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Back to basics

By Jenny Ruth

Tuesday 1st February 2005

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 Jenny Ruth
Hirequip New Zealand began life in May 1997 as a property investor named CBD New Zealand.

It was subject to a reverse takeover two years later by a team of investors and morphed into Southern Capital.

It gradually sold off the CBD assets and acquired an eclectic collection of investments ranging from property sub-divisions, a corporate dairy farmer, a mussel farming project and stakes in a number of biotech companies promoted by the late Howard Paterson, who had been a director.

Then in August 2002, the directors decided it wasn't getting the sharemarket's support as investment vehicles with unpredictable and lumpy profits were out of favour.

They transformed it into an industrial company with reasonably steady earnings through the takeover of Hirequip.

Management: Former Brierley executive Graeme Wong led the team that took over CBD and remains Hirequip's executive chairman. Hirequip founder Stuart McKinlay is managing director. He received $17.35 million for the first half of his company and was paid in shares for the other half, giving him a 25.2% stake of the new entity and making him its largest shareholder. Wong owns 6.7%.

The Numbers: The new-look company has gone from strength to strength with net profit rising from $5.2 million in the year ended June 2002 to $16.6 million in the 12 months ended June 2004. The company has a strong balance sheet with $79 million in equity and total assets of $139 million in June.

By September 30, net debt was down to $45 million with about $28 million in cash from pending asset sales. The share price has also flourished. The shares issued to McKinlay in May 2003 were at 60 cents, about where the stock was trading at the time. In mid-November, they were trading at $1.21. That's still below analysts' valuations: Rob Mercer at Forsyth Barr values them at $1.43 while Selwyn Blinkhorne at ABN Amro Craigs has the stock at $1.38. Both have a "buy" on the stock.

The company is particularly miserly with its dividends: in the latest year, it earned 14.8 cents a share but paid out only 3 cents a share. "It's better to build a strong business first and let the dividend lag, rather than the other way around," Wong says.

Current Strategy: While McKinlay manages Hirequip, Wong is occupied with selling the Southern Capital assets and looking for acquisitions compatible with Hirequip.

Dunedin-based McKinlay had already demonstrated acquisitive desires back in 2000 when he bought Projex Equipment Hire which gave the business a North Island presence.

Since the reverse takeover, the company has bought North Island-based Ready Hire for $21.2 million in December 2003, the single-branch Hamill Hire in Christchurch in February for an undisclosed sum and specialist generator hire business Power Hire for $11.3 million in May. The latter purchase was $5.8 million in cash and shares issued at 95 cents each.

Recent track record: The company is ahead of target to sell the Southern Capital assets. Before the purchase of the second half of Hirequip, those assets were valued at between $51.5 million and $61.8 million. Only about $15 million worth are left and the assets sold at prices consistent with that valuation.

Wong says he doesn't feel under pressure to sell the remaining assets. The biotech assets still held, including Blis and Botry-Zen, and Tasman Farms, are all suffering from depressed share prices and the Clifford Bay mussel project, of which it owns 22.6%, is still jumping though resource consent hoops.

The core hire business is performing well with its EBITDA (earnings before interest, tax, depreciation and amortisation) profit margins rising from 26.6% of sales in 2003 to 31.1% in 2004. Wong says the market is now recognising that there isn't any slowing in activity and that any softening in the housing market is likely to be compensated for by the government's spending on infrastructure. He is particularly optimistic about the prospect our government will follow Australia's lead and embark on a spending spree with its massive budget surplus in the lead up to the next election.

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