Owens Group selloff - just plain dumb

By Shoeshine

Friday 6th December 2002

Shareholders in transport group Owens most notably, the family of its founder, the late Sir Bob Owens will shortly have the opportunity to vote down the dumbest move in the company's history.

Announcing a dog of a first-half result last week, chairman Norman Geary said Owens would sell off Hirepool, the country's second-largest industrial equipment hire business after Hirequip.

Why the company thinks it can fix its problems by selling off the crown jewels and spending the money expanding its high-risk, low-margin, "core" businesses is a complete mystery.

Hirepool last year brought in ebitda of $8.1 million, half the group total, and in the latest half earnings grew 17%.

On a multiple of five or six times that would make it worth somewhere between $47 million and $57 million easily enough, incidentally, for a public float.

By contrast, half-year earnings from the "core" transport division fell 33%, losses at the freight division nearly doubled and the shipping/containers business went into loss after 18 months of steady deterioration.

At a share price of 78c the whole group has a market capitalisation of only $44 million.

So what value will the market put on the loss-making "core" businesses once Hirepool and the container services operations, also flagged as "non-core," are gone?

Chairman Geary says Owens can capture the "considerable potential" in the core businesses by gaining critical mass and economies of scale, completing the domestic and international freight networks, and "enhancing our capability to deliver customer-focused supply chain solutions."

Some analysts agree, but only if the country's fragmented transport industry is consolidated. It's hard to see how the proceeds from Hirepool will put Owens in a position to act as a catalyst.

Geary also complained the company wasn't well understood by the market.

Given the porridge of incomprehensible jargon, meaningless buzzwords, and PR hype with which it fills its annual report and market releases that's hardly surprising. Sample this profundity from chief executive David Ritchie:

"Our strategy for moving forward is clear and sound. We are tasked with achieving growth, improved and sustainable profitability and delivering shareholder wealth."

Shareholders will be heartened to know their chief executive knows what CEOs are supposed to do. Or;

"This capability provides the company with a highly strategic point of differentiation. It is a natural extension of our total logistics capability and enables us to enhance our overall service to customers with a proven methodology and the expertise to implement."

In fact, reading Ritchie's report last year investors could have been forgiven for thinking this was a company in bouncing good health with a clear path forward. So the 81% fall in first-half bottom-line profit, to just $3.2 million on total assets of $145 million, would have been hard to swallow.

The company has in fact seen strong growth in underlying earnings but obsessive tinkering has meant shareholders haven't seen any benefit at the bottom line.

In 1996, 1997, and 1998 it chalked up profits of over $9 million but earnings fell to $6 million in 1999, the year Sir Bob Owens died. In 2000 underlying earnings improved strongly but a "review and fundamental restructuring" took $5.4 million in abnormal costs and the bottom line fell to $270,000.

In 2001 and 2002 earnings pre-abnormals improved again, to $7.8 million and $7.9 million, but last year rationalisation costs took a further $2 million.

Despite the poor first half, Owens says it expects a full-year profit of around last year's level before any abnormal gains on sales.

Operating cashflow has been climbing too, from $8.5 million in 2000 to $12.2 million in 2001 and $17.3 million last year.

Given those healthy figures you have to wonder why the board and management seem hell-bent on tinkering around, and whether they know what they're doing.

For example, about 70% of Owens' freight revenue comes from pallet-size business, according to one analyst. Management is determined to push into the less than pallet-size market, which will bring the company into more direct competition with Mainfreight and Tranz Rail.

And it's a mystery how, after three years of reviewing its operations, the company still doesn't seem to see a clear way forward, despite Ritchie's assurances.

His maiden report to shareholders this year drew attention to a new "vision statement," which promised the company would be "the provider of first choice of industrial hire equipment."

Now Hirepool is up for sale as a "non-core business."

It hardly signals everything's under control when a business that just a few months ago was a key part of the "vision" is now considered excess to requirements.

Owens' communication problem is reflected in the share price, which would make a kangaroo look lethargic. It hit $1.45 in 1997, fell to 65c in 1998 and recovered to $1.15 in 1999. Over the past three years it has fallen again below 70c, leapt back to $1.40 and collapsed yet again to its current level.

At that price punters with their eye on the cashflows might be tempted to have a go.

They might do better to wait and see if they can buy into Hirepool and leave the risky transport stuff behind.

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