Kordia have released the 1st Half 2006 report and boy hasn’t it caused a real stink. Now NBR is in on the act.
I have taken the time to a bit more research and analysis for you;
“The transformation of the business to a diversified telecommunications company is progressing to plan.”
So they’ve spent close to $200m transforming the business and EBITDA has fallen from $51m in FY07 to $33m over the last 12 months and a broadly similar result for the full year and that’s the plan! One can of course understand the $200m not making a full contribution but going backwards at such a rate of knots!!!
In fact it gets worse;
“It is forecast that by the end of FY09, the total investment in new platforms, new businesses and internal systems for a diversified modern telecommunications business will be $200m (including the two new digital broadcast platforms). Internally-generated cash flows have funded 80 per cent of this investment and bank debt, the balance
Whilst there has been a short-term reduction in profit during the major investment period as the company was transitioned…”
To get to the $200m one has to work backwards to the end of FY03 i.e. the 6 years FY04 – FY09 will have cumulative capex and acquisitions of subsidiaries of a touch over $200m. So in FY04 the business made $19.5m pre-tax and EBITDA of $44.7m which isn’t a million miles away from what their SOCI has them doing for FY10 (EBITDA $59m and NPAT $12m). 6 years and $200m to stand still!!
“As at 31 December 2008, the Group was in breach of its net debt/EBITDA ratio (a rolling twelve month calculation). The reason for the breach of this covenant is that the interim period ended 31 December 2007 included two amounts of income pertaining to the termination of contracts which would have ordinarily been earned in subsequent months. As at 31 December 2008, this income was no longer included in the 12 month rolling calculation of EBITDA and the subsequent periods where it would have ordinarily been spread showed reduced results.”
In fact the reason for the breach is that earnings have fallen!
“The Bank of New Zealand (BNZ) provided a waiver prior to 31 December, satisfying the appropriate accounting standards, however as the BNZ facility expires on 31 March, it is treated as current. The Australia New Zealand Banking Group (ANZ) did not provide a waiver, but advised prior to 31 December that it would not take any action under the breach, although it reserved the right to do so. ANZ further advised it had no objection to Kordia Group Ltd treating the loans as a long term facility in its interim accounts. The Directors’ view is that in the absence of a specific waiver the ANZ’s facility should be treated as current. The Commonwealth Bank of Australia (CBA) provided a waiver prior to 31 December with the exception of the potential event of default forecast to occur in April 2009. In the absence of a specific waiver from the CBA with respect to the forecast April breach, the Directors’ view is that the CBA facility should be treated as current.”
So they’re in breach (hey it’s happening to a lot of other people as well) but there’s another expected breach in April. They’ve got sufficient headroom on all of their covenants but Net Debt / EBITDA (at Dec ’08 was 3.58x vs. covenanted 3.5x) so they’re clearly not picking EBITDA to pick up immediately.
Maybe they should actually cut their shirt to the size of the cloth i.e. 2H09 cashflow is still expected (or at least budgeted it’s not 100% clear) to be negative ($11.2m in 1H09 and FY09 budget -$15.6m).
Come to think of it given that 1H09 EBITDA was broadly in line (only marginally down) on 2H08 why wasn’t this breach anticipated earlier and corrective action taken earlier?
In fact they write “When the results are normalised for last year’s one-off items, the first half FY09 EBIT result is similar to last year” so what this implies is that they’d have been very close to breach historically if they hadn’t been saved by some one-off items or put another way on a normalised basis they’ve been in breach for a lot longer than they say.
On the subject of Mark to Market of SWAPs. They’re entirely within the rules with what they’re doing but they’ve elected to use Hedge Accounting which means that the M2M swings on derivatives (i.e. interest rate hedges) don’t go through the P&L rather they just go through equity. Anyone can do that if they document all the reasons for the hedge and then monitor its effectiveness etc. so it’s just a bit of paperwork really. When I looked at it originally PWC said their clients were split about 50:50 so, as I said, they’re not out of the ordinary at all but if they had adopted the policy that a large number of listed companies have NPAT would have been worse by another $4.67m for a total loss of $9.07m. You watch them change their policy when interest rates rise and their swaps move into the money!
About the only area they’re ahead of budget is their monopoly Kordia Networks business – should they be entering competitive markets when their track record is so poor?
Contracting “while revenue is has tracked close to budget, its EBIT performance is below budget due to provisioning for local taxes for an offshore project.”
So, there are two possible interpretations:
1. Tax is impacting EBIT- Duh! what does the T stand for?
2. They quoted on a project and didn’t realise they’d have to pay local tax – no wonder they got the job!
Also on Contracting “further downsizing is anticipated”. That’s fine but then go to the end “The 2H performance may be stronger than the first half….However, if continued adjustments to the NZ-based contracting business are required this will result in further unbudgeted redundancy costs and this will impact on NPAT” Sounds like 2H will definitely be worse!
Contracting did have problems last year as well – in fact they blamed a poor FY08 partly on “Redundancy costs in the Contracting and Consulting business totalled $2.6m for the year.” So why were the costs unbudgeted?
If any readers have further information about Kordia then feel free to contact me on the WOBH tiplines.