Updates: Big Write-Downs Ruin Trans Pacific Story

The first of many, of just a one off?

Whatever, Transpacific Industries, the big waste group, justified its ranking as one of the worst performing big stocks of the June half yesterday with a huge and surprising write-down that could reach a quarter of a billion dollars.

In fact the statement issued yesterday has raised questions why the management and board couldn't see the need for such a big write-down when a much smaller one was revealed after a query from the ASX about a fall in the price from 92.5c to 87.5c over the week ending June 7.

There was a warning that asset values were being reviewed, but the announcement yesterday was much bigger than had been expected.

The downgrade came after an impairment review conducted by the company, which "Following completion of this review, the Company expects to book a non-cash write-down on the carrying value of intangible assets of between A$225 million and A$250 million as a significant item in its full year 2011 accounts.

"This is in addition to the A$5.5 million write-down on its interest in CMA Corporation Ltd and the A$1.8 million restructuring charge for TPI's Manufacturing division announced on 7 June 2011," the company said yesterday.

The reply to the June 7 query saw investors sell off the shares and they fell to a 52 week low of 71c on June 16 and have traded just above that level since then.

Despite the bad news yesterday, the shares actually rose 4%, or 3c, to 78.5c yesterday.

Investors are a resilient lot. The shares peaked at $1.50 on January 19, and have basically halved since then.

The company was at pains yesterday to stress the write-down was non-cash, but nevertheless it will still leave it with a loss for the June 30 year.

In the June 7 statement the company forecast a net profit of at least $41 million, now it's a loss of between $177 million and $209 million, according to yesterday's briefing.

That compares to a net profit of $59 million in the 2010 financial year.

Transpacific said yesterday it was in compliance with its banking covenants, with debt reduction still its top priority ($209 million paid down since 2009, it said yesterday).

But the company has around $480 million of debt maturing over the next year to 18 months and to pay this, it intends using operating cash inflows, the divestment of up to five property assets that could generate up to $20 million to $30 million and use up to $200 million under its debt program.

The repayments could total up to $400 million if operating cashflow hits a forecast peak of $180 million over the 18 months. (The company still has plans to spend $160 -$200 million a year on capex).

That will still leave around $1 billion in debt on the balance sheet.

It reaffirmed annual operating earnings before interest, tax, depreciation and amortisation guidance of $420 million-$430 million, basically unchanged from 2010's $424.4 million.

The impairments wipe off all of the manufacturing division's acquired goodwill ($40-$45 million) and a huge $180-$200 million from the NZ division, but management says that apart from these black spots, the company's current performance (predominantly via its Cleanaway operation) is quite strong.

The NZ write-off resulted from the need to "apply a more conservative growth rate'' given the general NZ economic troubles and the Christchurch disasters.

"This planned write-down does not reflect TPI New Zealand's current business performance, which continues to be strong. It remains an integral part of TPI's total waste management service offering," the company added.

Looking to 2012, management was confident:

"TPI remains positive about the economy and about its market position in Total Waste Management services," it said in yesterday's announcement.

"Growth in Australian Total Waste Management revenues should run in line with the rule of thumb "GDP + CPI" formula, while New Zealand could exceed this through its involvement in the Christchurch recovery.

"Commercial Vehicles Division order book and market intelligence suggests FY12 should equal or exceed FY11, with a return to trend growth patterns beyond this.

"The Manufacturing Division is in turnaround mode and must get back to a cash profit position quickly.

"Significant corporate costs in FY11 were one-offs.

"TPI's FY12 operating cash flow target is for an inflow of $260-300 million, with circa $160-200 million planned for capital expenditure projects."

It's a real 'trust us' story for TPI.