Tag Archives: DCHL Assets

Delta #EpicFail —Noble Subdivision : set to music …

Text and images by Christchurch Driver [CD]
Monday, 25 April 2016 8:19 p.m.

Noble subdivision 0648 CD 1Noble subdivision 0646 CD Str1

With apologies to Helen Reddy and the composers of Delta Dawn….,

Delta boys what’s that picture you have on ….

Could it be a faded road from days gone by ?….

But did I hear you say, there’s a meeting in here today,

To take your debt to that mansion in the sky….

It’s 41 (months) and Grady still says it’s Ok, gents and ladies….

All the folks in Dunedin say he’s crazy….,

Cause he walks to Harcourts, with a suitcase in his hand,

Looking for a mysterious dark haired man….

In younger days they called it Citiworks, son….

Most profitable contractor you ever laid eyes on….

But a man of Noble degree came to their side,

Broke all promises and took them for a ride….

█ For more, enter the term *delta* in the search box at right.

Tanya Tucker / Helen Reddy – Delta Dawn (The McClymonts Cover) https://youtu.be/2vkzhj0E-6I
Published on Jul 14, 2014
From the The McClymonts album Here’s To You & I.

Posted by Elizabeth Kerr

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Delta #EpicFail : Strategic Reasons & Outrageous Logic

Election Year : The following opinion is offered in the public interest. -Eds

Delta - AuthorUphillBattle - The Books [blog.smashwords.com]

Received from Christchurch Driver [CD]
Tue, 19 Apr 2016 at 10:48 p.m.

Readers, tonight’s exposition is to examine the Dunedin City Council (DCC) worldview that does not contemplate a sale of Delta at less than $45M. Your correspondent says that will never happen on any rational economic basis, so the next best thing is to pretend that it would not be in the ratepayers’ best interests to sell at all, seemingly at any price.

However, annoyingly, logic and reasons must intrude at some point, and in the recent report on DCHL asset values, the DCC have a crack at pushing the Delta water uphill.

Agenda – Council – 11/04/2016 (PDF, 1.6 MB)
Item 22 Dunedin City Council Investments and Returns (pp 109 – 123)

Tonight, readers, we shall dwell on and allow the TWO big “strategic reasons”, the DCC propose to retain Delta, to stand in splendid isolation, while readers allow the cool chill of logic to bring these clouds of hot air back to reality.

We shall also overlay some markers over Delta’s financial figures that give support to your correspondent’s contention that Delta is at risk. (careful words needed here, readers !)

Safely camouflaged at para 55 (page 117), deep in the DCC report, the following statements appear : “If Delta were to be sold by the DCC, one likely outcome…. [it could be] purchased by a competing company in the same field. One consideration…. is the potential ‘head office’ job loss to Dunedin if Delta were to be sold to an existing company which is not locally owned.”

Stop right there, readers. The DCC say the first, most important consideration in retaining Delta is to retain the Delta ‘head office jobs’ in Dunedin. At one level we can take this to mean that the DCC are very fearful that the current occupiers of the Delta head office jobs in question would not find similar work in Dunedin. Your correspondent thinks that is a very well-founded fear. But the DCC head of economic development tells us the city is growing and it is hard to attract executive staff to the city…. it is a taxing puzzle why the authors of the report ignore their own staff…. At the next level, your correspondent is vexed at the concern shown by the DCC for the six figure inhabitants of the Delta Head Office suite. (Note, there are 70 people earning in excess of $100,000 at Delta, your correspondent guesses that the Head Office inhabitants occupy the highest echelons of those salaries). This brings a whole new meaning to the (draft) Statement of Intent requirement to be a “socially responsible …. corporate citizen”. At a higher level again, the DCC appear to say that the welfare and future of the head office positions rank ahead of the core task of providing returns to the ratepayers.

Readers, remember that DCC provide these reasons as reasons not to sell Delta even if someone paid the massive premium of 300-400% over the $15.804M shareholders equity (which is about to suffer a severe Noble induced virus).

Your correspondent is very sure these revolutionary themes of Soviet Style central planning and corporate welfarism were not intended in the Delta ‘Statement of Intent’ which is meant regulate how the company is run.

