Report Card: Frucor on a growth mission but UK venture yet to reap rewards

Friday 19th October 2001

There can be few better marketing successes than selling bottled water in a country as inundated with the liquid as New Zealand. Nor can there can be a greater satisfaction for a New Zealand company than doing the same to Australians.

Beverage company Frucor celebrates both feats in its annual report, along with increasing sales in several markets of its core fruit juice products and flagship energy drink V.

"We've come a long way since we operated as a New Zealand fruit juice company. In three years, Frucor has made a quantum leap ..." chairman Simon Pillar says in his review. He prefers to dwell on the company's product range and particularly its revenue, which has doubled in two years.

In the year to June, turnover grew 27% to $228.4 million while the report quotes a non-standard (and thus unwelcome) figure "contribution before marketing" which grew 36% to $92.2 million.

Less attractive are gross earnings (ebitda) which fell 3.8% to $30.1 million. That figure represents a 13.1% margin on sales compared with 17.3% in 2000. Net profit was 22% higher at $11.7 million, mainly because the company didn't have to pay $3.7 million in costs associated with its share market flotation this year. After allowing for this item, net profit was down 14%.

Part of the problem is that the company has spent heavily on expansion of its V product into the UK but has yet to reap any rewards. Segmented figures showed a net loss of $10.2 million on sales of $10.5 million.

"While a further loss is anticipated in the UK in the 2002 financial year, it is expected the business will reach break-even during the second half. In hindsight, we were perhaps ambitious to expect an early win in this fiercely competitive but under-developed market," Mr Pillar says.

The company shows an attractive return on equity of 36.7%, down a fraction on last year's 36.9%, but this has been built on a highly geared balance sheet.

Shareholders' funds amount to $37.9 million, less than a third of total funds of $125.9 million. Of its liabilities, $59 million are loans due in three to five years.

The company may be able to justify a high gearing because of its excellent cashflows, which are typical of companies in the fast moving consumer goods (FMCG) market. However, net cashflows from operations are slim at $9.8 million, or 3.9% of total receipts. This is a decline on last year's 5.5% and leaves little margin of safety if business were to turn down.

One contribution to this decline could be unsold stock, shown in notes to the accounts as finished goods, which has risen in value 25% to $17.2 million. This may simply be a reflection of the company's growth. Although worth nothing, its store of raw materials has stayed constant at just under $7 million.

Investors will be disappointed this year's result substantially underperforms forecasts made in Frucor's prospectus of a little over two years ago. To its credit, it displays detailed figures in its notes of those original forecasts and explains the shortfalls.

Revenue was 14% less than forecast while pre-tax profit missed the target by 39% and net profit by 43%. This was caused by lower-than-expected sales overseas and an inventory buyback in Australia.

Frucor remains positive about its future. Investors can take some comfort that this is not just a pipe dream from managing director Mark Cowsill's excellent breakdown of each operating region and clearly stated "strategic priorities."

It might be corn, but when he says, "We're on a mission to grow this company," it sounds as if he means it.

I would like to give special praise for the seven-year review in the Frucor report. Most other companies treat their public listing dates as "year zero" and offer little information about their murky past. Although listed for just two years, Frucor has shown its results as a private company back to 1995, adjusted to be as comparable with current results as possible. Superb.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz, Email: davidm@mcewen.co.nz

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