PGC
31/08/2015 09:41
FLLYR
PRICE SENSITIVE
REL: 0941 HRS Pyne Gould Corporation Limited
FLLYR: PGC: Preliminary Annual Results to 30 June 2015
31 August 2015
PGC Preliminary Annual Result to 30 June 2015
Pyne Gould Corporation ("PGC") has today released its preliminary unaudited
annual result for the year to 30 June 2015.
The full Annual Report, with accompanying Audited Financial Statements, are
due for release on 30 September 2015.
MANAGING DIRECTOR'S REPORT
After a first half loss of GBP3.36m to 31 December 2014 PGC clawed back to a
small but positive Net Profit After Tax (NPAT) of GBP0.038m for the year to
30 June 2015. This compares with a restated NPAT of GBP6.46m for the year to
30 June 2014.
After allowing for Other Comprehensive Income, PGC's unaudited Total
Comprehensive Loss for the year to 30 June 2015 is GBP8.35m, compared with a
(restated) Total Comprehensive Income of GBP2.91m for the year to 30 June
2014.
The result is largely due to non-cash accounting adjustments, in particular
GBP8m negative impact from the foreign exchange translation of foreign
associates and subsidiaries. The net outcome was a GBP decline in NTA per
share from 34 pence to 31 pence. In NZD the NTA per share remained stable.
The Statement of Financial Position was stable in NZD and down in GBP. At 30
June, PGC held total assets of GBP64.76m, total liabilities of GBP2.13m and a
net position of GBP62.62m. PGC has no bank debt. Current assets are GBP28.51m
(GBP21.64m last year), with GBP0.13m current liabilities (GBP3.02m last
year), giving net current assets of GBP26.38m (up from GBP18.62m last year).
PGC holds long-term assets of GBP36.25m and no long-term liabilities.
COMMENTARY
In 2011, we said that it would take a decade or more for PGC to fully convert
its collection of difficult assets into a strong and sustainable business. We
said that the job of converting bad book assets to cash and then into a
strong core business was technically demanding, inherently unpopular and
results would inevitably be lumpy.
We were correct - the time frame is long, the job requires highly specific
skills in arcane areas, we continue to ignore popularity contests and the
results are lumpy. However, and despite this, we have always been highly
confident our strategy of exit of non-core assets and building a long term
business from distressed assets was compelling.
The evidence of value obtained from the exit of non core assets is largely
complete. The material residual receivable is approximately NZD22m which
arose from the exit from Perpetual Trust Limited (PTL). This result has been
valued independently at NZD21.18m. This is slightly higher than the value
attributed by Grant Thornton (GT) - who once the role of Auditor became
theirs were no longer independent.
The other metric by which to judge the strategy in 2021 is value created by
reinvesting funds. The core strategy in this area is continued commitment to
the growth of the Torchlight Fund LP (TFLP).
Accounting Treatment of TFLP
For the 2015 year, TFLP has been treated as an associate for accounting
purposes. PGC started the year at 25% voting power in TLP. At this level, PGC
and its auditors agree it had sufficient votes with external investors to
still be considered as an associate and, therefore, not a subsidiary for the
30 June 2015 year.
Over the course of the year TFLP executed substantial buybacks. The effect of
this is that all other Limited Partners increased their relative percentage
in TFLP.
By the beginning of the 2016 financial year PGC held sufficient votes within
TFLP to eliminate any reasonable likelihood of loss of control. This,
combined with the completion of the TFLP audit, means that PGC has elected,
under IFRS 10, to consolidate TFLP as a subsidiary for the financial year to
30 June 2016.
Residential Communities Limited (RCL) Co-investment
PGC, through Torchlight Group Limited, also held a RCL co-investment on the
Statement of Financial Position as at 30 June 2015 of AUD27m. As previously
advised to market, this was held for conversion to TFLP limited partner
interests on TFLP audit completion and PGC election of TFLP as a subsidiary.
The RCL co-investors in the acquisition of debt from Bank of Scotland all
swapped direct RCL interests for TFLP interests on the same, or substantially
the same, economic terms.
These factors have now been resolved. PGC, after satisfying itself it has
50% or greater economic interests in assets and income of TFLP, has therefore
approved the conversion of the RCL co-investment to TFLP interests.
TORCHLIGHT FUND LP UPDATE
Torchlight focuses on maximising long-term returns by specialising in
distressed assets. Initial activities focused on credit. It was a "heads we
win, tails we win" strategy; if borrowers repaid we would get a high cash
return. If they failed we would exchange debt for long-term assets.
In South Canterbury Finance, Torchlight Fund LP 1 and its co-investor,
received a payout of NZD106m representing a return of 26% annualised.
Torchlight was lauded as a "winner on the day", however, it would have been
happy if not repaid and it appointed the receiver.
The focus on credit led assets continued with RCL - albeit with a desire to
achieve a long-term outcome rather than just a high return over the short
term.
