COMMERCIAL Challenge profit cut by costs and rural slump

Press, Volume CXV, Issue 33965, 4 October 1975, Page 18

COMMERCIAL Challenge profit cut by costs and rural slump

The rural subsidiaries of Challenge Corporation, Ltd, were seriously affected by the fall in primary produce prices and increases in costs. Turnover in the non-rural sector was a record, but manufacturing and retail subsidiaries absorbed cost increases and generally results were close to those of last year, the directors say in the annual report.

Challenge enters the new financial year with a stronger management group and with a greater sense of purpose. The organisation is confident of its ability to advance despite the generally unfavourable economic environment, the chairman (Mr R. R. Trotter) says.

As reported the group’s total net profit, for the year to June 30, fell 31.5 per cent to $6,393,000. The trading profit fell 48 per cent to $4,654,000. Sales turnover fell 22 per cent to $522.0m. The net profit on sales fell from 1.3 per cent to 0.9 per cent. Net capital profits, from the sale of surplus assets, were $1,796,000 — mainly from buildings surplus to requirements as a result of the merger in 1972. No provisions were required for exceptional items of expense. To illustrate the effects of inflation, included in last year’s report was a supplementary set of financial statements based on “continuously contemporary accounting.” These showed an improved result over the conventional accounts. This year, the company reported on the same basis and shows a loss after including unrealised profits from holding assets and after charging the cost of maintaining the purchasing power of shareholders’ funds. At the inflation rate last year of 14.9 per cent the cost of maintaining the purchasing power of shareholders’ funds was $14.5m. The form of presentation has some limitations, but the result shown is probably much nearer the true position than in the conventional accounts, the report says. Informative report Mr Trotter is a strong advocate of informative financial reporting, and the accounts this year are supplemented with a statement of the results of major subsidiary and associated companies. This innovation gives details of assets used, turnover, and gross income for each major activity of the group. A funds statement provides details of the sources, and applications of funds acquired and invested during the year. The net returns of subsidiaries will be published in the future, and equity accounting will also be adopted. A final ordinary dividend of 7.5 c a share is recommended. This is payable taxfree from share premium reserves, and capital profits, and requires s2.lm. The rate of dividend for the year is steady at 12.5 c a share (12| per cent). The total payment for the year of $3.5 m is covered 1.3

times by trading profits after allowing for preference dividends of $232,200. The trading profit was after providing $320,000 more at $2,805,000 for depreciation, but $3,230,000 less at $3,692,000 for tax. Interest charges were $2.7m higher at sB.4m. Investments During the year, Challenge Corporation arranged two private cash and conversion offers to cater for the holders of maturing stock, and Challenge Finance had public issues open for subscription throughout the year. The net result is an increase in debenture borrowings of almost s7m to $43.7m. Total term liabilities rose s3.Bm to $70.1m. Proprietorship was unchanged at 31 per cent. Capital expenditure on land and buildings during the year totalled $2. Im and included properties acquired through the purchase of D. H. Davies and Company and the provision of new premises or major additions for Wrightson NMA, Wrightcars, MacEwans and Fairbairn Wright. Contracts and commitments for capital expenditure not finalised on June 30 amounted to s2.lm. During the year, Challenge bought all the shares in Allied Real Estate, urban real estate agents, Wellington. It also bought an 85 per cent interest in D. H. Davies and Company, pump manufacturers, Auckland, and a 35 per cent interest, in A.N.Z.D.E.C., agricultural consultants.

A 44 per cent interest was purchased in Campbell Motors, Auckland. Part of the consideration was a private issue of 313,222 unsecured convertible notes of 130 c each, bearing interest at 7£ per cent and redeemable by conversion into fully paid ordinary shares in the ratio of one share for one note on June 29, 1982. Since balance date the company has arranged to acquire the rest of the shares in Campbell Motors. Shareholders’ funds rose $2,165,000 to $65,500,000. The saving rate on average funds fell from 15.4 per cent to 7.2 per cent. Current items Although there was little change in the group’s liquidity, there were significant changes in individual items. Total debtors declined s3m. Debtors increased in most non-rural subsidiaries and arranged advances to farmers increased $3.7m. These increases were more than offset by a drop of sB.lm in sundry debtors in the rural sector because of lower prices for livestock and reduced farm spending. The improvement in working capital from this source is therefore probably only temporary, the report says. Stocks increased ss.Bm "in value although the volume is less than last year. There has been a further decline in clients’ deposits of $5.6m, a reflection of the difficult times being experienced by farmers, the report says. Working capital rose $2.7m to $75.5m, but the current ratio was unchanged at 2.0 to 1. At 170 c the ordinary shares have a dividend yield of 7.4 per cent, and an earnings yield of 9.3 per cent. The p.e. ratio is eleven.