Barramundi 30 June 2008 Preliminary Full Year Announcement
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Barramundi Limited (BRM) | 4:11 pm, Tuesday 19 August 2008 | BRM | 0.420 |
 -0.020 |
(-4.55%) |
Barramundi Limited
Results for announcement to the market
Reporting Period 12 months to 30 June 2008
Previous Reporting Period 8 September 2006 to 30 June 2007
The financial statements attached to this report have been audited by
PricewaterhouseCoopers and are not subject to a qualification. A copy of the
Auditors' Report applicable to the financial statements is attached to this
announcement.
Current period NZ$000, Up/(Down) %, Previous corresponding
Period NZ$000
Revenue from ordinary activities (27,409), N/A% 26,051
(Loss) profit from ordinary activities after tax attributable to security
holder. (29,501), N/A% 21,318
Net (loss) profit attributable to security holders. (29,501), N/A%
21,318
Final Dividend Barramundi will pay a 2cps partially imputed final dividend
for the year ended 30 June 2008
Record Date 5 September 2008
Dividend Payment Date 19 September 2008
FROM THE CHAIRMAN:
Your Board is disappointed to report a performance for the year ended 30 June
2008 that reversed the results of the company's successful first eight months
to June 2007. Our portfolio, under the management of Fisher Funds, was not
immune from the fall in international equity markets. Indeed the significant
percentage drop in Australian equity markets for the six months ending 30
June 2008 established a record for the Small Industrial Accumulated Index.
Investor sentiment surrounding the US credit crisis flowed into the
Australian share market, impacting listed companies irrespective of their
underlying performance or prospects.
Financial Performance
Net Asset Value per share fell from $1.20 at the beginning of the year to
$0.90 at 30 June 2008.
The deficit for the year of $29.5m is the change in the value of the
portfolio from the start to the end of the year (2007: $21.3m surplus for 8
months). The main culprit was the holding in Credit Corp, whose share price
collapsed after two earnings downgrades. The portfolio highlight was Arrow
Energy which gained 31% in the year, contributing 7% of the portfolio return
for the year.
Operating expenses for the year of $1.8m were at a similar level to the
previous period, representing 1.9% of total assets (2007:1.4%). No
performance fee was payable to the Manager for the year as returns did not
meet the benchmark rate, being the change in the NZX 90 day bank bill rate
plus 7% per annum. Importantly, no performance fee will be paid to the
Manager until the high water mark (the highest point at which the last
performance fee was paid), is reached. Fisher Funds' base management fee was
calculated at 0.75% of the average value of gross assets under management and
is the minimum fee payable under the terms of the Management Agreement. The
Manager must achieve the benchmark performance if it is to earn the standard
1.25% management fee.
Warrant Exercise
The warrant exercise option period commenced on 26 October 2007. Initially,
547,774 warrants were exercised at $1 per share, followed by a further 5,500
in the quarter ended 31 March 2008. The exercise period will continue until
26 October 2009 by which time it is hoped market conditions will have
recovered and the underlying value in Barramundi shares is recognised by
warrants holders. A reminder will be sent to holders before the closing
date.
Share Buyback Policy
In November the Directors implemented a share and warrant buyback program
which allows the company to purchase up to 5 million ordinary shares and
approximately 2.5 million warrants over a twelve month period from that date.
To 30 June 2008, 519,464 shares were bought back and held as treasury stock
at an average cost of $0.70 per share. To date, no warrants have been bought
back by the Company.
Share Price and Net Asset Value ("NAV") Discount
Barramundi's share price at 30 June 2008 was at a substantial discount of
35.5% to NAV. Your Board and Manager continue to closely monitor the
discount and are frustrated by the level of negative market sentiment that
prevails. The extent of the discount means the share buyback mechanism,
while adding to the NAV per share, has limited effect on the share price in
the current climate. Fisher Funds' report will comment further on the share
price discount and the concept of "double-discounting".
Dividend Payment
Last year your Board decided to defer consideration of a dividend until after
the commencement of the Portfolio Investment Entity ("PIE") regime.
Notwithstanding the decrease in portfolio value for the year, your Board
recognises that many shareholders appreciate cash flow from dividends.
Directors are therefore pleased to declare a partially imputed dividend of 2
cents per share in respect of the year ended 30 June 2008, payable to all
eligible shareholders on the record date of 5 September at 5pm. Payment is
scheduled for 19 September 2008.
Dividend Reinvestment Plan
In July 2008, the company established a Dividend Reinvestment Plan ("DRP")
offering shareholders the opportunity to reinvest dividends in Barramundi
ordinary shares, thereby increasing their investment in the company. The
shares issued under the Plan will be issued at a 3% discount to the volume
weighted average share price calculated on all sales of shares which take
place through the NZX on the first five trading days on which the shares
trade ex-entitlement. This price may also be well below the underlying Net
Asset Backing.
