Alliance Textiles begins year on high note, says chairman

Press, 10 December 1983, Page 28

Alliance Textiles begins year on high note, says chairman

By

Adrian Brokking

Alliance Textiles, Ltd, the Dunedin textile group that did wonderfully well last year, has launched into the current year on a high note. “Very acceptable” increases in turnover and profit were reported to the annual meeting on Wednesday by the chairman (Mr W. R. Jackson).

He said that forward orders were better than usual for this time of year, and that the level of export orders was good. In some lines Alliance is sold forward to capacity through to the middle of next year. Obviously the good results for the last two years are more than sustainable.

After the meeting he told me that his comment did not specifically refer to the current year. At the same time he said, matter-of-factly, that he naturally would like to achieve this before he retired, and that was not very far away. Alliance had a cash flow of almost $9 million last year — and used it to good effect to restructure its financial position.

In fact, the managing director (Mr F. McKensie) said that the company was capable of returning $8 to $lO million in after-tax profits. Anybody who knows Mr McKensie knows that he is not given to shooting his mouth off.

Because of the improved financial position of the Group and the upward trend of share prices, the directors took the view that shareholders’ interests would be best served by coming to some immediate arrangement to redeem the various arrangements set up to finance the purchase of certain assets in August, 1980 from Mosgiel Ltd (In Receivership) and in March, 1981 from Holeproof Industries, Ltd. The accounts disclose the position after the part repayment of $2,960,000 of a

total owing of $4,500,000 to Holeproof Industries which was due to be repaid in full on March 31, 1984. The balance of $1,540,000 will now be paid on that date, but this early repayment was negotiated at an agreed discount to the mutual benefit of the two companies. Since balance date, agreements were reached with the Development Finance Corporation of N.Z. and the N.Z. Government to redeem the financial assistance they provided for the above arrangements in 1980. These payments have had a major effect on the company’s equity base, and although having no effect on the 1983 financial year, were explained in the company’s report for the year ended July 31. The total repayments including the payment in 1983 year were as follows:

These transactions removed the commitment to allot and service 4,500,000 new ordinary shares in the future, which would arise from conversion and bonus rights. Such a substantial increase in ordinary capital to only two holders at this time was not considered to be in the best interests of most shareholders of the company as it would dilute earnings a share. Commenting at the meeting on this restructuring, Mr Jackson said that although the transactions reduced asset backing slightly, and weakened the ratios, they materially increased the return both on shareholders’ funds and on capital.

The board had been conscious for some time of the diluting effect of preference share and debenture conversion. The company was making solid profit, good financial progress and had attained a position of strength sufficient to raise capital on its own account. The capital which was increased in 1980 to allow the rationalisation was proving more than adequate. “Earnings per share have been retained for the ordinary shareholder (it is currently more than 100 per cent and in our view more than maintainable) and the removal of the dilution has had a marked effect on the share price,” Mr Jackson said.

How is the spectacular progress since 1980 explained? Simply by pointing to in-

creased operational efficiency all down the line, and because of some rationalisation in the industry.

To take the latter first: as firms leave the industry, those that are left will do better, not just because of a lessening in competition, but because of the specialisation that becomes possible. As each profit centre specialises, the work force gets better, productivity rises and also quality of the product.

Operational efficiency also benefited from the capital injection that allowed the installation of better machinery. This leads to higher quality product, fewer rejects, less

downtime, and these benefits are passed on down the line, even leading to cheaper transport as batches are compiled more quickly and certainly. Of course, the rescheduling of term finance was done at lower rates of interest. and therefore interest charges and lease payments, which totalled almost $4 million last vear.

Mr Jackson referred to the dividend rate which remained at 25 per cent taxfree, and the total disbursement of $1,428,000 is covered 4.5 times, higher than considered necessary. But for the freeze, the board could well have recommended a 45 per cent dividend rate, representing 40 per cent of tax-paid profit for the year. As the rationalisation programme has been completed and inflation is reducing, a dividend cover of 2.5 times would be more appropriate, he said. Assuming that investors consider the present dividend yield of 5.2 per cent appropriate, a dividend of 45 per cent implies a share price of about 430 c. This would give a price-earnings ratio of 7.7 still well below the average for all companies of 9.8. If the company were to achieve earnings of $8 million the lower of the range mentioned by Mr McKenzie, and we postulated a price-earnings rati

lated a price-earnings ratio of 8, the share price would have to be 530 c.

Be that as it may, it can be said without a doubt that the current price-earnings ratio of 4.3 is ridiculously low, and that at a price of 255 c at the time of writing the shares must be considered underpriced.

July 29, 1983 Holeproof Industries 2,960,000 August 30, 1983 Redemption of Convertible cumulative redeemable preference shares as per formula contained in the Articles. (Due for redemption on or after August 27, 1983). 1,968,750 Purchase of Mosgiel Mill property and plant from Development Finance Corporation of N.Z. 3,398,225 September 15, 1983 Redemption of $1,000,000 convertible debenture from N.Z. Government including a premium on redemption. 3,150,000 Various dates Redemption of sundry captial leases 1,013,243 $12,490,218