AFFCO strengthens balance sheet with good half year

For several years the ugly duckling of the meat industry, AFFCO has put together another solid performance for its latest half year, posting a 52.6% improvement on its previous half year profit before tax. This is on the back of a $93 million increase in revenue which, for a company known more for its beef business than lamb, is an impressive performance in a year when lamb price rises outstripped beef.

 

The main benefit of the performance is to the balance sheet which has seen shareholders‘ equity lift from $265 million to $331 million while liabilities have fallen by $16 million, producing an improvement in reported debt to equity ratio of 72% compared with 95% at the previous half year. Expressed another way AFFCO’s balance sheet is funded by 42% debt and 58% equity which is conservative and appropriate to the present economic environment. The NZX announcement of the result made specific reference to the importance of maintaining a strong balance sheet, ‘while the worldwide situation remains uncertain and turbulent’.

 

Sam Lewis, AFFCO’s Chairman, attributed the improved result to a combination of more favourable exchange rate, processing efficiencies and some market share gains, but he was careful not to suggest it would be as easy in the second half of the season. Against a backdrop of a hole appearing in both the lamb and cattle kill, volumes will be tight and past history indicates exporters will have to pay plenty for the stock they want to process, while having to make early decisions to close capacity.

 

Lambs available in April, cull cows which are slowing down now, the positive tone of the US beef market and the bobby calf kill are likely to be the only bright spots for the second six months to the end of September.

 

It won’t be possible to form a reliable judgement about the relative performances of New Zealand’s meat processors until the full year results are published, firstly because Silver Fern Farms and AFFCO are the only companies required to declare six month results, and secondly this season is more likely than usual to be a game of two halves. It’s tempting to think, if the runs aren’t on the board by the end of May (if you will excuse the mixed metaphor), there isn’t a hope of making any for the rest of the year.

 

For those of us who like to be able to compare performances of the main companies in an industry, the meat industry is frustratingly difficult to assess: SFF balances at end August, AFFCO, ANZCO and Alliance at end September, but ANZCO as a private company doesn’t have to declare its result until the end of March. From outside it’s hard to estimate the profit effect of SFF’s August balance date, but the biggest impact is at the half year, when the missing March trading result inevitably adversely affects the first half and correspondingly benefits the second.

 

At its half year SFF’s net loss before tax and non-recurring items was $16.7 million compared with AFFCO’s profit of $21.82 million on the same basis, a difference of $38.5 million which is a lot of money by anybody’s reckoning and represents more than SFF made in the second six months trading last year.  So it’s difficult to believe SFF will have been able to make up more than part of the shortfall in March, but its half year press release forecast a profit at year end and an improvement in equity to 45%. Remember AFFCO’s equity ratio is 58%.

 

The rest of the contribution from PGG Wrightson which will appear as a non-recurring item will certainly help to improve the balance sheet, specifically the equity ratio, but that contribution shouldn’t have been included in the original forecast. Despite positive noises from Keith Cooper about a flatter sales profile aimed at aligning supply to year round customer requirements, designed to match the right-sized processing capacity, it looks as if AFFCO’s plant configuration, processing efficiencies and marketing strategies are proving more profitable at the moment.

 

I eagerly await the end of year results to get a more comprehensive picture of industry performance.

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