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Troubled Tower - the strong silent type

By Shoeshine

Friday 31st January 2003

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Shoeshine has long noted a peculiarity of the New Zealand business psyche.

In the UK or Australia it seems the prevailing mindset is to disclose anything unless there is a good reason that you shouldn't.

Here the instinct is the opposite; don't reveal anything unless there is a rule that says you must.

This doesn't do much to boost confidence in New Zealand's equities market or to help investors understand the factors that drive the performance of its listed companies, many of which moan about that very lack of understanding.

Our adoption of Aussie-style disclosure rules might help. But often it's the very bits companies don't have to disclose, sometimes for good reason, that investors need to know to make an informed decision.

A revealing comparison is the way in which Tower and AMP have handled market information during their recent troubles.

The share prices of both companies started heading south early last year as insurance and investment companies worldwide struggled with sliding markets.

AMP's "big bang" came on August 24 with the resignation of chief executive Paul Batchelor. Since then it has released updates, speeches, comments, presentations and briefings virtually on a weekly basis.

Tower didn't find anything to comment on until November 4 when a panicked and belated disclosure that its annual result would be a dog halved the share price in a matter of days.

In the 13 weeks since the silence has been deafening. Apart from commenting on the result itself and announcing a cost-cutting exercise it has given not a single update.

Admittedly the companies aren't in quite the same boat; AMP's woes are mostly in the UK where its capital position, which fluctuates with the FTSE100 index, has required bolstering.

Tower's weakness is, or appears to be, Australia but investors still lack any detailed information on how severe the problems are and when or if they can be fixed.

Its responses to demands by APRA, the Australian Prudential Regulation Authority, that it shore up the solvency of Tower Australia and commission an independent actuarial review bordered on the supercilious. They go hand in hand with the obviously PR-inspired "everything's under control" theme of the annual report and reflect the lordly arrogance and disdain that are a sad feature of many New Zealand boardrooms.

Having said that, Shoeshine thinks the company is not in as bad a shape as its savaged share price suggests.

Given the big falls in sharemarkets the profit was never going to match the $77 million booked in 2001, when investment income contributed $94 million. Last year it made a $53 million hole in the accounts.

Operating cashflow actually improved if you strip out the increased tax bill, which was accounted for by underpaid tax from 2001 and provisional 2003 payments.

Of the $100 million blowout in management and sales expenses, $45 million were down to "impairment of hardware and software" (writing off duff IT systems) and $15 million were restructuring costs. The other $40 million are presumably the focus of the cost-cutting.

And the balance sheet is in good shape. Despite last year's loss gearing increased only to 36.6%, from 36.1%.

The potential joker in the pack is Australia, where most of the one-offs that dragged the group to last year's $75 million loss were sustained.

Two particularly worrying items have never adequately been explained.

The first is a $36 million writedown of Bridges Financial Services despite a lift in pre-tax profit from $A11.1 million to $A13.3 million and higher funds under management.

The second is the $44 million of operational and experience losses in Tower Australia. In the annual report group acting chief executive Keith Taylor noted the division traditionally contributed 50% of group profit and said it was "anticipated" it would do so again this year.

Sliding sales momentum, he said, would be combatted with higher service levels. But that will be hard to achieve in a job-slashing and cost-cutting environment.

Given the all's-well picture the annual report paints, APRA's insistence Tower Australia boost its solvency ratio seems tough.

Tower needed only $347 million to meet the minimum reserve required for its $3.1 billion of liabilities and had $390 million on hand.

The additional $32 million it will have to stump up will lift the ratio only from 1.1 times to 1.2. If any policyholder was having trouble sleeping, that's hardly going to help.

What's behind the required actuarial review is anyone's guess. Provided it doesn't unearth any skeletons it will give investors some confidence Tower's management information systems are, if slow, at least accurate.

Tower's 10% shareholding cap comes off on September 30 so the company now has only five months to put some life back into the share price. It had better get on with filling the CEO's chair, which has been on loan to Taylor since July.

Guinness Peat Group's appearance on the share register will have surprised no one. It's unlikely GPG will want to get into a bidding war with a trade buyer, especially one that can squeeze synergies out of a merger. But with a 10% blocking stake it should in any case be able to exit at a hefty profit if a bidder turns up.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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