Eco Investor September 2014

Core Securities

Transpacific Joins Core Securities

Eco Investor has upgraded Transpacific Industries to a core security, following its years of restructure and the reinstatement of its dividend. In October Transpacific will pay a final dividend of 1.5 cents fully franked, the first dividend since 2008. The company intends to pay a regular dividend of 50 to 75 per cent of underlying net profit after tax.

However, Transpacific's restructure is not complete, and it will redeem the Transpacific SPS Trust on 30 September. This will reduce its costs and simplify its structure but the company still needs to clearly re-establish profitability as its results for 2013-14 have seen its share price fall despite the reinstated dividend.

The loss before tax was $285 million. There was a tax benefit of $77 million, and the after tax profit of discontinued operations such as New Zealand was $237 million. So the company's net profit from continuing and discontinued operations was a relatively low $28.9 million. Only $11.5 million of this was attributable to shareholders, but it did reverse the huge loss in 2012-13 of $200 million and it is also encouraging that the underlying profit was $92 million.

There was a $189 million after tax provision for landfill rectification and remediation, but these losses were mainly offset by the gains on the sale of the Commercial Vehicles and New Zealand businesses.

The huge plus for the company is that borrowings fell from just over $1 billion to $51 million.

Looking forward, the company said market conditions in 2013-14 were subdued for its Cleanaway business and impacted collection and post collection volumes; and market conditions for 2014-15 are not expected to be much different.

Market conditions for its Industrials division were also difficult as the demand for services from the manufacturing and industrial sectors continued to decline. So it will focus on improving performance and returns from capital projects.

But the company is putting forward a positive message. Chief executive Bob Boucher said "By implementing a four point strategy to address revenue growth, improve landfill capacity and internalization, maximize productivity and target tuck in acquisitions, the Company is well positioned to grow. Delivery of this strategy is underway and I expect it to begin to bear fruit over the next 18 to 24 months, against some significant economic headwinds facing the industry."

Long suffering investors will be hoping he is right. So much has changed at Transpacific including the sale of the New Zealand and Commercial Vehicles businesses, the massive debt reduction and the upcoming SPS Trust redemption that a clearer picture of the company will best come from the next half year and full year reports.

Meanwhile, environmental investors can take some non-financial comfort that the company is doing the right thing by its environmental obligations.

Mr Boucher said that after commencing as chief executive he visited all of Transpacific's landfill sites and was concerned that the company was not achieving best practice at some of these. A specialist landfill engineering consulting firm in the US conducted an evaluation of potential remediation liabilities and other issues at some of the operational and closed sites.
This led to one-off provisions of $232 million, including $69 million in rectification spending over the next five years to address historical operational issues, and $154 million in remediation spending over the next 30 to 50 years so all landfills meet best practice standards following their closure including their ongoing monitoring commitments. There was also a $37 million pre tax impairment charge related to the book value of landfill assets. The total charge for the year was $269 million pre tax and $189 million after tax.

Mr Boucher said Transpacific has a new operational team in place at Cleanaway and he is confident the company can manage its landfill remediation obligations appropriately.

An unfortunate event was a fatal accident last month involving one of Transpacific's vehicles in South Australia. This led to the company voluntarily grounding its entire fleet around the country for up to a week to conduct an internal investigation and satisfy itself, police and Comcare of the roadworthiness of the fleet and the adequacy of its maintenance program. (ASX: TPI)

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