As Members may recall, last November, Tower's Australian and New Zealand operations went their separate ways. The motivation was to facilitate greater growth as independent entities. This week, we look at the latest results and review the growth prospects of Tower New Zealand (TWR).

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"In our view, unless the KiwiSaver scheme becomes compulsory it is unlikely to be of great benefit to Tower."

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From a charting perspective, the separation of the operations has resulted in a clear dislocation in prices, shown on the non-adjusted daily chart. And despite posting modest gains over the past two weeks, the stock has made little progress since November.

For the six months to March 31, Tower New Zealand reported net profit of NZ$15.7 million. The result represents a gain of 40 percent on the same period last year. However, this doesn't quite tell the whole story. In fact, pre-tax earnings of NZ$31.2 million were virtually unchanged from the year before, with earnings growth derived from tax savings.

Tower New Zealand is comprised of three main divisions; Health and Life (insurance), General Insurance and Investments (fund management). Of these, Health and Life account for over 70 percent of operating earnings. General Insurance comes in second place at 20 percent, with Fund Management bringing up the rear.

The Health and Life division delivered the strongest result for the period, contributing NZ$13.6 million to group operating earnings. Indeed, the division's operating margin expanded to over 12 percent, from 9 percent last year.

However, margin expansion was not a feature all across the company. Despite Fund Management and General Insurance each achieving revenue growth, earnings fell at both divisions.

In regards to General Insurance, the Tsunami in the Solomon Islands and civil unrest in Fiji and Tonga hindered the division's profitability. And while these events may be viewed as uncommon when taken in isolation, writing insurance in the Pacific Islands is relatively high risk by nature and likely to cause more than a few hiccups along the way.

Meanwhile, the benefits of rising stockmarkets to the Fund Management arm were off-set by several one-off charges which weighed down the result. Chief among these were compliance costs of around NZ$2 million in relation to the Government's KiwiSaver scheme, for which Tower is one of six default providers.

KiwiSaver is New Zealand's answer to superannuation and comes into effect this July. The scheme differs to Australia's superannuation system in that it is not compulsory and the contributions are a smaller portion of salary.

In our view, unless the KiwiSaver scheme becomes compulsory, it is unlikely to be of great benefit to Tower. Indeed, CEO Rob Flannagan has stated that he expects to make a loss on the scheme for the first few years, due to a lack of public interest.

Once again, the company failed to declare a dividend, although management expect to announce a resumption at the end of the year. Even so, consensus estimates are for an uninspiring 2008 dividend yield of 2.6 percent.

Consensus Valuation Estimates

	2007	2008
Price to earnings ratio	14.5	12.7
Net dividend yield	1.6%	2.6%
Price to book value	3.1	2.9
Return on Equity	13.0%	14.6%

Source: Bloomberg

From a technical perspective, given the disruption to the longer-term trend and the lack of upward momentum, Tower does not currently exude a particularly positive outlook. The stock remains constrained between support at $1.66 and resistance at $2.39 and we anticipate further consolidation within this range.

Overall, Tower New Zealand is a well managed company with reasonable brand strength. However, after examination of the first set of accounts following last year's split, we believe the stock simply doesn't offer sufficient yield or growth potential to justify the opportunity cost of retaining our position. As such, we recommend selling Tower New Zealand (TWR) around $2.18.