Radical change signalled for Bord na Mona

A little item, almost unnoticed, in Bord na Mona's annual report, could, if implemented successfully, have a profound impact on the group. The managing director, Mr Paddy Hughes, in the middle of his review of the latest results, noted that the proposed legislation which is at the parliamentary draughtsman stage, will enable the restructure of Bord na Mona into a group of limited liability companies.

This, he stressed, "will facilitate appropriate financial and commercial partnership arrangements at the business levels in Bord na Mona". This means Bord na Mona is likely to become a public limited company and form commercial alliances with other firms. Once the final £61 million of the State's £110 million injection is put into the company, possibly by the end of the year, it will be donning a decidedly commercial hat. But after half a century as one of the many companies sustained by the State, does it have the mettle, the capital structure and businesses, to carve a successful commercial path?

The latest results indicate that pre-tax profit rose by 46 per cent to £7.1 million. However, part of this was due to lower interest costs as a result of the first Government tranche of £49 million. If these and other costs are excluded, the underlying increase was a more pedestrian 10.8 per cent. And significantly, turnover grew by a mere 2.1 per cent. On the basis of these figures, Bord na Mona does not appear to have the equipment to push itself on to a new commercial plane. It has already warned that it has only just over 50 per cent of its peat milled so far this year. And, "with little prospect at this stage of improving on that", according to the chairman, Mr Pat Dineen, "this will impact on our results for the 1997/8 financial year". In addition, the £110 million injection is a quid pro quo for a reduction in the price of peat from £19 per tonne to a commercial level of £13 (at 1993 prices) to the ESB. These changes, the company said, "will also lead to reductions in both turnover and profits in the future as the existing pricing arrangements contained an element which, up to now, has been used to service and amortise the unsustainable debt".

By way of illustration, Bord na Mona clearly shows the impact. Assuming the full £110 million is injected, the restated 1996/7 accounts show turnover at £133.3 million (against an actual £144.5 million), operating profit £8.8 million (£22.1 million), interest £6.6 million (£15 million) and net profit £2.2 million (£7.1 million). The company claims that the reduction in the sales price to the ESB will directly equate to the interest saving from the injection which will be used to pay off debt. However, it is understood that there will be extra costs associated with the early redemption of some loans which will probably have to be borne this year. Nevertheless, the injection by the State and the new Europeat peat-fired power station (Bord na Mona hopes to have a minority stake), scheduled to be completed by a consortium in 2001, are positive developments.

Bord na Mona will have the benefit of supplying around 1 million tonnes of peat per annum to the station, over a 15 year period. That could boost volume sales by 20 per cent. The injection will greatly enhance the group's balance sheet, turning a deficit of £63.1 million in 1995/6 into a net worth of over £50 million. In addition, while profits will be lower this year, the underlying trend might be positive. Bord na Mona will not be swamped with debt, as it has been, but it will still have a gearing of over 100 per cent which must limit its manoeuvrability. This could rise further as it spend an estimated u £30 million on preparing the bogs for the Europeat station. Of more immediate interest will be how its four divisions perform. Peat Energy, accounts for 40 per cent of sales. Operating margins should fall following the implementation of the commercial pricing with the ESB. Fuels account for 25 per cent of sales and is in a very competitive market.

Horticulture accounts for 32 per cent of sales and Bord na Mona has embarked on a programme to improve profitability. The environmental division is tiny with a turnover of only £5 million but it must have plenty of potential. For a company facing plc status with plans of joint ventures, its decision not to publish divisional profits is surprising. This is how it explains the omission: "In the opinion of the board full compliance with the disclosure requirements of SSAP 25 `segmental reporting' would be seriously prejudicial to the group's commercial interests". It would want to do better than that if it is to entice strategic alliances with possible equity holdings in its separate companies. Bord na Mona says it has a target to get a return of 15 per cent on capital employed. Based on its definition of capital employed that would represent a pre-tax profit of about £11 million, or a five fold increase on the restated results for last year. That looks like a pious hope but it would need to reach that kind of target to justify its more commercial mantle.