OMNICORP’S REPORT Behind the coloured sticker on the cover

Press, 15 July 1987, Page 45

OMNICORP’S REPORT Behind the coloured sticker on the cover

By

DAVID HAY

When the Omnicorp Investments, Ltd, annual report arrived it looked like the familiar dull grey and gold report Omnicorp followers have come to know. There was one striking difference — a bright coloured sticker right in the middle of the front cover.

Why would Omnicorp put that there if they didn’t have something to hide, I reasoned, as I picked the sticker off with my fingernails. But no, there was no hidden misprint or blot on the copy book.

Analysing the accounts was a similar experience. There are a lot more pieces to pick through, a lot more layers to be torn away. But often there was nothing to be concealed, although Omnicorp does have some weird features and odd accounting policies.

Omnicorp Investment wants to be an international tourism company, not an investment company as it was set up to be. The chairman, Mr Lloyd Morrison, explains that, “Omnicorp’s in-house skills in generating profits from capital market activities are reflected in this year’s results.” But he continues: "The thrust for the company’s long-term development lies solely in the area of international tourism.”

That is why most of the non-financial part of the company report is devoted to the tourism businesses Omnicorp has invested in. The companies are well worth explaining, and they are illustrated by some luscious photographs of tourist spots in New Zealand, the Mediterranean, and Asia. (Only one includes a girl in the foreground wearing a bikini.) After that, we could easily forget that, as at March 31, 1987, the tourism businesses were not a major part of the company’s assets. They are all

included among Omnicorp’s associated companies. Associated companies were shown at $24,796,000, slightly less than 10 per cent of total assets. Not only that, but these businesses did not contribute a dollar of profit to Omnicorp. The situation changed after balance date with the $95 million increase in Omnicorp’s shareholding in the London-based International Leisure Group (ILG), to a 49 per cent holding. Accounting for those associated companies is one of Omnicorp’s unusual accounting policies. The policy is “the accounts do not include the share of profit from associate companies, as the associates are in the early stage of development.” It certainly implies that the companies are not profitable yet. We are reassured, though, that excluding the associates “has not had a material effect in the group financial statements.” It seems that the directors do not really favour equity accounting (that is, including in profit the share of retained earnings of an associated company). But Dr Ray Thomson, Omnicorp’s executive director, told me, “We probably will adopt equity accounting now.” That is understandable when the group’s major asset will be the holding in associate company, ILG. That is not the strangest part of Omnicorp’s accounts. The most unusual policy concerns partial sales of investments. “Receipts from partial sales are credited against the cost of the investment and no profit is recognised until such receipts exceed the total cost of the investment.”

It must be a unique policy. Omnicorp does disclose the effect of the policy (it understates this year’s profit by $10.6 million). But the accounting policy is like the sticker on the front cover.

It looks as if it must be there to conceal something, even if it is not. This is the first company report I have seen for a long time with no earnings per share figure shown, and no calculation of the net tangible assets per share. The figures cannot be as bad as that, can they? No, I found they are not bad at all. Earnings per share are 10.3 per cent (last year 3.9 c), and net assets are 69c (previously 53c). The price/earnings ratio based on those figures and the current share price of about 126 c is higher than average at 12, and the market price is a little short of twice net asset value. (We can be sure that the shares are better value at that level than they were for the institutions which paid 260 c a share for a placement of 11.7 million shares in December.) I asked Ray Thomson about the exclusion of the earnings per share and net tangible assets data. He was surprised, too: “Are you sure?” he asked. “The figures should be there!” They are not — but it seems the omission was not intentional.

Omnicorp Investments showed a profit after tax of $17.7M. That is on net assets which started the year at SS3M. They increased through cash and option issues, placements and retained earnings to SI29M at the year’s end. Net assets, very roughly, were on average SB6M, so this year’s profit is about 20 per cent return on assets. Most of the return is tax free, so it is a good profit, which shows Omnicorp’s investment managers made a healthy margin over what could have been earned in interest on the money market. It is a good profit but we do not know what is happening in the year to March 31, 1988. Can they repeat this year’s profit performance? The fact

that the company is turning away from the investment business seems to show that it is not seen as the best long-term source of high profits. Why direct the company into tourism, an area the directors do not have a background in and which does not seem to have made money for the company yet? Mr Lloyd Morrison, the company’s chairman, sees the benefits of the change to tourism coming from the industry’s “natural growth prospects,” and the “trend to internationalisation from the industry’s current fragmented and regionalised position.” We might expect that the directors would have a considerable learning curve to go through before they would be experts in managing a new field of business. Mr Thomson did not see a problem here.

"That is because we are involved with very good people in the industry,” he told me. Particularly those in ILG and the 50 per cent-owned NZ Contiki bus tour operator, Jagwar Holdings, Ltd. Mr Thomson was not really

free to comment on 1988 results, but apparently the ILG acquisition alone ought to mean an increase in earnings per share. One uncertainty this year is the problem of the Strathmore group. Omnicorp. management has taken charge of the troubled group, in which a 20 per cent interest was bought last December. Strathmore is only a small investment for Omnicorp, which is unlikely to cause a major loss, apart from the commitment of management’s time. Mr Ray Thomson said to me: “We hope shareholders will be better pleased with the direction that we will give Strathmore.”

Omnicorp Investments is a most unusual company, one that is in the midst of a complete change in direction. That makes for a few uncertainties about how the company will do this year in its old field of investment and its new tourism businesses.

David Hay is a manger at Price Waterhouse, Christchurch, and lecturer in auditing at Lincoln College.