Wednesday 7th May 2003
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Southern Capital's new direction is to focus on equipment hire and related business activities following its full acquisition of Hirequip, and dispose of its non-core property investment assets either once they reach maturity or when suitable opportunities arise.
PricewaterhouseCoopers, in an independent report assessing the merits of the proposed allotment of shares to the McKinlay family trust, conclude that the proposed transaction is fair and reasonable to Southern Capital and its existing shareholders. They value Southern Capital's shares currently at between 67¢ and 83¢ and say that Southern Capital's change in strategic direction, once successfully implemented, should result in better value recognition by the market.
PricewaterhouseCoopers expect, on balance, the transaction to result in an improvement in the value of the existing Southern Capital shareholders' interests compared to their position if the transaction did not occur.
The transformation into an industrial company with an operating cash flow and earnings will also see the company implement a new dividend policy. The directors intend to move towards a policy which will see 40%-50% of net profit after tax derived from the core hire equipment business, paid out as dividends. The dividend is likely to be fully imputed. It is anticipated that the proceeds of any investment assets owned by Southern Capital will be applied to either:
a. Growth opportunities within the hire industry;
b. Debt repayment;
c. A special dividend or share buyback.
The new dividend policy will commence in respect of the year ending June 2004.
Southern Capital first acquired a 50 percent interest in Hirequip in August 2002 for $17.35 million. The company announced in March its intention to undertake the second Hirequip transaction, subject to shareholder approval, for $17.86 million.
"SCL shares have performed strongly over the past 10 months and recently the price has performed over 9 percent ahead of the NZSE Gross 40. The market seems to like what we are proposing for the company," Southern Capital executive chairman Graeme Wong said.
Southern Capital shares are currently trading between 63¢ and 65¢ per share, up from a 52 week low of 51¢ but still at a price less than the value independently assessed by PricewaterhouseCoopers.
"The market would appear to have endorsed the change of direction signalled earlier this year, as illustrated by the increase in share price, but because of adverse market sentiment towards diversified investment companies the shares have traded at a discount despite a rise in net asset value. This is consistent with the experience of other listed investment companies, both here and overseas.
"This contrasts with the share prices of companies with operating cash flows and the capacity to pay dividends. In line with this assessment, the directors decided shareholders would best be served by focussing on growth opportunities within the hire equipment industry."
The Board believes it has identified significant opportunities for growth through additional investment in hire equipment and related businesses. These include further investment in plant and equipment within the operations of the existing hire company, branch expansion, the acquisition of other general and specialist hire companies, and the acquisition or development of related businesses such as equipment leasing and financing.
"Further investment will be funded in the short-term through the company's unrealised debt capacity and over the longer term by the sale of Southern Capital's existing property and equity investments."
Southern Capital's land development assets include the 117 hectare premium Omaha Beach subdivision north of Auckland, the 338 hectare new town site at Pegasus Bay north of Christchurch and the 7.7 hectare Northwood Supa Centa at Belfast in Christchurch. Its equity investments include a number of biotechnology stocks and it owns 21.75% of Tasmanian dairy farmer, Tasman Farms Limited, which is quoted on the NZSE unlisted securities facility.
Mr Wong said: "We have no immediate plans to sell any investment. Investments will be reviewed and sold when they reach maturity or when the right opportunity is forthcoming. Some will require further development to maximise their potential prior to sale."
Infrastructure development proposed for Auckland and Meridian Energy's Project Aqua in the Waitaki Valley in the South Island are examples of large scale construction projects that generate business for the hire equipment industry.
"Hirequip is New Zealand's largest and only nationwide general and specialist hire company, and is well positioned to capitalise on such projects. The company is also regionally diversified, operating from 37 locations, and across all three sectors of the equipment hire business: heavy construction, building and do-it-yourself. It is not dependent upon any one market and this diversification acts as a buffer to business cycle changes."
"Southern Capital is 'asset rich' with a strong balance sheet. After buying the balance of Hirequip and the issue of new shares to the McKinlay family trust, our debt to debt plus equity ratio will be 41 percent without any asset sales, providing ample capacity for further acquisitions or investment in the industry," Mr Wong says.
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