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Investors do better than expected

By Peter V O'Brien

Friday 15th August 2003

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Investors reacted favourably to the expected improvement in profitability among companies that have reported so far in the June year round and have anticipated better earnings in others.

Market participants like nothing better than confirmation of their expectations, unless it is better than expected results.

Conversely, they quickly downgrade companies that fail to meet the market's prior assessments or revise profit forecasts downward.

The "better than expected" phenomenon also applies to general economic information that could eventually have an impact on company profitability.

That was seen this week in share price movements for major retailers The Warehouse Group, Briscoe Group and Pacific Retail Group.

Investors were said to have pushed the price of those stocks after total retail sales for the three months ended June improved 1.5%, well ahead of forecasts from economists.

Anyone who waited for Statistics New Zealand's figures before moving the Briscoe and Warehouse share prices must have ignored company statements.

Briscoe said on August 5 that sales for the three months ended June were $72.3 million, 10.65% higher than the $65.4 million reported for the same period last year. Same-store sales were up 7.19%.

The Warehouse Group said the next day that its New Zealand sales for the quarter ended July 31 increased 9.3% over the same period of the previous year and were 8% up on the same-store basis.

Those companies' gains were well ahead of the national statistics announced on Monday but Briscoe's share price fell after the group reported its sales and rose on the back of the official statistics.

The Warehouse got similar treatment, another indication that a supposedly "rational" market has weird movements.

Tourism Holdings' price was boosted when the tourism operator said net profit for they year ended June 30 would be "in the order of" $7.5 million, including unusual items of $500,000. A forecast on May 6 estimated profit of $4.5-5.5 million, including unusual items.

The market response would have been savage if, for example, the company had revised profit downward from $7.5 million to $4.5-5.5 million.

Chairman Keith Smith said better trading revenue from THL Rentals' motor home operations in Australia and to a lesser extent in New Zealand was the main reason for the better performance over the last quarter. Those operations contributed $1.1 million after tax to the increase.

Mr Smith also said the downturn from the Iraq war and Sars was less prolonged than was expected on May 6.

Tourism Holdings was not alone in facing the impact of the Iraq situation and the Sars virus scare.

CDL Hotels New Zealand's preliminary report for the six months ended June 30 said total revenue from its New Zealand hotels' operation was 2.5% higher than in the corresponding period of the previous year, average occupancy was similar to 2002 but the overall yield improved 5%.

"This was despite the significant impact on trading during the second quarter of both the Iraq conflict and Sars."

In a comment that said something about attitudes of non-New Zealanders, CDL said Queenstown was the only one of the company's operating regions to experience a yield reduction, down 1.2%.

"Being a prime tourist destination, it suffered from the drop in international visitor arrivals that occurred as a result of the aforementioned Iraq conflict and Sars."

CDL is an interesting operation which gets little publicity (and probably likes life that way), but has enjoyed good profit improvement in recent years, after some rocky experiences in earlier times.

It has three parts, all listed companies:

  • CDL Hotels, the parent company, which is the country's biggest hotel group, operating under the Millennium, Copthorne and Quality Inns names;
  • CDL Investments, a 61.48%-owned subsidiary of CDL Hotels, whose activities are based in the residential property development markets in Auckland, Hamilton and Tauranga; and
  • Kingsgate International Corporation, a 50.74%-owned subsidiary of CDL Hotels, operating in Australia and now converting its Millennium Tower hotel in Sydney to apartments. Other interests are two shopping centres, a marina and a residential project.
  • The total group increased profit 25.4% in the six months ended June compared with the corresponding period of the previous year.

    Profit for the six months ended June 2002 was 36.1% higher than in 2001.

    Full-year results for December years have shown similar patterns. The group has dominated shareholders, which could partly explain why the share price has persisted for some years in moving in the 20-30c range.

    The market decides a what a share is "worth" but it can be noted that CDL Hotels was priced on an historic price/earnings multiple of 10.4% in August 2000, when historic annual earnings were 2.1c a share.

    CDL shares were priced at an historic p/e of 5.4 this week, based on earnings per share of 5.4c for the December 2002 year, with no allowance for improved profit this year.

    Investors might find that apparent discrepancy worth investigation.

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