THE MARKET Firm but little direction

Press, 29 June 1985, Page 22

THE MARKET Firm but little direction

By

ADRIAN BROKKING

The New Zealand sharemarket firmed a little on balance this week, in quiet trading that at times seemed to lack direction. Barclay’s index of industrial shares rose 10 points to stop just short of the 1600-mark, at 1599.78.

Company news was scarce, as the March year reporting season is coming to an end. During the week Allegra announced a net profit of $1.4 million — handsomely beating an earlier forecast — and on Wednesday Abacus Ind that it has almost doubled profit to $1 million, and proposed a 1:10 bonus issue. The market is now eagerly awaiting the profit announcement from Dominion Breweries, Ltd, which is due on Wednesday. The result will be interesting for two reasons: first, it may provide a pointer to the likely attitude of Brierley Investments, and second, to what extent DB has benefited from the recent changes in the brewing industry and its own restructuring. Brierleys has gained Commerce Commission approval to increase its present 40 per cent stake in DB at any time in the next 12 months. This would allow Brierleys to take the full 100 per cent control, but a Brierleys executive director, Mr Paul Collins, said this week that the move had only been made because of Brierleys policy to always be in the position to purchase the shares it might want. Brierleys made a move late February to increase

its 24 per cent holding by standing in the market at 180 c a DB share. This immediately provoked counter buying by unnamed buyers, through the Auckland sharebroking firm, Morrow and Benjamin. However, it is now thought that this was buying for arbitrage rather than to build up a defensive stake. Brierleys forged slowly ahead, and was believed to have reached 35 per cent when in early May Qtron stood in the market for 10 per cent of DB but withdrew after acquiring 4.8 per cent. As Qtron paid up to 211 c, the arbitrageurs obviously did all right. About a month ago Brierleys bought the Qtron holding to increase its stake in DB to 40 per cent. DB shares are currently selling around 232 c with a high on Thursday of 236 c. Brewers always have a good cashflow, which is one of the main reasons why they make attractive takeover targets, as has been proved in Australia in the past year. And to an entrepreneur of the Brierley kind a target company’s cash flow would be a prime consideration, and would find a number of profitable avenues for it. However, to get its hands on that cashflow Brierleys would have to make DB a wholly-owned subsidiary. DB’s cashflow in the last five years has been: 1980, $11.9 million; 1981, $15.0 million; 1982, $15.7 million; 1983, $18.5 million; 1984, $17.7 million. Buttle Wilson and Com-

pany, the Auckland sharebroker, published an analytical report on DB last week, and projected a 39 per cent increase in this year’s profit to $l7 million rising, “in the absence of any major industrial unrest,” a further 47 per cent to $25 million next year, with $3O million quite attainable for 1987. On the basis of the average ratio of cash flow to reported earnings of around 160 for the last five years, this could mean cash flows of $27 million, $4O million, and $4B million for the next three years. However, this ratio is likely to decline with the restructuring. Buttle Wilson’s reference to industrial unrest parallels an observation by the directors of Lion Breweries in their report last week. They said: “The brewing industry’s industrial relations must be improved. The recent strike in Auckland illustrated the difficulties of managing change in an old industry with established work practices, which faces the need to become internationally competitive. Lion Breweries reported an increase in tax-paid profit of 52 per cent to $28.1 million.

Because of the good cashflows DB had a strong balance sheet, which will become even stronger with the realisation of unwanted assets and the sale of the shareholding in Mount Cook; this should substantially reduce the interest-bearing debt. The Auckland broker’s projection of a 39 per cent profit rise for DB is based on the consideration that the company will have benefited only in small part in this financial year from the reconstruction in progress. A further reason would be the effect of the brewery tradesmen’s strike which limited production in

all Auckland region breweries between January and March. DB’s strategy to escape from its ageing and unresponsive management structure of the seventies is:— ® Realisation of substantial funds from the sale of hotels and taverns which were providing inadequate returns. • A concerted drive to improve efficiency and obtain acceptable returns on all assets employed. ® Concentration on mainstream business, with the sale of several peripheral investments — including the Barraud and Abrahams and DB Merchandising subsidiaries, and holdings in McWilliams Wines and the James Cook Hotel. 9 Implementation of a responsive and effective management structure. These moves are, of course, similar to the strategy adopted by Lion Breweries and have been very successful for that company, as its 1985 profit achievement proved.