Stock of the Week Transpacific Industries Group Ltd (TPI)


Transpacific Industries Group Ltd (TPI), listed on the ASX since 2005, is an integrated industrial services company performing waste management, resource recovery and transport solutions across Australia and New Zealand.

TPI’s network of operations includes collection operations, transfer stations, waste-to-energy sites, composting facilities, and recycling plants.

These assets enable TPI to offer a full range of environmental services to industrial, municipal, and commercial customers.

TPI’s debt problems have been long known by the market. The group was officially suspended for five months last year as it struggled to address its massive $2.18 billion debt problem.

The company has since failed to recover, with the share market disappointed in TPI’s 2009 capital raising, its recent 1H10 results, a forecast lack of dividends into the future and ongoing struggles in the waste management sector.

Money Problems

Earlier last year, TPI was one of the main shares to sell before it was suspended from official quotation due to a capital structure review.  It was then reinstated to official quotation in July 2009.

This came hot on the heels of serious questions surrounding TPI’s cash situation. In March 2009, TPI admitted to battling debt of around $2.18 billion.

TPI was hoping for a waiver of a debt covenant breach from the lenders, and opened itself up to any potential takeover rescue (which was not to come).

In June, TPI finally detailed its recapitalisation plans, almost four months after suspending its shares from trading so it could sort out its crippling debt.

TPI hoped to raise up to $800 million though a placement and a rights issue.

In July, the company confirmed it had raised around $560 million from the institutional component of its share entitlement offer.

TPI sold about 467 million new shares at $1.20 each in a fully underwritten 1.77-for-1 offer, with eligible institutions taking up more than 86% of their entitlements.

The news wasn’t well received, with TPI shares dropping as much as 20% on the day of the announcement.

A Dismal Year

In August, TPI reported a $237.4 million FY09 loss, swung from a profit of $175.3 million a year ago, largely on asset writedowns and losses on interest rate hedges.

Normalised full year net profit was $72.3 million, roughly half of FY08’s $141.7 million.

TPI wouldn’t pay a final dividend and said at the time that it doesn’t expect to pay any dividends this FY, in accordance with the strict conditions set by financiers after TPI breached loan covenants.

What Went Wrong

After a massive stock dive from 2007 to early 2009 on the global economic downturn and TPI’s glaring debt troubles, the stock failed to regain ground over the course of 2009 and into this year.

The problem was that, whilst overall waste volume and revenue should be generally resilient across a given economic cycle, TPI needs substantial public sector work to keep going. The company relies on winning big contracts from works that are driven by government initiatives.

However, lower economic growth prospects saw less construction activity over the period of TPI’s stock decline. Government stimulus packages over the period of the downturn were not beneficial to all of TPI’s key markets, which include manufacturing and resources.

TPI has continued to suffer on volatility for commodity prices, making its revenue stream more cyclical in nature. The group’s revenues also rely on construction activity and activity in “heavy” industries such as manufacturing owing to the processing of specialised waste volumes.

The company is also struggling to keep its hold as a leader in its markets, as the industry is highly fragmented with a large number of competing companies not much smaller than TPI, including WSN, Wanless, Tox Free and Thiess.

A Hairy Half

On 21 January, TPI forecast a fall in 1H010 earnings on sluggish activity in its commercial vehicles, construction and liquid waste units.

TPI predicted operating earnings for the December half of $197-$200 million, down from $255.7 million in 1H09.

In late February, TPI reported its 1H10 results. Revenue was down 16.1% on 1H09 to $998.1 million.

However, writedowns and impairments weren’t a major problem for the company this time. Operating earnings slid an unimpressive 21.5% to $200.5 million, whilst normalised NPAT crashed 67% to $18.6 million.

Though many other companies reported improved 1H10 results on a stronger economic environment, TPI noted conditions in 1H10 were similar to 2H09.

Net debt was consistent between 30 June 2009 Pro Forma ($1.64 billion) and 31 December 2009 ($1.63 billion).

The group declined to pay a half dividend and said  it anticipated no final dividend for 2H10.

Outlook

The last few years have been disastrous for TPI , with the company consistently in the headlines owing to its massive debt problem.

The market has remained unimpressed with TPI’s measures to address the debt to date, and a “takeover rescue” of the company looks unlikely.

TPI’s revenues have remained soft on a lack of demand for the construction and, in particular, the manufacturing sector. The group’s revenues rely on construction activity and activity in “heavy” industries such as manufacturing, owing to the processing of specialised waste volumes.

The company is also struggling to keep its hold as a leader in its markets, as the industry is highly fragmented with a large number of competing companies not much smaller than TPI in size.

TPI has failed to pay a dividend in 1H10 and forecasts no final dividend for 2H10.

The group says that FY10 net profit is expected to be impacted by a one-off expense of about $10 million on warrants.

In terms of stocks to watch, TPI’s finances are currently in a messy shape, which is not positive looking ahead.  It is likely TPI will suffer continued difficulty in the coming half on an operational and profit front.