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Shares of Guinness Peat Group [NZX: GPG] have dropped 16 percent since announcing it is still grappling with its UK pension liability on Wednesday, while its sole investment, the Coats threadmaker unit, reported a near trebling of first-half profit.
The shares fell for a third day, down 7.3 percent in afternoon trading to 57.5 cents, the lowest level since October last year. In its first-half announcement on Wesnesday, GPG, which plans to rebrand as Coats once it settles the pension liability, said it was still in negotiations with the UK Pensions Regulator and the trustees of the two schemes, which have been holding up its return to shareholders.
GPG generated $1.4 billion from the asset sales programme since 2011 after a shareholder revolt over plans to split up the company along regional lines saw a board shake-out. It had cash of $734 million as at June 30, and shareholder funds of $782 million.
"The half-year report that came out the other day had a pretty bearish view on the timeframe around sorting out pension issue with regulator," Paul Harrison, head of equities at Salt Fund Management told BusinessDesk. "The basis for buying GPG would be around when you think you can get a return on capital, the longer that takes the less there is, and the more uncertainty around it as well, and it may actually be a reasonably negative outcome."
GPG and the trustees of the schemes have until Sept. 30 to make a written submission to the regulator, and any formal hearing would be unlikely to happen before the first half of next year. As at June 30, the pension obligation was valued at 222 million pounds, up from 178 million pounds six months earlier.
The investment firm's board has proposed to retain 170 million pounds across the two pension schemes through cash invested directly in the schemes and cash invested into sponsoring employers of the schemes, it said in a statement. The board had previously agreed to retain 124 million pounds to support the two pension schemes.
The investment firm spent 10 million pounds in advisory fees in 2013 with a further 8 million provided for to deal with anticipated costs in 2014.
"The issue for it will be the discount rate that's going to be used by the regulator and with interest rates on bonds quite low, it keeps pushing up the liability of the pension scheme further out," Harrison said. "High interest rates mean that liability is lower, but because bonds have rallied then it works the other way, the liability gets bigger.
"It becomes an issue for GPG if they want to cash up and get out of it, they have to pay an enormous amount to get rid of that liability," Harrison said.
Substantial shareholder notices showed American investor Southeastern Asset Management had reduced its holding below 5 percent. According to GPG's annual report it had 5.6 percent stake in Dec. 31, 2013. UK investor Prudential, parent company of the British M & G Investments company, boosted its holding above the 5 percent threshold to 7.3 percent.
The investment company's Coats unit, which is now GPG's sole investment, reported a profit of 11 million pounds in the six months ended June 30 from a profit of 4 million pounds a year earlier. Revenue edged down to US$837.1 million from US$839.7 million, due to the British pound strengthening against the greenback, with sales up 2 percent on a like-for-like basis. Operating profit climbed to US$63 million from $59.4 million, driven by gains in the industrial division.