Will the better results improve the likelihood the two big meat co-ops can finally find a way to merge, asks Allan Barber

By Allan Barber*

A note to shareholders last week updated the company’s position after 9 months and predicted a substantial improvement on last year.

Gains have occurred across the board with sales up 8.6% or $150 million, debt $100 million lower and improved inventory turnover.

This enables Silver Fern Farms to forecast EBITDA of between $75-80 million for the year ending 30^th September. This is quite a bit better than last year’s $39.3 million EBIT which was $68 million on a comparable basis, although there should be even more improvement at the NPAT level because of reduced interest costs and the need to provide for redundancy costs in 2014.

After allowing for depreciation EBIT should be around $45-50 million with a further $30 million of finance costs which would produce a net profit before tax of $15-20 million.

This would be significantly better than results in recent years and may be good enough to provide a return of 5% on net assets. Last year’s after tax profit was less than $500,000 which admittedly was a big improvement on the $28.6 million loss in 2013.

On the face of it the country’s biggest meat processor is in a much better state than at any time in the last five years in spite of the declining sheep numbers leading to fewer lambs for slaughter. It appears the operational decisions to close inefficient capacity and rebuild Te Aroha, as well as shedding ownership of co-product facilities, have all started to pay off.

The big question is whether this level of performance improvement is sustainable in the future against a backdrop of falling sheep numbers, fewer prime cattle and rising cull cow numbers, with prospects boosted by a lower New Zealand dollar. Market conditions are uncertain, particularly in Europe and China, although the outlook for beef is positive.

Shareholders of both SFF and Alliance are unhappy about the failure to give serious consideration to a merger as a means of reducing costs and improving farmers’ returns and are unlikely to view one good year for their meat processor as an indication of future farm profitability.

Each cooperative will now be required to hold a special general meeting to vote on a resolution which, if passed, seeks to require the directors to provide an analysis of the potential benefits and risks of a merger as well as an independently verified risk mitigation plan. However Alliance chairman Murray Taggart makes the point such a resolution would not be binding on the directors.

In the past both cooperatives have considered the benefits of a merger, although Alliance has steadfastly maintained the weakness of SFF’s balance sheet makes such a proposal uninteresting. It will be interesting to see whether SFF’s performance improvement provides sufficient justification for reconsideration, although Taggart says in a press release Alliance is working on six key priorities for improving returns to its shareholders.

He also maintains the benefits of a merger estimated by consultants GHD and published in MIE’s report Pathways to Long-term Sustainability are unrealistic. It is becoming increasingly possible the combination of livestock population and SFF’s improved balance sheet may offer enough benefits for a merger to be an attractive option. The results of SFF’s capital raising exercise will be announced in August which will provide another important element for both company and its shareholders to take into account.

There is still a fair amount of water to flow under the bridge before we will see a clear picture of the future shape of the meat industry, but it is encouraging to see better performance after several years of pain. Farmers will be hoping this bodes well for their on-farm profitability as well.

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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 ». This article first appeared in Farmers Weekly. It is here with permission.