N.Z. Refrigerating Needs To Improve Liquidity

Press, Volume CVIII, Issue 31595, 5 February 1968, Page 16

N.Z. Refrigerating Needs To Improve Liquidity

Freezing companies work in a market. which is noted for its erratic profit and loss behaviour but New Zealand Refrigerating Company, Ltd, which incurred a loss of $259,686 in its latest year to October 1, can ill afford another loss in the next two years. ‘

The annual group accounts, released last week, showed a lack of> liquidity which was reflected in bank overdraft standing at $1,860,589, a rise of $1,502,199 on the year before and easily the highest level for some time.

As well, the shares from the three-for-five bonus issue of 1965, which up to now received no dividends, qualify for dividends declared after March 31.

This will mean that if the reduced dividend of 6 per cent were maintained in the current year, the dividend payment would rise $195,000 to $495,000 on that paid out in the year just finished. But since the balance date, $499,340 in notes have been converted into shares. These previously carried an inteust rate of 7 per cent which was deductible for tax (which does not have to be disclosed by meat companies). If a 8 per cent dividend were to be paid for the current year, then the extra cash which would have to be paid out as dividend on the converted notes would be about $9OOO more than paid out as interest.

Cash Requirement

Thus, a 6 per cent dividend this year would require about $504,000. A 7) per cent dividend—the same rate as in 1966—would need about $635,000. A loss would add to this cash requirement.

Another loss of the same magnitude as 1967 would almost certainly force N.Z. Refrigerating to find further funds from fixed-term borrowing. At the last balance-date these stood at $2,132,570, or about 19.5 per cent of stockholders’ and convertible noteholders’ equity, which is quite an acceptable relationship. However, working capital is so low Sa ratio of 1.1 to 1) that term lenders would want this proportion raised an amount comparable to the size of their deposit, to bring the borrowing-equity relationship into better proportion.

Alternative Another alternative would be to sell Government and local body stock but this, if the cost price could be recouped, would bring only $183,660. N.Z. Refrigerating’s equity position as displayed by the annual accounts has deteriorated since 1964 to the point where (if the notes are converted into shares) shareholders’ funds as at October 1, 1967, are actually $190,268

less than they were at October 31, 1964. The prinicpal cause of this has been the deficit of $863,136 arising from the take-over of Meat Packers (N.Z.). In the take-over, $449,340 in notes (now converted into shares) was issued for the nominal value of shares and convertible notes in Meat Packers of $649,048. However, according to the notes to the 1965 accounts, an estimated stock deficiency in Meat Packers of $1,062,844 was disclosed by an independent investigation. This, less the difference between the convertible notes issued, and the shares and notes in Meat Packers, leaves the $863,136. The other erosion of funds arises from the excess of losses and dividend payments over profits in the last three years. This amounts to $699,724.

Credit Side

On the credit side, there is added the issue of convertible notes, $449,340 and the $923,012 from fixed assets reserves used for the 1965 bonus issue. The amount of $240 this sum differs from the fall in shareholders’ funds of $190,269 is accounted for by minor changes in reserves over the three years. With the conversion of the notes, ordinary- capital represents 79.4 per cent of shareholders’ funds at the latest balance-sheet date against 44.8 per cent in 1964. On results of the last nine years, about one in three of the trading years brings a loss.

Good results in the next two years, which no doubt will be assisted by the large capital expansion programme, will be needed to improve the liquidity position, allow cash for a reasonable return to shareholders, and a building up of the depleted revenue reserves as a hedge against another loss. N.Z. Petroleum The key to the price that N.Z. petroleum will fetch depends on the price which Americans are willing to pay in Dallas.

According to one report, when the shares sold at 240 c in New Zealand the week before last, buyers in Dallas were willing at 270 c. Added to their cost would be the tax Americans have to pay on mining shares of overseas companies. Most of the buying for the American market is apparently being done by three Wellington brokers and their demand for shares will also have an effect on the prices here. Active Market Last week saw another active market in N.Z. Petroleum shares which began the week at 250 c. Curiously, the price dropped to 100 c on Wednesday and the boom seemed over, only to revive for the rest of the week. The closing price on Friday was 200 c. According to the Official Record of the Stock Exchanges of New Zealand, the company has $981,060 in capital, made up of 1,542,120 50c shares and 420,000 50c vendors’ shares. Of these. New Zealanders hold about 350,000, or about 15.8 per cent, and the remainder is held overseas, mostly by Americans.

The company holds licences for drilling over 8815 square miles in New Zealand.

Shares Discount

The discount on Australian shares has increased to ■ the point where it is possible for a buyer of Australian shares here to sell them in Australia at a profit. On Friday, as one Christchurch broker pointed out, B.H.P. could be bought for 1820 c and sold in Australia at 1845c —a profit of 25c for each share.

But then comes the snag. The money must be repatriated or used to buy other overseas shares which must be deposited with the Reserve Bank in New Zealand.

If the money were ’to be repatriated, then there is a time lag while the cheque is cleared by the Australian Reserve Bank, which means an eventual delay of between

four and five weeks before the cheque arrives in New Zealand.

The amount of profit (1.4 per cent on the example given) just does not make the trouble worth while, according to this broker. Overseas Issues The one-for-four issue of 10c shares at 320 c each by Western Mining Corporation, announced last week, raises the problem of how New Zealand shareholders will be able to take up their allotment They will have to find $4 in Australia currency for every present 50c share they hold. To do this, they can:—

Take up the issue with money held in Australia; Buy Australian shares here, sell them in Australia and use the proceeds for the issue (which would mean depositing the shares with the Reserve Bank), or; Sell some of the rights, which are likely to fetch a high price, and use the money to take up the issue.

The problem of taking up allotments is likely to arise again with New Zealanders if B.H.P. decides upon a cash or premium issue, later this year.