Gaynor: Frucor share offer looking tasty

By BRIAN GAYNOR

Investors should think twice before rejecting the $2.35 a share bid for Frucor.

Although Grant Samuel has valued the company between $2.53 and $2.96 a share, recent experience indicates that the company may not achieve the profit forecasts on which this assessment is based.

We need to look at Frucor's history to see why shareholders may be best advised to disregard the independent directors' "don't sell" recommendation.

In June 1998, the Apple and Pear Marketing Board sold Frucor to a consortium of investors, mainly from Australia, for $50.4 million.

In a complex capital reconstruction, the consortium contributed $18.7 million and borrowed the rest of the purchase price against Frucor's assets.

In the middle of last year, the consortium offered 62,625,000 existing Frucor shares (50.1 per cent of the company) to the public at an indicative price range of between $1.95 and $2.25 a share.

The issue price was eventually reduced to $1.50.

After its sharemarket listing in June last year, Frucor released a spate of positive press statements and analysts fell in love with the stock. Most have had a "buy" or "strong buy" recommendation for most of the past 17 months and their valuations have generally been well above the company's share price.

As one would expect, Frucor achieved its profit forecast for the June 2000 year because the prospectus was issued just six weeks before the balance date.

But the year to last June was a different matter. Frucor reported a net profit of just $11.7 million, compared with a prospectus forecast of $20.4 million, and operating earnings of $13.3 million in the previous year.

The poor result was due to the disappointing performance of its V energy drink in Britain.

The Grant Samuel report revealed that Frucor recorded a net loss of $4.6 million between July 1 and October 26. Although the company is subject to seasonal factors, this indicates that it is performing well below the year to June.

Frucor must earn $11 million this month and next to match last year's interim result of $6.4 million. Based on experience, this is extremely unlikely unless its advertising spending is slashed.

There are several additional observations from the Grant Samuel report:

* Frucor is highly geared, with shareholder funds of just $27.8 million and assets of $124.1 million, including $33.6 million of intangibles.

* The company's bid to establish itself in Britain has not been successful.

Grant Samuel concludes: "The sales performance for the first four months of the current financial year has been poor due to an overall decline in the energy drinks market in the UK. Frucor's UK business is continuing to incur significant losses and in Grant Samuel's opinion, may not be viable in the absence of a strategic partner."

When Frucor was floated last year a great deal of emphasis was placed on its expansion into Britain. The success of this strategy was important because the Australian-led consortium had extracted full value from the company and left it with a highly geared balance sheet.

The Australians now want to get out. They will realise a profit of more than $220 million on their original investment of just $18.7 million if Danone's bid is successful.

Frucor's remaining shareholders should seriously consider accepting the offer, but should wait until just before the December 7 closing date before making a decision.

The company is expected to report a disappointing result for the six months to December 31 and may need to raise more capital to strengthen its balance sheet.

This suggests that its share price could fall well below $2.35 if the bid is unsuccessful and Danone walks away.

Michael Hill International

The champagne flowed at last week's Michael Hill International annual meeting and the company's founder and chairman was in his usual ebullient mood.

Shareholders had plenty to celebrate as the company reported another record profit. Michael Hill now has 115 stores - 74 in Australia and 41 in New Zealand - and its share price has substantially outperformed the NZSE40 capital index.

Directors believe the company can operate 200 stores in Australasia and may open an experimental outlet in either North America or Britain within 18 months.

Trading conditions in Australia are difficult at present but rural areas in New Zealand remain buoyant.

The company will focus on improving the performance of its less profitable stores this year.

Mr Hill is an incredibly successful businessman. Against all the odds he has turned a small Whangarei jewellery operation into a major Australasian chain in just 20 years.

Wakefield Hospital

Friday's profit announcement from Wakefield Hospital was a poor reflection on the expertise and judgment of Forsyth Barr and the company's directors.

On August 6, the Wellington-based hospital group released a prospectus for the issue of 3.3 million shares at $2.50 each. The lead managers and organising brokers for the issue were Forsyth Barr in Wellington and Forsyth Barr Frater Williams in Auckland.

The board and management forecast a net profit of $1.965 million for the year to next March 31, compared with $1.712 million for the previous year.

The prospectus contained the following statement: "For the first quarter of the 2002 year, actual revenues and profits have been adversely affected by a combination of the temporary absences of some surgeons and a reduction in the volume of contracted cardiac surgery. These events are not unusual and allowance for them has been made in the forecast of financial performance for the year."

On Friday, the hospital operator shocked shareholders when it revealed a net profit of $417,000 for the six months to September 30, compared with $1,041,000 for the period last year. The dividend was cut from 3c to 2c.

"The net profit after tax was within 4 per cent of our expectations for this period," said chairman John Calder, a Tauranga orthopaedic surgeon.

"However, the amount of cardiac surgery we do is unlikely to increase before the end of the year. If this is so, Wakefield Hospital's full-year earnings are likely to be about 50 per cent of the figure forecast when the company floated."

If the interim net profit figure was within 4 per cent of expectations then the company was expecting to report a 58 per cent decline in earnings in its first profit announcement to the Stock Exchange.

Why didn't Forsyth Barr insist that this information be revealed before shares were sold to the public?

How could the hospital's directors and management make such a terrible hash of their full-year profit forecasts?

Forsyth Barr should have been particularly vigilant as it was lead broker to the Metlifecare float in 1994 that also fell well short of its profit forecasts.

Wakefield Hospital shares last traded at $1.80. Its issue price just 11 weeks ago was $2.50.

* bgaynor@xtra.co.nz