Next up as the DCC apologia for retaining Delta is the statement, “the loss of Delta from the local contracting market, particularly if through acquisition from an existing contractor, would remove an element of competition from an already limited local market”.

This is illogical. Let us count the ways:

1. If competition is “limited” then margins will be high, and demand for skilled staff intense, so any logical purchaser would leave the Delta structure alone to continue its high margin work…. but of course, if there is limited competition and Delta are not making good profits, then there is a problem…. and Delta should be sold to an entity that can generate good profits in a limited market.

2. It can be safely assumed that Delta’s local competitors Fulton Hogan, Downer, SouthRoads, Whitestone, Asplundh, Waste Management, and any of the local power contracting companies are not stupid and they would have no interest in paying the DCC $45-60M for $15.804M of equity (on a good day). If Delta expired, the limited competition just got less, and paydays all round for all left standing. Your correspondent says then that any purchaser is likely to be someone who does not have a presence in the market, and sees potential for profit in this market, allegedly with limited competition. If that were true they would leave Delta as it was, maybe even with some of its precious head office jobs, to continue their (merry and profitable ?) way. (For the time being at least).

3. The bottom line is your correspondent posits that Delta will never be sold in its current form, because its competitors know, even if DCC Treasury does not, that Banks have certain standards for lending money to companies, and an important one is the debt to equity ratio. Delta has $26.9M of debt and $15.804M of equity. That is a debt : equity ratio of 183 % which this correspondent says is far too high for a contracting company. A debt : equity of 100 % or less is usual in this sector. Another is the Liquidity (Quick) Ratio which is Current Assets / Current Liabilities. Contractors should have a minimum of 1.35 and many accountants would say 2. (What would Mr McLauchlan say ….?). Delta has $17.5M of current liabilities and just $220,000 of cash in the bank. This is one seriously undercapitalised contracting company.

Delta will no doubt say their quick ratio is fine because the accounts show $25.244M in receivables, but this includes the very non-current and very illiquid Noble debt of $13.2M. They do have $2.84M of Work In Progress (WIP) which is included under inventories. They then have proper current assets of $0.22M cash, $2.84M WIP, and $12.2M Receivables, ($25.24-13.2M) for a total of $15.08M and a quick ratio of 0.88. The bottom line is : even putting aside the elephantine $26.9M in debt, Delta have serious cash flow issues with a quick ratio of less than 1, and if they have a further problem contract, or even just a delay of a month or two getting paid on a larger contract, they are not just on a cashflow knife edge, but in serious trouble. Delta has basically no cash reserves as at June 2015. Of course, Mr Cameron did not dwell on that factoid in his report….

Readers, the quality of the excuses made in support of retaining Delta are of the same quality as the prediction of its value at $45-60M.

[ends]

█ For more, enter the term *delta* in the search box at right.

Posted by Elizabeth Kerr

1. factoid

*Image: blog.smashwords.com – AuthorUphillBattle, tweaked by whatifdunedin

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Delta #EpicFail Noble Subdivision : Avanti Finance —Feeding at the Delta Trough

Election Year : The following opinion is offered in the public interest. -Eds

Received from Christchurch Driver [CD]
Monday, 18 April 2016 11:03 p.m.

Readers may remember that in an earlier post, ‘Gold Band Finance – The Little Finance Company that did (Delta)’ March 2016 – your correspondent was lacking information on what transpired between Avanti Finance and Delta.

Your correspondent indulged in some dark speculations about what Delta might or might not have done. But recently your correspondent has received email information shining a light on that transaction, a welcome piece of disinfectant as Justice Brandeis would say. While we no longer see through a glass darkly on this matter, the disinfectant metaphor is apt, as yet again, Delta suffers another grievous and substantial financial wound, this time, a deliberate and self-inflicted one. It seems that in order to save or salvage something from the Noble debacle, it is first necessary to destroy the Delta financial reserves.

