Sharemarket: Rural service companies hold up well

Peter V O'Brien

Friday 30th April 2004

Share prices of rural services companies held up well over the past year, including the difficult period from November to April. Operations suffered from climatic conditions, currency movements, lower prices for several products and a decline in spending on merchandise among the farming community.

The Williams & Kettle figures in the table are not strictly comparable, because no adjustment was made for the buyback of one share in four, a subsequent 2:1 share split and the issue of shares in unlisted subsidiary Rural Equities as consideration for the buyback.

The companies earn most of their profit in the second half, irrespective of the impact of weather conditions, currency movements and commodity prices.

That will not change this year, although there could be significant financial changes when results are compared with the second six months of last year.

Wrightson's report for the six months ended December 31 noted the disproportionate profit split between the two half years and said the pattern would continue this year.

It also said Wrightson expected the rural economy to continue to feel the impact of the strength of the New Zealand dollar against the US currency as well as "the extreme climatic conditions being experienced across large parts of the country."

The outlook was for farm profitability to decline further in the next six months but it was expected to remain well above 1980s levels.

New Zealand's dollar was worth 68.33US¢ when Wrightson's report was issued on February 24, having spent most of the previous week above 70US¢.

The exchange rate was 62.6US¢ on Monday, a sharp fall from February's levels, as the US currency responded to some solid economic reports and suggestions that the Federal Reserve would lift interest rates soon.

Wrightson's comments about climate were based on the effects of bad weather early in the season, and the "late arrival" of spring.

Then came the floods of February.

South Island operator Pyne Gould Guinness (PGG) had a different problem with weather, referring to "heavy drought conditions, which have affected much of the South Island."

The company noted the "yet unabated strengthening of the New Zealand dollar" (as at February 23) and likely increase in interest rates.

PGG believed some slow-down in activity was inevitable but it was "well-positioned to deliver a very satisfactory full year result." The outlook for 2004-2005 was less certain.

Allied Farmers' operations are spread across Taranaki, Waikato, King Country and Manawatu. Its interim report had comments similar to those of others, noting a fall in farmers' proceeds from prime cattle and dairy cows while returns for sheep were the same as the first half of the previous year.

Williams & Kettle was particularly concerned about flooding in the central and southern North Island, saying those areas were a key part of its stock and horticultural business. A number of clients suffered significant damage.

Every examination of the sector in The National Business Review has emphasised its cyclical nature, the effects of changes in commodity prices, the currency and the consequent necessity for companies to be financially strong with good operating cash flows. The last is essential in both good and bad times.

Prices for many farm products have firmed since the end of 2003, particularly for dairy products, although dry conditions in the North Island are apparently leading to early drying-off of herds.

Shareholders in rural service companies tend to take all these matters in their stride, a factor which can give the share prices resilience.

The $1.50 a share offer from Rural Portfolio Investments (RPI) for sufficient shares in Wrightson to take the former company's holding to 50.01% is the biggest news about the sector.

RPI's bid had opportunistic elements in it particularly references to Wrightson's recent share price history but every such offer is opportunistic, or else there would be none.

The RPI, Wrightson situation was hardly the amicable outcome of discussions among two like-minded boards.

It was not the first time people had a lash at rural services companies, nor will it be the last.

Investors with less money than RPI, and who can accept cycles, could find the sector's shares attractive at current prices, particularly in relation to gross dividend yields of up to more than 12% (PGG), assuming companies can maintain the base payments.

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