Silver Fern Farms heaves sigh of relief

This week’s announcement by Silver Fern Farms of an unaudited pre-tax profit of $5-7 million for the last financial year signals a massive improvement on the substantial losses of the two previous years. But in spite of the $100 million debt reduction, it does little more than provide some breathing space for the company to review its future capital structure options.


The balance sheet will have improved since last year when members’ shares valued at $136.5 million in the accounts, worth just over 40 cents per share compared with the issue price of $1, funded assets of $833 million. But interest bearing loans and borrowings at $387 million and a total interest bill of $35 million including the cost of off balance sheet leased assets dwarfed the equity.


This is clearly the reason for the PricewaterhouseCoopers report which was announced at the last AGM and has now been delivered to the board. However Chairman Rob Hewett told me it will be a further six months before the board and its advisers have assessed the options identified and talked to shareholders. In the meantime the company will appoint an investment bank to help with the assessment.


According to the announcement SFF’s improved performance, coupled with the positive global outlook for protein, improved farm profitability and customers’ need for security of supply, makes this an appropriate time to examine the company’s capital structure.


This is all code for reaching the obvious conclusion SFF has to get more capital into the business, but previously the balance sheet and two years of large annual losses totalling nearly $80 million made it impossible to think of attracting new outside investors. The banks have been supportive, probably because the alternatives were completely unpalatable. But the PwC report must have been triggered by bank unrest at the amount of money at stake with little sign of improvement.


SFF must be given credit for continuing to invest in a number of initiatives including FarmIQ, the consumer brand development programme and the beef eating quality system, as well as rebuilding Paeroa and competing very aggressively in the livestock procurement market this year. All of this has coincided with an improved operating performance.


But until it can get more capital into the business, there is a danger of it all being money tipped down the offal chute, although to be fair offals, blood and other co-products are actually worth good money nowadays. However any injection of outside capital, as distinct from debt, will further water down the farmer ownership proportion of the company.


Since changing the farmer shares as a means of removing the redemption risk associated with the cooperative structure, SFF has effectively been a hybrid rather than a true cooperative. This means any outside investment unless by farmer shareholders will inevitably take the company even further away from its original status as a farmer cooperative. This also makes the prospect of a merger with Alliance even less likely than it has ever been.


Following Keith Cooper’s resignation a completely new team will be at the helm of SFF with Hewett as chairman and Chief Strategy Officer Dean Hamilton taking over as CEO. They will be faced with all the same structural issues that have made the last few years so difficult, but at least there are some positives in the market which will hopefully give them a fighting chance of success.


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