Sanford fishes in perilous fiscal seas

Friday 22nd March 2002

Once upon a time, fishermen ventured out to sea not knowing where their quarry might be. Fishing was a simple matter of dipping the nets and pulling them in again, hoping that providence would deliver a bumper haul of fish and not a pile of seaweed.

Technology has taken the guesswork out of the process but making a living in the fishing business is still hard work.

Sanford is better at it than most and has remained profitable for many years despite sometimes difficult conditions.

Last year was more trying than many for the company and its typically no-nonsense and useful annual report contains a formidable list of frustrations. These include a declining world economy, a global glut of salmon, slow mussel growth rates, higher fuel prices, scarce fish resources, quota cutbacks and adverse currency movements.

Rather than having something so upbeat as a "highlights" page, the report opens with a "financial summary" that shows net profit down nearly half to $30.2 million from $54.6 million.

That's the bald bottom line. Sanford tries to soften the blow by also showing its gross earnings.

Most companies that want to put the best possible interpretation on their figures use ebitda (earnings before interest, tax, depreciation and amortisation). This is popular because it shows figures before certain normal costs of doing business that are accused of distorting underlying earnings.

Sanford goes further than citing ebitda. It uses the unwieldy description "earnings before interest, taxation, depreciation, foreign currency exchange losses and profit on disposal of fixed and long-term assets." As an acronym, this phrase comes out as "ebitdfcelpdflta" which appears unlikely to catch on in the corporate world.

However, by ignoring these many items, the company is able to show its gross earnings fell just over 3% to $84.6 million.

By far the biggest blow to the bottom line was net currency losses that saw the company's profit hit to the tune of $27.7 million compared with $5.1 million the previous year. Chairman William Goodfellow and managing director Eric Barratt offer little in the way of explanation other than to say they were "challenged" by the management of Sanford's currency exchange needs.

The company has a long-standing policy of hedging only part of its exposure. To be fair, if it did fully lock in its currency exchange rates, the day would surely come when it would miss out on tens of millions in dollars in profits and attract as much vitriol as was flung at it when it reported last year's currency losses.

The two graphs it uses on the financial summary page show dividend payments and total equity over the past five years, both of which show encouraging upward trends.

Apart from making the company look good, however, they aren't the most useful graphs that could be shown. After all, it is not how much equity a company has but what it does with it.

As it happens, the five-year review further back in the report shows Sanford's return on average shareholder funds last year was 7.7%, half that of the previous year, which was a strong result. However, it is also well down on the 10.4% it recorded in 1998, when net profit was $5 million lower than last year.

Despite a much lower net profit than 2000, the company has chosen to maintain its dividend payout for the year at 20c per share. Such a move might be acceptable if the poor result was just an aberration and the company was confident of a rebound next year.

However, this does not appear to be the case for Sanford. As Mr Barratt puts it in his review, "In the current climate of world instability it is difficult to forecast profitability for the next year."

Fortunately, the company is not under financial pressure to meet its dividend payments. As a result of maintaining its dividend, the company's payout ratio has jumped from 48% in 1998 to 63%.

Less fortunately, that level of comfort won't be there if this year's profit is down again.

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

Comments from our readers

No comments yet