To date, 25% of shares or 1,986 holders have elected to participate in the
Plan. Any further requests must be received by our share registrar by 5
September in order to participate in the upcoming dividend.
Annual Shareholders Meeting
The Barramundi Annual Shareholders Meeting is to be held in Auckland at the
Ellerslie Event Centre on Monday 13 October 2008 at 10.30am. The meeting is
an ideal opportunity to meet your Board and Manager, to receive an update on
the September 2008 quarter and to hear more about the portfolio companies. We
look forward to your attendance.
Conclusion
The past year has been a difficult one for Barramundi and it is perhaps cold
comfort in knowing we are not alone. Fisher Funds reports monthly to your
Board and following recent company visits continue to affirm their view that
the Barramundi portfolio companies are executing strategies that will enable
delivery of medium term sustained growth. The share market may not reflect
underlying intrinsic value at the moment but if the fundamentals of our
portfolio companies continue to be sound, we are confident that investors'
patience and perseverance will be rewarded. We look forward to an
improvement in market conditions which will allow our portfolio to outperform
once again.
On behalf of the Board
Rob Challinor
Chairman
Barramundi Limited
19 August 2008
"I should emphasize that we do not measure the progress of our investments by
what their market prices do during any given year. Rather, we evaluate their
performance by the two methods we apply to the businesses we own. The first
test is improvement in earnings, with our making due allowance for industry
conditions. The second test, more subjective, is whether their "moats" - a
metaphor for the superiorities they possess that make life difficult for
their competitors - have widened during the year."
Warren Buffett - Renowned American Investor
The 2008 financial year was a tough one for investors in shares. The
newspaper headlines said it all; a US led credit crunch, rising risks of a
recession and, particularly in the Anglo Saxon world, a sharp hangover from a
housing party that has come to an end. Barramundi was not immune to these
global forces with share prices of many of the portfolio companies falling
over the year.
The Australian share market keenly felt the impact of the global equity sell
off with the part of the market that Barramundi focuses on - industrial
companies outside the top 100 - very harshly treated. For the year, the
index which measures the performance of these companies - the S&P ASX Small
Industrial Index - fell by 36.5% in Australian dollar terms. New Zealand
investors were somewhat protected from this fall by a declining kiwi dollar.
This cushioned the blow meaning that smaller companies fell 27.3% when
translated into New Zealand dollars - still a savage beating in anyone's
language.
Share market investors live with uncertainty and mixed messages, but this
year's environment has been particularly challenging since share price
signals have been completely at odds with the fundamental news flow from our
portfolio companies. The Australian share market responded to Wall St's woes
by aggressively selling any liquid stock, irrespective of its progress or
prospects, leaving many quality businesses significantly undervalued. In
such volatile times, we managed the uncertainty by continuing to focus on the
long term fundamentals that mark out superior businesses from the also-rans.
We did not waste too much of our time and energy on short term share price
movements; although we remained vigilant to price swings insofar as they
presented us with opportunities to buy quality businesses at sale prices.
In the above quote, Warren Buffett's talks about two ways that he evaluates
the performance of shares he owns. Most importantly he does not focus on
short term share price movements. Instead he turns his attention to
fundamentals. First and foremost he questions whether his companies have
grown earnings and whether they have improved strategic positioning so that
they can beat competition. It is Buffett's contention that it is the ability
to do both of these on a sustainable basis that will enable a company to
generate healthy long term returns for share holders. We couldn't agree more
with Mr Buffett's framework for evaluating the ingredients of long term
investment success.
In this regard, we are pleased to report for the year that the companies in
the Barramundi portfolio, in general, are scoring positive ticks on both of
these fronts.
First and foremost, in what is an increasingly challenging economic
environment, your portfolio companies grew earnings strongly. In the
February 2008 reporting season (for most companies that was the first half
report for the 2008 fiscal year) the firms in the Barramundi portfolio grew
their earnings on average by over 15% - a very satisfactory result. For the
forthcoming year we expect average earnings growth in the vicinity of 20% for
the Barramundi portfolio companies. Your businesses are growing earnings at
a very healthy clip.
Allied with this there was also a slew of positive announcements from the
portfolio companies over the year which we believe demonstrate that they are
increasing the size of their moat - by the moat we mean the advantages that
protect them from competition. We comment more specifically on some of those
below.
Despite generally sound operating performance by the portfolio companies
there have been challenges over the year. The most disappointing has been
the performance of Credit Corp.
