Getting the ‘bear’ essentials on Chase Corporation

Press, 27 January 1988, Page 34

Getting the ‘bear’ essentials on Chase Corporation

By

DAVID HAY

I overheard some interesting characters discuss Chase Corporation, Limited, the other day. It was at the teddy bears’ picnic.

“Has the sharemarket been too hard on Chase Corp?” a company director was asking. (He was well padded and he had a beard. He must have had the same tip-off as me: if you go down to the woods today, you’d better go in disguise.) “Maybe so, and maybe not,” a grizzled, hard-bit-ten old bear responded. Later we spoke to Chase’s deputy executive chairman, Mr Peter Francis, and found how true that was.

“The market priced us on whether we were going to survive!” Mr Francis said.

“I think the share price values us on a liquidation basis.” The shares started off the year near six dollars, and fell to around 90c. That is about half the stated net asset backing, and the Wall Street Journal rated Chase the second worst performing share in the world (after Renouf Corporation). It is a very large fall when Chase does not even have any major scandals besmirching its name like those around Judge Corporation and Renouf Corporation, or Rada and NZ Forest Products.

Mr Colin Reynolds, the Chase chairman, sent a letter to shareholders and a special interim balance sheet. He told shareholders then: “It is our view that the sharemarket has been oversold, and the Chase Corporation price is no exception. The current price is less than half the net tangible asset backing.”

But the market is a complicated place, and there are always a lot more factors than that behind a share price, the bears told us. Some are based on the company’s situation and some on the market generally.

We looked at the interim balance sheet, which was issued in midDecember and reached most shareholders with the Christmas cards or a bit later.

The accounts support

the directors’ view of net assets at about 180 c to 200 c a share. Property developments are at cost, $957 million, and investments in listed company shares have been written down to market value $333 million. But the biggest asset is property investments of $1436 million (“and the report is discreetly silent on the valuation method for those," Grizzly's deep voice growled). Capital and reserves have fallen $2OO million since June 30, 1987. If we treated all that as a trading loss, then Chase would have earnings per share of a negative 66c. But most of that decline must have been from the decline in value of the share investments (which are reduced by $152 million).

Not even the directors know yet how the company’s result for the year will look. It will include losses on share investments, some operating profits and perhaps some operating losses. How much of each could be the most important question.

Surprisingly, the recent report to shareholders does not make any comments at all on the company’s profit situation, and Mr Francis could not help either.

“It all depends on how we treat the write-offs” (of share values), he told me. The profit announcement for the six months to December 31 will be made in March.

Chase is very much a specialist property company now. In the statement to shareholders, Chase makes a comment on the market situation: “We expect the property investment market in New Zealand to remain firm, contrary to the view of some other commentators,” Mr Reynolds said, highlighting how. Chase’s business is now somewhat less fashionable; and how not everyone agrees there are good prospects for it. The interim financial statement also draws us to look back at the company’s June, 1987, annual report. The highlights of the report show Chase’s terrific growth — in the years from 1983 to 1986. Since then, growth has slowed, and in fact we see

that return on shareholders funds fell from nearly 70 per cent in 1984 to 26 per cent in 1987. The statistic confirms what we would have known — as Chase has become a much larger company, each increase in profit is harder to get. Perhaps Chase was due to lose some of its glamour status anyway. Mr Francis said Chase was certainly going to survive. “There was no doubt about that in our minds, although I think there was in the minds of some of the public. We have had to take steps to ensure that we will. We had a big run on our funds, but we were able to meet it. We have had to sell assets, especially the big sale (of Chase Property Holdings pic) in the U.K.; and we have to take some big write-offs.” Chase has seemed to be in full retreat. Investments that had been made for the long term are being sold — for instance the United Kingdom subsidiary. It is part of a plan that includes selling shares and properties. I calculate that SSBOM in asset sales is planned, of which the Chase Property Holdings sale raised S3OOM. It will change the nature of the group — again! The 1987 annual report declared another “philosophical change from a long term property investor to a developer.” And no company can have bought and sold as many “long term” major holdings as Chase — remember the company’s involvement in Lane Walker Rudkin, Hooker Corporation, Baker Group, Leisureland, Aurora, Pacific Metropolitan, Troy Corporation ... Perhaps all those changes are one reason Chase never seems to have become part of New Zealand life. Unlike Sir Ron Brierley, Bob Jones, Michael Fay or (dare I say) Sir Francis Renouf, the Chase team never seem to have developed a strong positive image that would give some shareholders an emotional hold on their shares. And a fluffy, kindhearted bear spoke up,

saying: “It would certainly be ironic if the market is too concerned about Chase’s accounting policies. Chase has always been among the most notorious creative accounting organisations — the company blatantly smoothed its profits in the 1986 year by deferring two-thirds of its profit on the Hooker Corporation venture; and then in 1987 the annual report shows no less than five changes in accounting policy.” It could be that the changing policies have left analysts in general with a cynical view of any figures that Chase produces.

The market itself is still in a chaotic state. Recently, Mr Frank Pearson, a leading investment manager, spoke about the time when investment managers will bend over to pick up dollar bills which they can see available for 50c. The bears explained that there are times when it is not right to pick up a cheap dollar bill — when it will be worth only 25c next week, or when we can already buy a dollar bill for less somewhere else. In other words, does the market think that Chase might have more losses still to be announced? Or is everything else in the market relatively cheaper anyway? The bears do not like to be held entirely responsible for the bear market in general, or for any particular share. If there are more shares for sale than there are shares that people want to buy, of course the price will fall and stay down, they told me. “Maybe Chase shares are held by special kinds of shareholder, who are more likely to be in a position where they want to sell, or need to sell — less experienced, smaller investors?” asked Fluffy. “Could be margin traders, or short sellers!” rumbled Grizzly. My disguise was starting to slip by now, and I had to exit (Chased by a bear). If we only look at the Chase Corporation share price and net asset backing, the shares do seem to be under priced. The directors certainly seemed anxious to tell us that the shares are cheap. But share prices are complicated, and you do not have to be a bear to want

to see evidence of earnings as well. Mr Francis certainly sounded relieved that the situation is not as bad as it could have been: “We are in a lot better shape than last year.”

David Hay is a manager at Price Waterhouse, chartered accountants, Christchurch and lecturer in professional accounting at Lincoln University College.