buy on dips, page-14

the warning on 31 may 2005 From Robert Gottliebsen (previous founder and editor of BRW):

Legend obscured the reality
31May05

LONDONERS joke that Multiplex was so overextended in Britain that, in negotiations, the Australians sometimes did not know which people in the room were on their side.

Back home, the high-risk techniques of Multiplex to justify a float price of $4.05 will cast a cloud over many local listed property trusts, led by Australia's largest trust, Westfield.

Although Multiplex used similar accounting techniques to Westfield, it went much further and multiplied the risk process many times.

With hindsight, all the Multiplex danger signs were in the prospectus. The Australian Securities and Investments Commission should immediately review the practices Multiplex used to float at $4.05 now the risks are exposed.

Clearly, the combination of the Multiplex name and the John Roberts legend obscured the prospectus realities, which we all missed.

If the Wembley damage can be confined to what was stated yesterday the company will survive -- partly due to the high float price -- but it is paying a dangerously high uncovered dividend. The risk is that more bad news might emerge.

Multiplex floated its units in December 2003 on the basis that a stapled combination of an investment property trust plus a building and development company operation could pay stockholders 31.28 cents a unit to yield an enticing 8.78 per cent on float price.

The Multiplex trust and the Multiplex company generated a "real" after-tax profit of only 19.7c a share - 11.6c a unit less than the payout.

In simple terms, Multiplex covered the earnings shortfall by "profits" of large internal transactions, which were then capitalised into the value of the properties - exactly what Westfield does on a small scale. Multiplex's "real" profits were only 3.4 per cent of turnover.

If anything went wrong, the profit could be blown away. Since the float, more equity has been issued, which has helped the company's balance sheet but lifted the level of investor misery.

After the float, the proportion of "real profits" indicated by the company rose from 19.7c to 23.7c. After Wembley and other writedowns the "real profits" have been reduced from 23.7c to 16c a unit but the internal profits have been slashed from the prospectus level of around 11.9c to only 5.4c a unit, which is not surprising given the risks the trust is taking in financing the construction company.

Total expected 2004-05 profit is therefore now only 21.4c a unit, or 38 per cent below the prospectus estimate. But distribution is propped at 29.8c, which is down only slightly from the prospectus estimate. The company's prospectus underlines the risks of an uncovered distribution.

The prospectus shows that Multiplex expected to gain its basic 2004-05 gross income from two sources - $131 million from the company's construction and development arms and $100 million from the investment property trust.

Prominent in the prospectus was a series of photos of investment buildings and the rentals they reaped. Some may have thought that these were the key profit drivers for the $100 million trust earnings. But I would argue that this was not so.

Around $60 million of the $100 million trust earnings came from those internal deals. And most of the remainder of the trust income was absorbed in interest.

So one could argue that the majority of trust earnings, plus all the other activities, came from high-risk construction and development.

Even the best builders from time to time do things that are stupid. In the case of Multiplex, 72-year-old John Roberts, as chairman, did not exercise enough restraint on his aggressive son and CEO, Andrew.

Until it went to the UK, the two biggest projects that Multiplex had performed were the $553 million Sydney Olympic stadium and Sydney's $433 million Citigroup Centre. When Multiplex first went into the UK it did the right thing and took on two very small contracts, including a small local grandstand.

But instead of graduating to the next stage in the UK it had an incredible rush of blood and it took on, not one, but two contracts (White City Shopping Centre and the Wembley Stadium) which were both two or three times bigger than anything Multiplex had attempted in Australia.

In the UK, Multiplex's management became stretched beyond belief. As pointed out in The Australian, Andrew Roberts was also spending time socialising with London society.

In Australia, subcontractors are accustomed to doing what the builder tells them. In the UK, subcontractors want to do it their way. It requires a totally new way of managing.

Multiplex at Wembley is now entirely dependent on its new open-ended subcontracting deal. To that add ballooning steel costs and the lingering problems in the conversion from a family company to a public company and you have a nasty situation.

Let us hope that the Australian group can survive it.