In November 2007 Credit Corp reported challenges in managing growth from an
operational perspective. This was allied with a reduction in profitability
from one of the debt ledgers that they had purchased. The net result of
these influences was that the company issued reduced profit forecasts on two
separate occasions. This precipitated poor share price performance over the
year. Despite these disappointments, in our view, the Credit Corp business
model is not broken but in the current market environment a stumble is
treated harshly. We believe the market has unduly punished the stock
reinforced by the fact that valuations are comfortably higher than the
current share price with the most pessimistic assumptions. Unfortunately it
will be a long road for the company to regain investor confidence and we are
evaluating our investment in the light of this.
On a more positive front we had material contributions to portfolio
performance from Arrow Energy and Pipe Networks over the past twelve months.
Each of these companies made major strategic announcements over the year that
demonstrated they are increasing the size of the moat around the business
that will reap benefits for years to come.
The list of achievements by Arrow over the year is almost too long to detail
here but highlights include further developing its international portfolio of
coal seam methane assets, progress on the proposed LNG export facility at
Fisherman's Landing in Gladstone and most importantly the announcement of an
investment in their upstream assets by Royal Dutch Shell. This last
announcement is a very significant transaction for the company. It provides
a powerful endorsement on Arrow's Australian and International strategy from
a giant in the energy industry and reiterates that coal seam methane is an
important source of future energy. As one broker put it in their note on the
deal, "Go Well, Go Shell!" This is an incredibly important deal for Arrow
that will underwrite its ability to execute its strategy over the medium
term.
Pipe Networks continued to make solid progress over the year upgrading
earnings forecasts twice over the course of the twelve months as they
continue to get sales success in signing up customers to their "dark" fibre
optic network offering. Most importantly from a long term perspective, Pipe
announced two projects, PPC-1 and PPC-2, which involve building a submarine
fibre optic cable between Australia and Guam and Australia and New Zealand.
We believe customer interest for access to these networks will be strong
driven by the insatiable demand for bandwidth as internet usage grows;
particularly as people move to broad band. These projects represent a great
long term growth option for the company and will, in our view, add
significantly to shareholder value.
Despite what has been a challenging year we are excited by the outlook for
our businesses and in particular believe that they represent great investment
value at current prices - the market has become too pessimistic on the
outlook.
One way of gauging this is to look at the price earnings ratio that companies
trade on. The PE ratio, or multiple, is a useful tool for assessing whether
the share price for a company is cheap or expensive versus its underlying
fundamental value. Typically we assess this relative to the earnings growth
potential for the company and the long run average PE multiple that the
companies of its ilk trade on.
On average smaller Australian companies trade on a PE ratio in the range of
13-15x. Growth companies, like those owned by Barramundi, often trade at a
premium to this average as they are growing their earnings more rapidly than
the market average. With the material fall in share prices this year the
average PE ratio for the Barramundi portfolio now stands at 10.5x 2009
earnings. This is a significant discount to the long run PE average. We
believe that the market has become unduly pessimistic and the shares in the
Barramundi portfolio currently represent outstanding long term value. Two
examples further emphasise this theme.
First a core portfolio company, Bravura Solutions, has received a conditional
takeover offer from a private equity firm, Ironbridge Capital. Whilst this
offer is at a premium to the market price that prevailed it is at a material
discount to our perceived value of the firm. Ironbridge is a financial
investor and evidently shares our view on the long term value of this
business. Current market conditions have given them the chance to make what
we see as an opportunistic bid for the firm hoping that nervous investors
deliver them a bargain. This is a classic sign of an oversold share price
precipitating corporate activity.
Second we note that one of the portfolio companies, Treasury Group, has
recently announced a share buy back - companies do this when the Board sees
the current share price as an attractive investment. Both of these examples
provide tangible support for our view that the portfolio companies have been
oversold.
So despite what has been a very difficult year the portfolio is emerging in
good shape to generate attractive returns over the medium term.
Carmel Fisher Frank Jasper
Managing Director Senior Portfolio Manager
Fisher Funds Management Limited Fisher Funds Management Limited
19 August 2008 19 August 2008
For Enquiries, please contact Carmel Fisher, Director - Barramundi Limited,
Director - Fisher Funds Management Limited on (09) 484 0342 or Rob Challinor,
Chairman - Barramundi Limited on (09) 489 7074.
The Barramundi website, www.barramundi.co.nz contains up to date company
information, copies of Shareholder reports and recent NZX announcements. The
30 June 2008 Annual Report to shareholders will be sent in early September
2008 and will be available on the website at that time. Investors are
encouraged to register for regular email updates on the Barramundi Limited
web site.
