch, which occupies one-third of the Hawaiian island of Molokai, is one of the more difficult assets to value.

BIL initially ran it as a cattle operation but in recent years it has been looking at two options; either selling the operation or turning it into a tourist development.

Molokai has fewer tourist attractions, particularly beaches, than most of the well-known Hawaiian islands and BIL has some difficult regulatory barriers to surmount before it proceeds with any development.

The ranch was valued between US$170 million and US$220 million by an independent registered valuer in August 1999 and it is included in BIL's accounts at US$168 million ($350 million).

Several analysts, who are familiar with the operation, argue that the ranch is worth nowhere near this and one analyst assesses its value at just US$60 million.

For the sake of this NAV (net asset value) analysis Molokai Ranch is assumed to have a value of US$115 million, the mid point between BIL's book value and US$60 million.

BIL would love to sell its Air New Zealand shareholding at current market levels but there are several reasons why this is unlikely:

* The Australian media is speculating that Qantas wants to buy the BIL and Singapore Airlines stakes in Air New Zealand but these small shareholdings have no strategic value, as the Crown owns 82 per cent.

* At yesterday's closing price of 71c Air New Zealand has a market value in excess of $3 billion. This is far too high for a company that has yet to prove it has a successful strategy for the future.

* The regulatory authorities may reject a Qantas shareholding in Air New Zealand because the two companies dominate the Tasman and would have a virtual monopoly on New Zealand's domestic routes.

A shareholding deal would also be inconsistent with the strained relationship between the two companies in the past.

BIL's other big investment is its holding in the Bass Strait Oil Trust. The trust receives 55.11 per cent of the Weeks Royalty, which is an entitlement to 2.5 per cent of the income (less some agreed costs) from all hydrocarbon production in Bass Strait.

BIL is entitled to a share of the income from the Weeks Royalty in perpetuity. The investment is difficult to value because it is influenced by several factors, including oil prices, exchange rate movements and interest rates. Its book value is US$69.1 million.

BIL's other investments are valued at $118 million. These include the Denarau Island Resort in Fiji and some interests in Asia.

After deducting net debt of US$530 million BIL has a NAV of 52c a share. This figure is subjective because it is heavily reliant on the Molokai Ranch valuation. One analyst, who includes the ranch at book value, has a NAV close to 70c whereas another, who has taken a much more cautious view of the Hawaiian operation, has a NAV of less than 50c.

When BIL released its interim result in March it gave a NAV of 24USc (51c) based on the market price of the group's holdings as at December 31.

Several share prices have changed since then but it is always better to take a cautious view when assessing BIL's asset values.

BIL's share price rise has all the signs of a speculative bubble because there is nothing to suggest that management is going to produce an important deal in the immediate future that will create considerable shareholder value. The investment group may be able to sell the Fraser & Neave and Air New Zealand stakes but Thistle Hotels and Molokai Ranch will continue to be a significant drag on performance.

There is a huge anomaly between the pricing of the BIL and Guinness Peat Group securities on both the share and fixed interest markets.

BIL's share price is at a considerable premium to NAV yet its capital notes, yielding up to 16.1 per cent, are at a big discount to face value. This suggests that fixed interest investors have taken a cautious view towards the group's future whereas share investors are extremely bullish on its prospects.

BIL's improved share price offers shareholders two attractive propositions. If they believe the investment group has a viable future they should switch out of BIL shares, which are trading at a substantial premium to NAV, and buy its capital notes, which are at a large discount to face value.

The alternative is to sell out of BIL and buy GPG shares, because the latter has a much stronger investment portfolio and is trading at a discount to NAV.

* Disclosure of interest: Brian Gaynor owns shares in BIL and GPG.

* bgaynor@xtra.co.nz