Forum Archive Index - June 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Long time readers of this forum will know that I have been a long 
time critic of Wrightsons.   There was my post on the focus 
investment forum which showed a none too rosy picture.  I have 
previously referred to the jettisoning of their crown jewel 
financial assets in a controversial restructuring.  There was the 
contaminated seed scandal in Southland.  It seemed, from a management 
point of view, they could do no right.  So why have I just put in an 
order to buy some more WRI shares?

I guess critics will say I have just shown my true colours as a two 
faced voluminous verbal dross spilling bastard.  I have been doing my 
best in my own small way to fuel negative media hype, all the time 
hoping that it would drive the price down so that I could buy more 
shares more cheaply!   Well, that is one way of looking at things  
but in my defence I feel I could still stand in a courtroom with my 
hand on my heart and say "Not so!"    

First point.  I withdraw none of my previous criticisms of 
Wrightsons.  For the NZ Sharemarket growth investor there are now 
choices available in the rural retail sector, and quite frankly, if I 
were looking for growth Wrightson's would probably be at the bottom 
of my shopping list.  Warren Buffett would be running a mile if he 
studied their history.  Sure there has been a huge surge in the WRI 
share price over the last year, even allowing for the pull-back over 
the last few months.  But I did (and still do) attribute that to the 
rise in the rural sector in general, in spite of managements efforts, 
not because of any management magic!  For the growth investor my 
advice would remain the same: stay away from WRI. 

However, if I now take off my 'growth hat', and put on my 'income 
hat' a somewhat different picture emerges.  At the current market 
price ($1.04) WRI are trading on a before tax equivalent yield of 
15%.   I'll repeat that - FIFTEEN PERCENT - and I make no apology for 
shouting!   I think of all the listed shares in NZ, this would 
have to be the highest yield available.  This is the sort of 
dividend return that even hardened property fans like Hugh might stop 
and take a second look at.   Whenever I see a high yield figure like 
that I instantly become sceptical, and ask is it sustainable?   My 
answer is 'very possibly'.  

It is rumoured that the final dividend, paid in mid September could 
be as high as 10c.  If this comes to pass, and we add in the 3.5c 
interim dividend, this means a prospective dividend yield of near 
19.5% based on the $1.04 share price.  That is an absolutely amazing 
gross return on what must be one of the more down to earth businesses 
on the NZSE.   I am almost certain such a return cannot be sustained, 
but even if dividends slump by say 20% (from 13.5c to 10.8c) for 
FY2003-2004 the WRI yield will drop back to a 'mere' 15% again.   
Still a good return I think!  If the dividend drops back to 
FY2001 levels (8c) then even this will give us a yield of 11% based 
on WRI at $1.04.   And 11% compares very well with other 
income type investments out there.

My prediction is that if Dr Freeth, MD of Wrightsons, and his team 
can lift the performance of the company (and by lift I don't mean 
hugely raising profits - I mean being able to ride any rural 
downturn, minimizing profit falls), then we may see Wrightson 
start to trade up around the $1.20 mark again.   It floated at about 
this level in 1995, so it has taken a long time to get back to square 
one.  It was only early this year that it last made these 
giddy(?) heights, but I think it has the potential to get there 
again.

There is evidence that the WRI management team might be getting 
their act together.  Dr Freeth is on record as saying that:
"We are determined to show the market that we have a role that isn't 
thrown all over the place by these (agricultural) cycles."
They are dipping their toe back into some direct financing, with the 
approval of Rabobank who own what was the Wrightson finance arm.  
According to Dr Freeth, there is tangible evidence that the 
Wrightson 'Solutions Strategy' (a farm management plan utilizing 
Wrightson developed grasses, enabling increased stocking rates, and 
introducing farmers to selling produce on forward contracts) is 
flowing through to the bottom line.  Up until now I have regarded the 
much touted 'Solutions Strategy' as empty hype, as has the market, 
but perhaps Wrighton will surprise us all with an unexpected upside.

An income investor wouldn't invest for capital gain, but a 15c rise 
in share price would be a nice little bonus over and above 
the bumper dividend income payouts if the share price plateau of 
$1.20 was once again able to be reached.

On the other hand if management fails, or the $NZ resume's its 
upwards path, then Wrightson could be back trading in the 80c to $1 
share price range within a year or two.   Nevertheless even if this 
happens, income investors would still be better off buying WRI today 
at $1.04, than putting money in the bank (as I see it).  This is 
because the huge dividend yield will balance the expected capital 
loss.  Such an investor can afford to take a real capital loss, and 
see the WRI share price slide by 7c or so for each of the next two 
years, and *still* beat bank deposit rates on an after tax return 
basis!   I know any traders reading this would be appalled at the 
idea of buying a share in a medium term downtrend, as I think WRI is.
Nevertheless for the income investor, such a move, in the case of 
Wrightson's I think makes sense.

SNOOPY

disclosure:  Have held a not very meaningful parcel of WRI shares for 
some time.  Have topped up to make it something meaningful today.  

And still I hold no gold ;-)



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