Failure to produce positive cash flow makes BIL outlook bleak

Friday 12th October 2001

In the three years since BIL was described as "a basket case" (NBR, Sept 18, 1998) the situation has gone from bad to worse. The recognised revenue and expenses have deteriorated from a profit of $US21 million in 1999 to a loss of $196 million for 2001. When dividends are taken into account, shareholders' funds shrank by a total of $427 million.

Each year BIL's operating cashflow has been a deficit. In 1999 its operating activities consumed $US64 million more than they generated, in 2000 the shortfall was $70 million and in 2001 this had climbed to $98 million. Cumulatively BIL had an operating cash deficit of $298 million when dividends in 1999 and 2000 are included. The trajectory is the classic pattern of a "dog."

The company has survived the past three years because it has generated a positive cashflow from investing activities  in other words by selling more shares than it has bought. Such a strategy may prove difficult to follow in the future as the global economy contracts and the war against terrorism affects travel and tourism.

BIL's investment in Air New Zealand has already been written down to $156 million to reflect the post-balance date losses arising from its Ansett losses. But even this value is not sustainable. The government's rescue package for Air New Zealand has slashed the value of BIL's investment to about a third of even that figure. A further write-down may be expected in the interim report to December 2001.

The World Trade Center bombings have had an immediate impact on world tourism. BIL's largest investment sector is hotels and resorts. It is inevitable the value of BIL's holdings in Thistle Holdings, Denarau Resort and Molokai will fall significantly.

BIL has taken major steps to trim its overheads. Senior executives have been reduced from eight to four; overall staffing has halved from 52 to 26. The company expects its overheads to be running at less than $US10 million a year in 2002 compared with $20 million in 2001.

At June 30, 2001, shareholders' equity had shrunk to $US653 million. In the current and foreseeable environment BIL's ability to generate a positive cash flow from liquidating its investments at a profit must be doubtful.

If the trend of the past three years is anything to go by BIL may well cease to exist within the next two years.

Alan Robb is a senior lecturer in accountancy at the University of Canterbury. He holds no shares in Brierley Investments

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