AFFCO cautious after good first half

AFFCO’s net profit after tax at $15.91 million was marginally ahead of the same period last year in spite of a 0.6% drop in revenue, but on balance it appears to be a very solid result in a season which both AFFCO and Silver Fern Farms termed slow because of good early grass growth. That said, the drought in the north brought the cattle kill forward which must have had a beneficial impact on sales and margins towards the end of the period. It now looks probable the peak of the kill was short, sharp and early, so March, April and the first three weeks of May have just about seen the end of serious volumes to the processors.

After yet another loss in the half year to the end of February, despite the improvement on 2009, Silver Fern Farms will be thankful to be aligning their financial year with the rest of the industry at the end of September 2010. Even though a change of balance date means they will have to wear the impact of a seven month second half with another loss making September, in future they will be able to reflect the profitable March month in the first half accounts. The big question is whether the profitable start to the second half can be sustained through what looks like a highly competitive winter when livestock will be hard to come by.

While the SFF Chairman and CEO’s commentary emphasised the company’s balance sheet and operational improvements as well as the recovery into profit in March and April, the fact remains AFFCO’s result to the end of March was the more impressive of the two by a long way. The shareholding in Open Country Dairy contributed $1.9 million of profit with the meat business accounting for the balance. This is money in the bank to cope with the difficult period to come and, for the first time, it’s a genuine tax paid profit which should earn ANZCO Chairman Graeme Harrison’s respect. After about 15 years AFFCO has finally used up all the tax losses from the disasters of the early and late 90s.

I was confused by the tax-go-round in last year’s accounts, as AFFCO paid almost identical amounts of tax in the first half years 2009 and 2010 which turned into a tax credit by the end of last year. Sam Lewis, AFFCO’s chairman, told me they had reported provisional tax paid to March 2009, whereupon the auditors uncovered further tax losses, hence the small credit by year end. That’s it now – they have finally all gone, so from here on AFFCO will have to pay normal rates of tax, but Sam agreed it was good to be making money consistently, evidence of the way the company’s fortunes have turned around since Talley’s Group took a majority stake.

Hamish Simson, AFFCO’s CEO, was cautious about making any projections for the year end result, saying the second half would be tougher than the first with greater procurement competition. Consequently AFFCO would be unlikely to double the profit already banked in the first six months and it was unlikely to do much, if any, better at the pre-tax level than last year. Based on last year’s $25.2 million pre-tax, this suggests a final result not much better than $18 million tax paid.

Last year Alliance, traditionally the industry’s best performer, posted NPAT of $19 million which suggests AFFCO will have done very well if it can get close to that figure, even with help from Open Country Dairy. ANZCO’s 2009 result at the same level was a profit of $7.3 million. We will have to wait until the end of November to be able to compare the performance of Alliance, SFF and AFFCO, while ANZCO won’t declare a result for the year before next March. However none of the omens are particularly positive for SFF’s ability to hang onto whatever profit it’s made to date for the tough last four months of the season.

Grant Cuff from Alliance expressed the view the meat industry is in an unstable status quo because of lower livestock numbers, particularly sheep, and no real capacity reduction yet. As a result the risk of processor default has increased. This year may not crystallise that risk, but it certainly won’t reduce it.


Tags: , , , ,

One Response to “AFFCO cautious after good first half”

  1. Anna Briggs Says:

    You have done it again! Incredible post!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: