Allan Barber says the latest SFF results are a watershed and shows that the business is back 'under control'; and without debt, farmer shareholders may get better returns with 50% ownership than 100%

Allan Barber says the latest SFF results are a watershed and shows that the business is back 'under control'; and without debt, farmer shareholders may get better returns with 50% ownership than 100%

By Allan Barber*

Silver Fern Farms has confirmed what it flagged more than three months ago with the release of a dramatically improved annual result in the 2015 year.

The final result is even better than the July prediction which indicated EBITDA of $75-80 million compared with $86.9 million actually achieved.

At the time I estimated EBIT of between $45 and $50 million which has been exceeded by the final figure of $58 million, while I also estimated net profit before tax of up to $20 million. The improvement at EBITDA level over the July forecast has flowed through to the NPBT which at $27.2 million is significantly better than last year’s $500,000, but the interest component of over $30 million is still a big drag on SFF’s overall performance.

A study of the trend between EBIT and NPBT shows interest costs blowing out from $20.2 million in 2011 to $26.1 mln in 2012, $28.0 mln in 2013, peaking at $37.5m in 2014 before reducing to $30.8 mln in the most recent result. The year end debt of $120.9 mln is massively down on the previous three years, and also better than the 2011 debt figure of $153.2 mln.

The sooner the deal with Shanghai Maling can be consummated, the better it will be for profits and dividends paid to members of the cooperative, even if 50% is due to the joint venture partner.

The comparative table of five years financial results provides the most graphic illustration of how a reasonably well performing company in 2011 turned into a basket case over the next three years. However it is worth remembering 2011 was a bit of an aberration after a big loss in 2010. Admittedly market conditions were not particularly favourable over that period, but comparisons with the rest of the meat industry show SFF’s directors and management in a particularly poor light.

It should have been recognised as a time to tighten belts and avoid extravagant investments, not spend the banks’ money like kids in a candy shop. There should have been no need for the company, even before its capital raising programme, to have found itself in such straitened circumstances. No wonder the banks wanted out, but it beggars belief that they allowed the situation to develop in the first place.

There has been a lot of shareholder dissatisfaction with the SFF board’s eagerness to accept the substantial injection of capital by Shanghai Maling, when there didn’t appear to be the need for that amount of capital to solve the immediate banking problem. The banks got the blame for forcing the issue when there was a feeling they should have been happy to continue lending to a recapitalised company with the capacity to improve further on its current debt levels.

But realistically the banks were probably fed up with having to take so much risk in previous years financing a company with undisciplined financial management in an industry which has lurched from one downturn to another with occasional recoveries in between. Quite possibly the mainly Australian bank head offices said it was high time to reduce the risks and find a safer haven for the money.

The investment by Shanghai Maling finally gives the banks the opportunity to reduce their exposure to the meat industry, when they didn’t want such a large exposure in the first place.

However SFF’s announcement provides assurance the company has now got its business under control and is able to exert a beneficial influence on behalf of its shareholders. The banking syndicate has committed to provide a financial facility until Shanghai Maling is able to consummate its capital investment.

This gives SFF the necessary reassurance to continue with its strategic direction while it awaits what should be almost automatic OIO approval for the joint venture. In the unlikely event of a rejection, there would no doubt be some happy shareholders, but it would be a highly unwelcome outcome in more ways than one. From a meat industry perspective, there would be something of a crisis of confidence when the industry appears to be getting itself on track towards a more stable future. From an overseas investment perspective it would destroy any Chinese or foreign investor confidence in applying to buy New Zealand agricultural assets.

In more ways than one, this is a watershed for New Zealand agriculture.


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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here »

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13 Comments

For further context note that the offer document showed a status quo $46m tax paid profit forecast for the current financial year with core debt reducing to a mere $89m. SFF shareholders have sold the goose just as it started laying the golden eggs. That the board weren't able to bring an alternate plan B to the table defies belief!

The shareholders will reap the rewards, the same way any investor owned processor does, by minimising costs. Like all other investor owned meat processors, livestock procurement is a cost.

"But realistically the banks were probably fed up with having to take so much risk in previous years financing a company with undisciplined financial management in an industry which has lurched from one downturn....."

Choke chortle cough !!!Yet the banksters are happy to keep funding the non productive ponzi Auck housing market -- if you want evidence of undisciplined financial mangement, it's in a league of its own....

While the directors signalled an improved profit result, one has to question whether the sale would have been justified in the light of the very large reduction in debt. Have the poor old farmers been shanghai'd without the full picture, by a bunch of dubious directors and bankers. It will be interesting to see if the new regime gets rid of these directors who have been "shown in a bad light" or protected in their position as compliant puppets and as a reward for facilitating the deal.

The Chinese understand strategy better than Mr Barber. They know about ownership and New Zealanders really have not worked it out. The Chinese bought SFF and the New Zealanders stupidly sold it. Dumb.
We should look to the Chinese and try to understand what they already know about how business works.

an example of such:

Fonterra boss Theo Spierings wasn't mincing his words this week when asked about rival Synlait Milk's moves to sell cut-price infant formula in China.

