Brian Gaynor: Ports chief keeps the ball rolling

Geoff Vazey

When Geoff Vazey took over from Robert Cooper as chief executive of Ports of Auckland on June 30, 1996, the fear was that the company's performance would languish.

Ports of Auckland had performed extremely well in its first few years of listing under Cooper and he was going to be a difficult person to follow.

Vazey has done a good job, particularly from mid-2000 onwards when the company's share price has picked up from $3.65. He scores a highly respectable 10 out of 15 on the star rating system.

Net earnings from continuing operations under Vazey have increased by 7 per cent, the dividend rate by 67 per cent and the share price, after adjusting for the recent $120 million capital repayment, by 43 per cent.

Vazey is particularly progressive and innovative in one important area, communications.

Ports of Auckland goes out of its way to keep the media and shareholders fully informed and is always willing to host tours of its port facilities.

Other companies, including Telecom, could learn a great deal from Ports of Auckland's communications strategy.

At November's annual meeting the company reported that container volume grew 11 per cent in the September quarter and non-containerised volumes were up 9 per cent.

Since then it has reported that container volume grew by 7 per cent in October compared with October 2001 and 13 per cent in November, an all-time record month.

The result for the June 2003 year will benefit from increased volume but will be adversely affected by higher interest costs associated with the $120 million capital repayment.

A net profit of $46.5 million, similar to last year, is expected for the current year but earnings per share will rise from 35c to 44c because of the capital reduction.

At $6.70 Ports of Auckland has a prospective price/earnings ratio of 15 and a fully imputed dividend yield of 4.8 per cent.

The company's strategic location and relatively high dividend yield makes it an attractive long-term investment.

Takeover offers

Based on the latest offer to Otter Gold Mines shareholders, it may be wise to accept initial takeover bids.

In October 2001 Normandy NFM made a full offer for Otter on the basis of 1.9 ordinary Normandy NFM shares for every 100 Otter shares. The bid valued Otter ordinary shares at 26.1c compared with the pre-offer price of 13.2c.

The offeror reached 89.17 per cent, tantalisingly short of the 90 per cent required for compulsory acquisition, and the company was delisted from the New Zealand Stock Exchange on November 1 last year.

On December 4, Normandy NFM, trading as Newmont NFM, made a new takeover offer for Otter at 28Ac (30.5c) a share. This looks attractive compared with the 2001 offer but it is not.

Normandy NFM's share price has risen dramatically and Otter shareholders who accepted last year's scrip offer now have the equivalent of nearly 44Ac per Otter share, whereas the latest offer is for only 28Ac.

The Australian mining giant has played hardball on this issue and it doesn't have to get too many acceptances before it reaches the magical 90 per cent compulsory acquisition threshold.

Fonterra

Fonterra, the country's largest company, has just appointed a new chairman and looks as if it may have a new chief executive by the middle of the year.

In an unprecedented move, Fonterra's board has commenced a global search for a chief executive officer. The present chief executive, Craig Norgate, has been asked to take part in the process.

It has been a bad year for Norgate with the decline in dairy prices, his involvement in the New Zealand Rugby Football Union's World Cup debacle and being asked to reapply for his Fonterra job.

The process will be watched with interest. If it is successful, some poorly performing listed companies will be under pressure to follow suit.

Share buybacks

Share buybacks were a hot topic at recent annual meetings.

Shareholders asked Fletcher Forests directors why they were having a buyback when the company wasn't paying a dividend, and a Hellaby Holdings shareholder wanted to know why the company was paying back capital instead of reinvesting in the business.

Taxation usually has a big impact on dividends and share buybacks. The tax implications of the different strategies are as follows:

* Dividends are paid tax-free to shareholders if a company has imputation credits. If a company has no imputation credits and does not pay tax then the dividends are taxable in the hands of recipients.

* Pro-rata share buybacks are tax free only if the amount of the buyback exceeds either 15 per cent of the company's sharemarket value or its net assets.

* On-market buybacks are tax free as long as the payments are made from subscribed capital.

Sir Dryden Spring told Fletcher Forests shareholders that the company could not pay a tax-free dividend and the proposed $50 million buyback was too small to qualify as tax free under a pro rata offer to all shareholders.

He said the best option for shareholders was to have a tax-free, on-market buyback, although cynics might argue that this will allow Rubicon to raise its 17.6 per cent Fletcher Forests shareholding without spending any money.

Rubicon's $60 million buyback in 2001 was large enough to be in the form of a tax-free pro rata offer to all shareholders.

For some unknown reason directors approved an on-market offer that saw the company buy 73.8 million shares at an average price of 81.25c, mainly from institutions, in a frenzied 30-day spending spree.

Hellaby managing director David Houldsworth told shareholders that the company was having a share buyback because it was under-geared; in other words, it had too much equity and too little debt.

He said a reduction in the number of shares would raise earnings per share and the ability of the company to increase its dividend per share.

Studies in North America and Europe have come to a variety of conclusions on share buybacks but the consensus is that buybacks achieve the best outcome when a company's shares are undervalued.

Contact Energy got it right when it repurchased 46.3 million shares at an average price of $2.67 a share, but Telecom paid too much when it bought back 138.1 million shares at an average of $7.25 each.

Fletcher Forests looks more like Contact Energy. Its shares are cheap on a long-term basis and a buyback should create value as long as it doesn't adopt Rubicon's fanatical buying strategy.

* Email Brian Gaynor