By BRIAN GAYNOR
Waste Management can look forward to a lively annual meeting in Auckland tomorrow. Among the contentious issues is the decline in operating margins, poor share price performance and a further share options issue to managing director Kim Ellis.
The waste collection and disposal company reported a net profit of
$13.1 million for last year, an 8.7 per cent reduction on the previous year. The ebit (earnings before interest and tax) margin for the 12 months was only 16.3 per cent, compared with 18.9 per cent in 2000 and a recent high of 20.8 per cent in 1998.
The operating margin in the second half was a meagre 14.9 per cent, compared with 19.5 per cent in the second half of the 2000 year.
The poor result was due to three main factors:
* Aggressive tactics by a new competitor hurt pricing and margins.
* Waste Management was an unsuccessful bidder for the Auckland City Council collection and disposal contract that began last July 1. This was a big setback because the group is attempting to expand its disposal activities and this contract combined collection and disposal for the first time. Its previous contract with Auckland City was for collection only.
* In July, two businesses were bought in Australia for $28 million. These acquisitions badly affected the group's operating margin as they produced a return of 11.2 per cent on sales of $15.6 million whereas New Zealand activities had a return of 16.8 per cent on sales of $137.8 million.
But the good news is that the group produced positive operating cash flow of $37.4 million last year and directors expect a return to earnings growth this year.
Ellis believes last year will eventually be remembered for the successful entry into Australia rather than the loss of the Auckland City Council contract.
He and his management team must produce much better results. Most shareholders bought their shares at $3.30 when Waste Management of the United States sold its 57.4 per cent stake two years ago and group results have fallen well short of analysts' forecasts at the time.
Item four on tomorrow's agenda is the proposed issue of 110,000 options to Ellis at an exercise price of $3.02 a share.
The managing director now has 453,999 options; 90,000 with an exercise price of $3.80 were approved at the 2000 meeting and 106,633 with an exercise price of $3.60 were approved last year.
The exercise price is determined by the market price just before the notice of meeting is sent to shareholders and as Waste Management's share price keeps falling so does the exercise price of the new options.
Companies that issue options at lower and lower exercise prices are being strongly criticised overseas by investors and regulators. There is a strong argument that this does little to encourage management.
Ellis is already very well paid and it would be far more sensible to give him tough performance targets instead of an annual handout of new options with lower and lower exercise prices.
Waste Management
Share price $2.95
Market value $289m
P/E ratio 22.0*
Dividend yield 2.5%*
* Based on 2001 results
WILSON NEILL
Wilson Neill has been one of the big corporate topics in the past few months, but behind the disaster has been another story - the determination of Ian Andrews to expose the company's wayward behaviour to the regulatory authorities and the media.
Andrews is an Auckland investor who was the joint owner of 6.9 million Wilson Neill shares or 2.5 per cent of the company according to the 1999 annual report. At that time he was the fifth-largest shareholder.
But Andrews realised he had made a big mistake and reduced his holding. He then started a persistent and determined campaign to expose the goings-on at Wilson Neill.
He harangued chairman Trevor Mason, made a string of complaints to the Companies Office and Securities Commission, and revealed a constant stream of non-compliance to the media.
Andrews had the bit between the teeth and was determined not to let go.
Some time after he realised his mistake, a stockbroker released a very bullish report on Wilson Neill under the heading "A strong buy at 13 cents". The report was simplistic and naive and made the bold prediction that Wilson Neill's share price would be between 20c and 30c within 12 months.
One normally expects a private investor to be mesmerised by the deep blue sky while the stockbroker does the number-crunching analytical work. As far as Wilson Neill was concerned, these roles were totally reversed and the company's shares are now worthless.
MR CHIPS
Mr Chips is one of the NZSE's lowest-profile listings, but directors say it has a very interesting future.
The potato chip company was formed in 1985 and listed on the NZSE in September 1993 by way of a compliance listing. It has only 380 shareholders, is 50.8 per cent owned by Eion Edgar and just $573,000 worth of its shares traded last year.
In view of this, it is not surprising that no analyst covers the company and it has no institutional shareholders.
On February 25 Mr Chips announced a renounceable rights issue at $1 a share on the basis of three new shares for every existing 10 shares. The $5.5 million proceeds will be used to partly finance the new processing facilities next to its East Tamaki plant.
One of the features of the issue is that it is underwritten - for a fee of $84,500 plus expenses - by the four major shareholders who own 70 per cent of the company among them.
The Stock Exchange has granted a number of waivers in respect of the underwriting agreement but has not insisted on a high level of disclosure in the short form prospectus.
The prospectus contains no information on the total cost of the East Tamaki expansion or details of the Restaurant Brands contract on which the expansion is based.
Directors say the new plant will result in "an increase in earnings before interest and tax (ebit) of more than 100 per cent" for the March 2003 year. This forecast compares with the March 2002 year earnings that have been affected by disruptions caused by the plant expansion.
Although a higher level of disclosure would be welcome, Mr Chips shareholders are advised to take up their rights issue entitlement.
The company has a relatively low price/earnings ratio of 13.6 based on the March 2003 year earnings forecasts and a prospective fully imputed dividend yield of 5.5 per cent.
Mr Chips
Share price $1.09
Market value $26m
P/E Ratio 13.6*
Dividend yield 5.5%*
* Based on 2003 forecasts
* Disclosure of interest: none.
* bgaynor@xtra.co.nz
By BRIAN GAYNOR
Waste Management can look forward to a lively annual meeting in Auckland tomorrow. Among the contentious issues is the decline in operating margins, poor share price performance and a further share options issue to managing director Kim Ellis.
The waste collection and disposal company reported a net profit of
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