In partnership with Chinese firm New Hope Nutritional Foods, Synlait's strategy is to eliminate the middle men and sell baby milk online for much less than what consumers in that country usually pay for imported brands.

"Those developments are absolutely the wrong developments," Spierings told the China Business Summit on Monday.

One 900g can of Akarola-branded formula, produced by Synlait, reportedly sells for less than 100 RMB ($24). To compare, a 900g can of Fonterra's Anmum brand sells in China for 288 RMB ($67).

At the summit, Spierings went on to suggest Synlait's Akarola play undermined New Zealand's premium brand image in the Chinese infant formula market, which Fonterra has projected to almost double in size, to $33 billion, by 2017.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1154...

There are no surprises, none, in Synlait/New Hope's strategy. The intention is to secure supply and then, once the supply chain is under control, plunge costs and prices. Exactly the same strategy is in play in the global resources sector. Simply, China needs/wants product. It intends no longer to be beholden to supplier price-setting. It is not in the business of enriching suppliers; it is engaged in providing for its people - most of whom have earnings far below those in supplier economies.

As to Spierings' comment regarding the undermining of 'New Zealand's premium brand image', exactly this charge can be levelled at Fonterra, and fairly so. In an environment where reputation is everything, Fonterra's exhibited incompetence in matters of food safety, from Sanlu to botulism, has gravely tarnished the image of this country and its produce/products. Fonterra may not want to admit the truth of this, but other major New Zealand businesses do. They get the message and see the results themselves.

I recall reference to "near terminal shock" being used to describe the NZ economy in 1973 following Britain's accession to the EEC. Is China our new-Britain? It sure feels eerily familiar.

Kate, the parallel you draw is that of a commodity-thinking and commodity-producing country requiring a semi-colonial relationship. In many ways, we have swapped one colonial power for another. The reason is that commodity producers - in undifferentiated, easily replicated products (different from a stock of minerals) - earn very little. They build up a very limited capital base. They become trapped in the position of requiring someone else to take volumes of largely unimproved commodity product. Certainly, China is a very large market and will, though for an indeterminate time, remain a substantial market opportunity (these, I know, are platitudes). But the more we lose control of our production and supply chains, the less we will earn. It means more volume for ever more vulnerable, likely ever lowering, returns. That, to my mind, is the position we're in.

We have to break this commodity-colonial thinking. It seems to me we learned nothing from the loss of the UK market. And it is only the development of desirable, differentiated premium products that will break this spiral. Some of these (excepting tech etc) need to be based on a new way of looking at, and caring for, New Zealand's environmental privileges. Industrial commodity dairy production is a hiding to nothing. Global niche is global value. An example? Burt Shavitz, founder of Burt's Bees 'earth-friendly natural personal care products', died this year. He founded Burt's Bees in 84, lip balm etc, sold in 07 for $1bn.

it's in China's interest to buy cheap and value add at home, as much as we try to value add for the Chinese market, we will be up against the fact the most countries have large internal dairy markets and are happy to sell the surplus at low prices, this especially applies to Milk powder which as been our main growth sector. They also will be happy to copy rather than innovate
As much as we want strong local value added exporters creating wealth,China wants local importers adding value, watch the SFF space.
Than there is the problem of just how much interest Fonterra really has in value adding, after the huge investment in milk driers,they can just clip the ticket and farmers get whats left over, I'm not sure how much incentive there really is to value add.

and credit where credits due, or is that rinse and repeat

https://bluenotes.anz.com/posts/2015/11/can-australia-meet-asias-growing...

While Australia currently only accounts for around 2 per cent of the world's milk production, there is the potential for dairy exports as a whole, including liquid milk, powered milk, cheese and yoghurt, to lift due to the rapid growth of the Asian middle class.
Only investment today will capitalise fully on the generational demand opportunity that lies ahead.

and
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

The best way to add value is to own it. Simple really. And avoid short term thinking. All this "working hard - working smart" we are told about just keeps you busy. (ie. not actually smart)

You only have to look at who's pushed the sale...... our government. Don't assume that they are acting in the best interests of all New Zealanders. Key has said before that FTA's will benefit the majority of New Zealand. ( meaning some of us may lose out). Farmers are one of the minority groups in this country who are being pushed around by the powers that be and have no voice to speak out or we are attacked by the propaganda machine, labled as "the rich" or "polluters".
People are afraid to speak out against the injustices that are happenening in this country as bureacrats have alot of power to attack it's own people and businesses.
In our area for example no water races and drains are being cleaned as contractors will not touch them as regional council will make no committment to what the rules might be. In other words they are taking the "you figure it out" attitude, i.e clean them at your own risk of being sued.
I know someone else ( not a farmer) who is being sued by a government department, I believe they are totally innocent but were niave as to how nasty things could get.