The conversation must have gone like this : “Dear Avanti, you have gate-crashed our game of Monopoly and you have further erred in somehow gaining a piece of the Noble subdivision that we simply must have ! Poor form, poor form indeed. Now chaps, we can do this the easy way or the hard way ! There is no way in this whole wide world we are prepared to pay you the 37 % per annum interest rate that your friends at Gold Band are charging on their part of the mortgage…. That was then, and this is now !! Take it or leave it, our offer is…. not a penny more than…. 34.50 % !!”

Yes readers, Delta in March 2015, paid Avanti $2.19M for its interest in the Noble Investments (NIL) first mortgage. Avanti had paid Gold Band $1.5M for the same interest just 16 months before in November 2013. A gain of $690,000, or 34.50 % per year. Let’s see, only 350 times the rate of inflation. Avanti made out like a bandit, but then, they are a finance company…. and Delta are, well, Delta.

Delta CEO Mr Cameron confirmed that Delta spent $3.3M “strengthening its position”. We now know how that went : $1.2M to Gold Band, $2.19M to Avanti, which all pans out, taking into account a rounding error.
What we do not know is the timing of the $3.3M, but that is not a central issue at the minute.

Readers should bear in mind that if the situation is resolved by June 2016, then the first mortgage of $1.75M lent by Gold Band around 2004, could have spawned the amazing sum of $11.8M, and at least $9.1M. Gold Band and Cup Investments (CIL) will have lent out $1.75M and received $3.1M plus $2.7M received from Avanti and Delta. That is a total of $5.8M. Huge. Delta have paid $3.3M for a part security and if they are charging around the same interest as the others, then their figure will be around $5.5-6M. That is, the first mortgage securities of Gold Band and Delta will consume the first $10M of the mortgagee sale. Not looking good for Delta’s core debt of $11.35M of lower ranked securities….

ODT 18.4.16 front page small [allied.press.co.nz] 1bYour correspondent is desperate to see a Councillor ask for confirmation about this and the Gold Band and Avanti ‘premium’ they paid. Perhaps then the Otago Daily Times might sense that Delta paying $1M plus over the face value to Gold Band and Avanti for part of a first mortgage in an attempt to get a better recovery on their lower ranked securities is News, and not in a good way. Heaven knows they could do with some – Building Consent Delays on the front page – Good Lord what next ! more cat pictures ?
The Wash ?

Your correspondent can’t wait to read the emails around that board decision…. when the Auditor-General releases them. Will there be another email from a Delta Director stating in effect “if the subcommittee agrees then I agree with them?” (As there was for the ill-fated decision to proceed with Luggate).

Next we shall look at the “Strategic” reasons the DCC put forward as compelling reasons for retaining Delta in its report…. Irony and comedy abound….

[ends]

█ For more, enter the term *delta* in the search box at right.

Posted by Elizabeth Kerr

*Image: alliedpress.co.nz – ODT 18.4.16 front page sml

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Delta #EpicFail : What is Delta Worth ? $10.5M or $52.5M ? (Murray & Co)

Election Year : The following opinion is offered in the public interest. -Eds

Received from Christchurch Driver [CD]
Sun, 17 Apr 2016 at 11:41 p.m.

Your correspondent was ruminating about the DCC over a cup of Choysa last week, and was in need of some light relief, so he had a quick read of the latest DCC “report” – (I use the term in the loosest possible sense) about the efficacy of its DCHL assets, including of course, Delta. Your correspondent urges readers with a taste for comedy and irony to read it. It will not disappoint.

Agenda – Council – 11/04/2016 (PDF, 1.6 MB)
Item 22 Dunedin City Council Investments and Returns (pp 109 – 123)

The report starts by explaining why a holding company structure was set up in 1994. It was to “operate commercially”, the major benefit of which is helpfully explained as the interest can be tax deductible under a company structure whereas as a DCC entity it cannot. Let’s just think about this in light of the recent fuss about offshore trusts and tax planning : Accountants call it tax efficient, or tax minimisation. Some, including the Government might consider it a form of tax avoidance, particularly when the Owner of those companies constantly has its hand out to central government begging poverty, seeking handouts for capital projects. ($15M for the Stadium, $5M for Otago Settlers Museum, etc).

