FYI | Aug 31 2006
By Chris Shaw
Recent results from the likes of WorleyParsons (WOR) and Origin (ORG) have shown the market generally remains very tough on companies reporting profit results that don’t meet expectations.
Guinness Peat Group (GPG.NZ) similarly failed to match broker expectations with its interim profit result of GBP31m, but continues to be viewed positively due to one important difference – with Guinness Peat the actual profit result doesn’t really matter.
As Credit Suisse and Macquarie both point out, profits are not so important for the company as they are almost always distorted by currency revaluations and investment profits. This means of more importance is the change in the company’s net asset value (NAV), as this measures how much value is being created for Guinness Peat and its shareholders.
In this respect the company continues to deliver, as Credit Suisse estimates the company’s NAV has increased by 19.4% to NZ$2.90 since the beginning of the year, even after factoring in the lower than expected earnings result.
The disappointment in the profit result was the performance of major subsidiary Coats, which had a tough time in its major US market as a de-stocking of inventories resulted in it recording an 11% drop in operating earnings before tax. But as ABN Amro Craigs notes this obscured to some extent good performances in the other divisions of Coats, as Asia continued to record strong growth and the industrial threads operation performed well.
With the broker, along with GSJB Were, forecasting a return to more normal market conditions in 2007, Coats should be able to lift performance in coming periods. Weres points out though a full recovery in earnings may take until 2008.
There was some good positives in the result as well, Credit Suisse noting the re-listing of Nationwide Accident Repair Services adds about 6c to its valuation on the stock and Weres seeing some potential for value to be realised in some other assets such as stakes in Tattersall’s (TTS) and Tower (TWR).
Following the result all four brokers continue to rate the stock as Buy, with average share price targets in the range of NZ$3.00. This compares to a closing price yesterday of NZ$2.47.