Hirequip: Interim Report To 31 December 2005
Hirequip: Interim Report To 31 December
RESULT TO 31 DECEMBER 2005
This report covers the six months to 31 December 2005. As announced in the 2005 Annual report the Company has adopted New Zealand Equivalent of International Financial Reporting Standards (NZIFRS).
This has required restatement of the balance sheet as at 30 June 2004, 31 December 2004 and 30 June 2005 and the restatement of the income statement for the six months to 31 December 2004 and twelve months to 30 June 05. All comparative figures, where necessary, have been restated to reflect these standards.
After adjusting for NZIFRS the financial statements are directly comparable to last years interim result as no major acquisitions occurred during the intervening period. The interim report to shareholders will contain detailed reconciliations between the NZIFRS compliant financial statements and the financial statements previously prepared in accordance with accounting standards previously applying.
Revenue from core hire and related operations was above that generated for the equivalent period last year being $42.5m compared to $41.1m. EBITDA from the core business before the one-off cost of the ‘Doing it Better’ initiative decreased marginally from $12.3m to $12.1m between periods.
Earnings in the current period were impacted by a one-off cost of $1.2m for consultancy fees incurred in undertaking the ‘Doing it Better’ initiative. This initiative, discussed in last year’s Annual Report, focused on improving efficiency and effectiveness across the business. Implementation of the first range of cost initiatives began in November and December, and so far measurable cost savings on an annualised basis are in the range of $1.0m - $1.2m p.a. While the benefit of this expenditure will be derived in future periods, the accounting treatment of the cost has been to book it as an expense in the current period.
Group net profit after tax, restated in accordance with NZIFRS, for the six months was $1.1m compared to $3.7m for the same period last year.
No profits from investment activities occurred during the period. The book carrying value of remaining legacy investment assets is conservative and considerable future profits are expected to be realised.
Bank debt increased with the further expansion of the hire fleet, branch upgrades and land purchased for future branch development.
An unchanged fully imputed interim dividend of 1.25cps will be paid to shareholders on 28 March 2006. The date of record for dividend payments will be 24 March 2006.
CORE EQUIPMENT HIRE BUSINESS
As reported previously, over the past two years the Company has followed its stated policy of favouring internal growth with an aggressive capital expenditure programme. The expansion and upgrade of the hire fleet and existing branches has been in preference to purchasing potentially over valued rental businesses with significant goodwill. This strategy has allowed the Company to take advantage of the high NZD exchange rate.
This investment has also materially reduced the average age of the Company’s assets. As a consequence it has improved the Company’s competitive position.
Revenue for the first six months when compared to the corresponding period last year is up 3.5%. This increase does not fully reflect the recent additional investment that has been made in new equipment. However the Company is confident that the availability of new equipment will enhance utilisation and future profitability.
Revenue for January and February 2006 is significantly higher than the modest increase reported in the first half of the year. A number of supply orders for large projects will be delivered in the second half of the year. Accordingly the second six months is being approached with confidence.
In the event that excess fleet capacity eventuates it will be corrected by the sale of the Company’s old and obsolete plant and future capital expenditure tuned to match demand and Company return requirements.
Redevelopment of the Palmerston North and Rotorua branches was completed during the period with the Whangarei branch likely to be completed by April 2006. Further branch developments are planned for Grenada, Tauranga, Hastings, Hamilton and Silverdale. The amount of branch development currently being undertaken has given rise to the Company carrying a greater than normal amount of property on its Balance Sheet. This has contributed to interest costs being higher than normalised levels. The Company is in the process of disposing of a number of properties with settlements due before year end.
Sub-branches have been set-up on the Springhill and Milton new prison sites to support these construction projects.
The ‘Doing it Better’ initiative as outlined in the 2005 Annual Report has enabled the Company to reduce costs in the key areas, principally in labour, and repairs and maintenance. The benefit of these cost savings has not been captured in the interim result and will flow from the second half of the year forward. At the same time the Company has established an internal audit and training function to improve systems compliance and put a significant investment into the development of the HQ brand.
We believe the initiatives undertaken will strengthen the Company’s financial performance in future periods and accordingly the non-recurring costs expensed in this half year will have been well spent.
Pegasus Bay Town
The progress made by Infinity Group on the development of Pegasus Bay Town remains on the original timetable as far as planning and sales launch activities, having conducted a successful launch on 23 February 2006. Section sales achieved so far have met our expectations and further new buyers since public launch date will have until April 23 to confirm their contracts. www.pegasustown.com provides real-time information on sales activity.
The $20m receivable carried on our books (estimated present value $13m as at sale date) looks to be accruing value as time passes, due to the reduced discount factor as the timing of receipt of funds is closer than expected.
Omaha Beach (42.2%)
During the period under review an apartment development on the remaining beachfront land was planned and the concept can be seen on www.omahavillas.co.nz. A simple land subdivision is also in the process of receiving consent and we will have the option of either development. A decision will be made once consent for the latter is received and after considering market conditions at the time.
There is little comparable apartment product in the region but beachfront sections remain buoyant with a two Omaha sites selling recently, one at auction for $1.58m (3 bidders) and another before auction for nearly $1.31m.
Tasman Farms Limited (21.75%)
Dairy farming is a seasonal business and the interim result for TFL released recently (for the 6 months to 30 November 2005) reflects early season revenue but full six months costs. TFL reported NPAT of $1.21m against $0.83m the year before. World dairy prices have been firm, underpinned by low inventory levels so that farm payout prices have been strong (A$3.94/kg milk solids vs. A$3.37/kg last year) notwithstanding strong Australasian currencies. After the interim period Bonlac have announced a further uplift in payout for the 2006 year to A$4.13/Kg milk solids.
The Company’s farms are all in Tasmania and farm (land) prices there have been firming albeit prices are still a significant discount to either mainland Australia or New Zealand.
Weather conditions since interim balance date have been favourable, so production targets should be met and budget profitability levels as well.
Clifford Bay Marine Farms (22.6%)
The Minister of Conservation issued a coastal permit to establish a 424.57ha marine farm on 8 November 2005. There are several conditions to the permit, the primary one relating to research to be conducted in Hectors dolphin. NIWA have commenced the planning work for this research.
Despite some sectors of the economy in general showing signs of weakening, such as residential construction, the outlook for our business remains positive with a significant number of non-residential construction and road projects either underway or in the planning stages. We are encouraged by the positive trend in revenue for the beginning of the second half of the year after a somewhat flat first six months.
The full year forecast EBITDA for the hire business, whilst subject to the vagaries of autumn and early winter weather, is in the range of $27m to $29m after deduction of the one-off costs.
We are confident that our strategy of investing in our people and the systems they need to support their daily activities, improving fleet age and condition and upgrading branch facilities has placed Hirequip in the best possible position for the future.