apr-11.pdf (2.07 MB) - Crown Ownership Monitoring Unit

OperationsFor the past six years, Kordia Group has been working through a transformationstrategy to ensure a viable future beyond digital switchover (DSO) inNew Zealand. This has involved acquiring businesses, developing new productsand services, removing costs and changing cultures, and has been a challengingprocess. DSO has been confirmed as commencing in September 2012 withcompletion by late 2013. This is earlier than Kordia had been planning, and hasresulted in a large write-down in the value of its network assets. This has also hada significant impact on the commercial value of the Crown’s investment in Kordia,which has decreased from $198.5 million to $112 million and is the reason for thenegative TSR of 43.7% for 2010/11.While Kordia has been successful in diversifying the business and growingrevenue, over the past few years this has not yet translated into the level ofprofitability and financial returns we expect from this company. In the future,we think Kordia needs to significantly improve its profitability and generatehigher returns on the Crown’s investment in the company.Financial performanceKordia reported a net loss after tax of $14.7 million for 2010/11. This compareswith a loss of $1 million for the previous financial year. As noted above, Kordia’s2010/11 result reflects a $21.9 million write-down in the value of its network assetsthat have been impaired as a result of DSO. If this were excluded, Kordia’sunderlying result was a profit of $7.2 million, which is a significant improvement onits underlying profit for the 2009/10 financial year of $2.2 million, though still belowthe level of profitability we expect from Kordia in the future.Subsequent to balance date (30 June 2011), the Commerce Commissionreached a settlement with Telecom regarding the sub-loop extensiondiscrimination claim. This is likely to result in some financial benefit for Kordiain the 2011/12 financial year and partly offsets the commercial harm to Orconowing to the delay in the sub-loop extension service being provided.Performance against planKordia modified its 2010/11 SCI during the year to reflect the material impactof an earlier than planned DSO date. Kordia’s net loss after tax of $14.7 millioncompares with a budgeted loss of $13.8 million. The variance of $900,000relates to an impairment charge on equipment damaged as a result of theFebruary 2011 Canterbury earthquake.Major investmentsKordia is making investment innew products and services suchas OnKor (its wide area networkplatform) and Genius, a newproduct launched by Orcon, whichallows phone calls to be madeover a broadband connection.Kordia continues to make someinvestment in developing itscapabilities associated with thegrowth in broadband in bothNew Zealand and Australia. KordiaSolutions in Australia is targetingthe energy and natural resourcessectors where it sees a numberof opportunities.Non-financial performanceKordia achieved its safety, networkavailability, customer satisfactionand Resource ManagementAct targets. However, its staffengagement index measure of 70%did not meet the target of 75%.Corporate social responsibilityIn response to both the Canterburyearthquakes and the Queenslandfloods, Kordia played a key role inrestoring communication services.In Australia, Kordia assisted withsetting up a mobile banking centre,which assisted displaced floodvictims with performing basicbanking transactions and allowingthem the ability to cash emergencyrelief cheques.DividendsKordia has not paid a dividend since 2007/08 as debt repayment andinvestment in the transformation of the business have been the priority. TheBoard intends paying a $2 million dividend in relation to the 2011/12 financialyear. While it is pleasing that Kordia intends to reinstate dividend payments,over time we expect Kordia to return significantly higher dividends tothe shareholder.page | 77