RCL - Credit Bid
In 2011/12 Torchlight Fund LP Number 1 and co-investors acquired senior debt
in ASX listed RCL from the Bank of Scotland - and in due course appointed a
receiver.
We considered a lower risk, lower return work out strategy where we mandate
the receiver to build and sell sites and pay us off as debt holder.
However, to maximise shareholder value, we preferred a credit bid where our
own land development company acquires 100% of RCL assets in exchange for
debt. Then we consolidated all RCL co investors into a single new fund
Torchlight Fund LP which prepares for and executed a credit bid for 100% of
assets of RCL
The credit bid took a frustrating amount of time to complete and the hangover
was a very slow audit process. It was complicated and expensive with more
than AUD9m paid in stamp duty and legal and accounting expenses.
The value created is expected to become apparent over time as an excellent
management team monetise a very large land bank and recycle the proceeds into
creating what we believe will be one of Australia's largest private real
estate investors and developers.
The aim is to build a land bank of 7500 to 10,000 sites from retained
earnings. At the end of the fund we expect a land bank of this size to
attract a generous earnings multiple. We expect long-term investors in
Torchlight to be well rewarded for their investment horizon.
Local World
There are four reasons why we were excited about our investment in UK
regional news publisher Local World: timing; price; capital structure; and
management.
When Torchlight acquired its stake in Local World in late 2012, the UK
economy was in the doldrums, the pound sterling was trading near record lows
against the Australian dollar, Rupert Murdoch was facing a select committee
on phone hacking allegations against the News of the World and double-digit
declines in print advertising had many pundits predicting the imminent death
of the newspaper industry. These conditions enabled us to pay - alongside
some significant industry operators - an attractive entry price: just three
times cash flow for the business.
While we had no special insight into the longevity of print newspapers, we
believed the prospect of their demise had obscured several attractive
features of Local World's business.
First was the asset-light nature of company's balance sheet. When Daily Mail
General Trust and Iliffe News & Media spun out their regional titles to form
Local World, the printing presses stayed with the parent companies. Local
World incurred the cost of outsourcing the printing of its newspapers, but
there would be no maintenance capital expenditure to spend on rapidly
depreciating printing plants. This was a structural advantage over the peer
group as the cost of printing was falling after 50 years of readership
decline.
The advantage of this business model was proved in Local World's recent
tender for the printing contract in the South-East of England. News UK, whose
state-of-the-art printing and production facility won the 'Printer of the
Year' award for five of the past six years, was awarded the tender after
further reducing its already competitive rates.
With no major CAPEX costs, Local World's net operating profit after tax is
essentially all free cash flow, after accounting for changes in net working
capital.
Another benefit of Local World's capital structure is that the vendors
assumed responsibility for the regional papers' unfunded pension liabilities.
Local World's high free cash flow conversion is thus available to pay
dividends and invest in the growth of the digital business.
The final point was management. In Northern Irishman and former News of the
World editor David Montgomery, we had a chief executive and co-investor with
the experience to aggressively cut costs and execute a bold transformational
plan to grow Local World's digital audience and revenue. Local World is
working to become a fully digitised transactional platform for self-served
content and commerce, effectively keeping its shopfront open 24/7, 365 days a
year, like every other e-commerce site.
All this adds to deliver a particular insight - that declining print will
almost inevitably be offset by rising digital advertising - a "Digital
Tipping Point" that will see major rerating of the sector.
The value of our initial investment was fully returned by the way of
dividends earlier this year.
As other media companies have strengthened their balance sheets, some have
come to appreciate the structural advantages of Local World's business model.
As a result, several suitors have approached Local World, including Trinity
Mirror, an existing shareholder and the biggest regional newspaper group in
the UK, as reported in the Financial Times.
Lantern Hotels
Due to pending court action it is inappropriate to comment on this asset at
this stage.
Other Matters
Some shareholders might be familiar with the 'matching principle' - the idea
that financial risk is minimized by matching the time period of an asset to
the time period of a liability, such as your funding.
Torchlight was established to invest in long-term assets. Therefore the
correct structure was a vehicle where liquidity was set by the asset
strategy, not by investors' needs or demands. The limited partnership vehicle
was chosen as this did not allow partners to withdraw capital until the end
of the partnership. Other vehicles such as hedge funds or retail unit trusts
have liquidity dictated by investors. On a daily, weekly or annual basis
capital can be withdrawn without warning.
Torchlight's assets are perfectly matched to its structure. Torchlight has
invested about AUD250m in long-term assets such as RCL, Lantern and Local
World. We believe, for sound reasons, that at the end of the TFLP's life
these assets will be worth substantially more.
George Kerr
Managing Director
For more information, please contact: David Lewis +64 21 976 119
End CA:00269333 For:PGC Type:FLLYR Time:2015-08-31 09:41:08