The humour starts when the report nonchalantly notes that Delta is valued using the current ($13.8M) asset valuation for the elderly Noble debt. In its words there is no allowance for any “additional impairment” – spot the careful euphemism, or excitingly, “any increase in value” : Yes readers, they actually wrote that. There is a useful biblical precedent to this statement in Luke 6:39. Readers’ homework is to look this up….

Delta is valued at “$45-60M”, but this clearly alarmed at least one of the DCHL Directors, Mr Keith Cooper, who as CEO of Silver Fern Farms has recent extensive experience trying to merge or flog off basket (brisket?!) cases to foreigners. Mr Cooper hurriedly said that “a lot of preparation” would be needed to get Delta ready for sale at anywhere near that figure. Your correspondent thinks that preparation would actually be a very good idea.

Getting Delta “prepared for sale” would require some clarity around the costs and revenues of each of its business activities, and each of its major contracts, not just aggregating everything as per the current annual reports.

However, your correspondent believes that level of detail won’t ever be revealed, for a reason which readers should be aware, and that is your correspondent has been advised by former Delta staff that Delta is propped up by its sweetheart contracts with Aurora, and they are the reason that Delta survives and makes a profit. Most of its other activities are awash in a sea of red ink.

Of course, if this is not true, then some detailed information can be released to show that your correspondent is barking up the wrong tree here. Now, is that likely to happen ?

Naturally, Christchurch-based merchant bankers Murray & Co did not provide detail about how the $45-60M valuation figure was arrived at.

What we know from previous Delta posts (Some Forensics, 30.1.16) is that Delta has shareholders’ equity of $15.804M. This is the difference between the alleged $59.705M in assets and the staggering $43.901M in liabilities, which includes $26.49M in term debt. The key factoid : average Delta net profit over the 5 year period 2011-2015 was $2.636M. It is not forecast to pay a dividend for the next three years. Remember, this includes the proceeds from the sweetheart Aurora contracts which are unlikely to be so generous if owned by a private non DCC entity. In 2015 Delta completed $35.4M, fully one third their turnover, on Aurora work.

Now, your correspondent has had a bit to do with valuing companies for sale. A contracting company such as this would sell for an average P/E (Price Earnings ratio) of between 3-5, over a 3-5 year period. With the 5 year $2.636M average net profit, and using a P/E of 4, that gives a value of $10.54M. That is a long, long way from $52.5M, the value DCC and Murray & Co say it is worth.

There is a case to be made that net profit before impairments should be used, but this will not get to anywhere near the $52.5M. On that basis the 5 year net profit would be $4.59M, which at a P/E of 4 gives a nominal value of $18.38M. Your correspondent says this is too much, no one is going to pay many millions over and above net asset backing for goodwill for an “impaired” contracting company.

Readers, who is right ? A tea drinking blogger, with an interest in the facts, or Ms Bidrose and Mr McKenzie, signatories to the report, assisted by Murray & Co ?

Your correspondent can hear the readers’ lament already – CD is a numbskull ! –what about the $15.804M in equity –it has to be worth at least that much !!

Sadly readers, as outlined in the earlier forensics post, it is my prediction that the $15.804M equity will be written down to $5-8M and quite likely less, when the Noble Debacle is finally dissolved, and the actual loss known.

The Owner of Delta is going to have to pump millions in to recapitalise Delta, otherwise it is a dead company walking – towards extinction.

Your correspondent says it is a feat of extreme positive thinking to get to a value of $52.5M, the figure used in the report. Edward de Bono would be proud. Murray & Co probably bend spoons as a warm up exercise.

This correspondent is incredulous that this figure saw the light of day. Your correspondent says it is completely unsupported by the facts.

[ends]

Tue, 12 Apr 2016
ODT: Valuations raise asset-sale questions
A report tabled at yesterday’s Dunedin City Council meeting has revealed the extent of the city’s assets for the first time. The report, which revealed the $417.9million value of council-owned companies, raised some questions during the meeting about the possibility of asset sales.

█ For more enter the term *delta* in the search box at right.

Posted by Elizabeth Kerr

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Filed under Aurora Energy, Business, DCC, DCHL, Delta, Democracy, Dunedin, Economics, Infrastructure, Name, New Zealand, People, Public interest