Silver Fern Farms comes crashing back to earth

Chairman Rob Hewett wasn’t joking early last year when he warned that the 2016 result would not be in line with budget. The actual result was a $30.6 million after tax loss compared with a profit of $24.5 in 2015, although a significant part of the latest year’s result was attributable to a $22.4 million non-cash accounting writedown related to the anticipated Shanghai Maling investment. Nevertheless, at a more comparable level the net pre-tax operating profit remained in negative territory, producing a $7.5 million loss against $30.8 million in the previous year.


Although this may not have been a complete surprise, the fall in revenue from $2.452 billion to $2.161 million, a drop of nearly 12%, must have come as an unwelcome shock. Clearly changing inventory levels make inter year comparisons problematic, but it is also evident that SFF continues to bleed market share as a result of declining supplier support. I am in the process of doing a more comprehensive analysis of quota entitlements which will illustrate very clearly just how much throughput the company has lost since the Richmond takeover in the early 2000s.


SFF’s commentary accompanying the release of the annual result refers to what a tough season it was across the whole industry with a perfect storm affecting both beef and lamb returns. Sharp in market price falls, lower availability and unusual livestock flows that increased procurement competition and adversely affected capacity utilisation, the strength of the New Zealand dollar and the impact of global events like Brexit all had an adverse effect on performance.


Debt levels were $14 million lower and interest costs were sharply down at about half the previous year’s level, plus a 31% increase in the sale of added value production. But this was nowhere near enough to offset the negative factors listed. In contrast main competitor Alliance succeeded in posting a $10.1 million pre-tax profit, reduced to a final post-tax figure of $100,000 after paying tax and $9.8 million in supplier pool distributions. Neither company will be happy about a very poor return on assets which will be unsustainable if repeated.


SFF will be pleased to get last year’s result off its chest and can take relief from the completion of its deal with Shanghai Maling which injects $210 million into the parent company’s balance sheet with the balance residing with the co-operative for payment of the special dividend to shareholders. This will take pressure off the immediate need to deliver better returns to shareholders, but declining livestock numbers will soon put more pressure on the main board to make some tough decisions about plant capacities. The Meat Workers Union Christmas newsletter has already drawn attention to SFF’s attempts to renegotiate collective agreements which suggests some of the warm and fuzzy sentiments expressed about the company’s 7000 passionate employees may be about to be tested.


CEO Dean Hamilton is optimistic as can be seen in the recent press release: “Looking ahead, whilst mild weather and strong grass conditions have delayed the start to the new season, we are confident that if a more settled operating environment prevails combined with the improvements we have undertaken and have planned, we will see the performance of Silver Fern Farms improve significantly in 2017.” Time will tell whether his optimism is well-founded.


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