Meat company results compared

11-08-2010 | Gerard Hall

Silver Fern Farms (SFF) and AFFCO have recently released their six months for 2010, and it makes interesting reading.

Before commenting on these results, it is probably worth reviewing the 2009 year comparison between the "big four " meat processors.

The Alliance Group achieved the highest turnover growth year-on-year with operating revenue up 16.5% on 2008, SFF up 2.6%, AFFCO up 1.9% and ANZCO up 6.1%.

Alliance, at 3.4%, recorded the best operating profit (before interest) as a percentage of operating revenue.

While SFF has made concerted efforts in the past few years to reduce borrowings and interest expense, its interest burden remained high relative to its competitors.

Only Alliance paid a pool surplus distribution to shareholder suppliers for 2009 ($15 million) with SFF electing not to.

Net profit before non-recurring items as a percentage of operating revenue is another key indicator of profitability and efficiency. Again, AFFCO and Alliance are clearly superior to SFF and ANZCO.

If it were not for the one-off gain from the PGG Wrightson settlement of $42m, SFF would have reported a profit (before tax) of only $1.3 million for the year.

Still, as they say, the devil is in the detail. International financial reporting standards, and in particular whether companies qualify for hedge accounting of financial derivatives (eg, forward exchange contracts) make straight-out comparisons of financial results difficult.

For the 2009 year, SFF shows in its operational expenses a loss on foreign exchange of $36.4m. This is a large amount and there is no explanation of how this was incurred. Alliance's accounts include $5.9m of foreign exchange gains, while AFFCO's show a loss of $12.6m fully offset by a gain from revaluing derivative instruments.

With the exception of ANZCO, all companies recorded good operating cashflow surpluses. ANZCO's cashflow deficit reflected funding of increased inventories and contracted livestock.

SFF remains the biggest meat processing company in New Zealand (turnover and balance sheet), however with its downsizing initiatives and reduced livestock market share, the other companies are closing the gap.

Shareholders' equity and debt positions clearly show AFFCO and Alliance Group to have significantly stronger balance sheets.

The 2010 table summarises the recently reported six-month results for SFF and AFFCO.

A direct comparison of the operating results for SFF and AFFCO is not appropriate as SFF's six months is to the end of February while AFFCO's is to the end of March. Therefore, SFF includes an extra loss-making month as opposed to AFFCO's profit-making month of March. Management of SFF have advised that its loss to the end of February has been recouped during March and April.

Changes from the prior year's six-month results make a more relevant comparison.

SFF's operating revenue has fallen 23% while AFFCO's has fallen 5.5%. The higher value of the NZ dollar compared with the prior six-month period will be a factor in this as well as sheep and lamb throughput volumes to the end of March being some 700,000 head behind last year.

SFF's operating result before interest is a loss of $4.5m compared with a $0.4 profit for the corresponding period last year. This result is after recording net foreign exchange gains of $15.1m (prior year comparative $0.025m).

AFFCO's operating profit before interest of $23.4m is $2m back on the prior half-year but it is still an impressive result relative to SFF, irrespective of balance date cut-off. While the second-half year should see a significantly improved result for SFF, it is difficult to imagine them getting close to AFFCO following AFFCO's strong first-half performance.

SFF's interest expense is at last showing the benefit of its debt reduction, although the cost is still significant compared with AFFCO.

SFF's stocks and debtors are down significantly on the prior year as a result of lower throughputs and increased focus on reducing its working capital and improving its balance sheet.

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