Land-based companies enjoy healthy price movements

Friday 9th March 2001

By Peter V O'Brien

Recent share price movements for land-based companies disproved a comment made (NBR, December 1) when it was said "future increases might be at the margin unless something extraordinary happened in rural industries."

Nothing extraordinary happened, apart from the expected solid profit rises in the latest reporting period, but there were healthy price movements in the past three months as shown in the table. The comment about future increases being at the margin were made in the context that market anticipation of good profitability gains had pushed up prices over the (then) past 18 months.

Percentage movements from the end of 1999 to November 24 were: Cedenco (+40) Dairy Brands (+55.5), Grocorp (32.5), Reid Farmers (+41.2) Tasman Agriculture (+61.2), Williams & Kettle (+28.5) and Wrightson (+27.9).

Interim reports released in recent weeks confirmed the accepted view that the companies' operations were generally going well. They justified the current share prices.

Apart from Wrightson's recovery from being almost a corporate basket case in terms of its share price two years ago, the Reid Farmers share price change was one of the more notable efforts.

It broke through $1 for the first time in at least six years and probably longer if one went back further.

Reid Farmers' profit for the six months ended December 31 was $2.66 million, a jump of 62% on the $1.64 million recorded in the corresponding period of the previous year.

The "rural services and related activities" segment had a pre-tax surplus of $2.28 million, compared with $1.222 million in the first half of last year and $3.83 million in the year ended June 30.

A commentary on the result said the company had budgeted for a 30% profit improvement in the half-year, so the 62% gain (including the financial services division) showed the solid strength of the rural economy.

Profit gains were spread over the other land-based companies.

Grocorp reported a loss of $1.31 million, but the operating profit before a writedown of orchard and packhouse and a gain on sale of share in apple marketer Enza was $680,000.

Wrightson said its earnings before interest and tax were up 54% at $4.3 million.

The reported net profit was $962,000, compared with $1.47 million in the first half of 2000, because the company was unable to recognise tax benefits on Australian losses.

That technical point meant the group had a tax provision of $3.38 million on a pre-tax profit of $3.97 million.

A return to profitability in Australian operations was expected to result in recovery of the tax benefits in the future.

Wrightson's New Zealand businesses produced a profit of $6.4 million after tax, a 137% increase on the $2.7 million on the previous corresponding period.

Losses of flat earnings from Australian activities were a feature of the latest reporting round across all industries.

Wrightson repeated the optimism expressed last year, saying there was a positive outlook for the rural sector over the next three years and said the Ministry of Agriculture and other agencies shared its view.

The assessment was based on productivity expectations remaining high, continuing good commodity prices and "export-friendly" exchange rates, the last allowing for some appreciation in the rate against the US dollar.

In those circumstances it would be rash to repeat the comment about share price improvements likely to be "at the margin."

Further support for the revision of last December's view came from Cedenco chairman Basil Logan's speech to his company's annual meeting on February 27.

Mr Logan said an earlier forecast of a $4.7 million pre-tax profit for 2001 would be "comfortably exceeded" assuming the balance of the food ingredient manufacturer's crops in New Zealand and Australia were successfully harvested.

Earnings after tax of 22c a share gave a forecast price/earnings multiple of seven at the then share price of $1.55.

Mr Logan said that multiple was "very modest," and he had a good point, even after allowing for the market inclination to apply a discount to companies associated with rural and/or land-based operations.

The broadly defined "land-based" sector's share prices have outperformed the NZSE40 capital index since the end of 1999 and are substantially above the lows of the past 14 months.

Future price growth depends on commensurate earnings gains in any given period. That simplistic truism is designed to avoid another sticking-the-neck-out situation.

Land-based companies' share prices (c)
Company	Price 2.3.01	Price 24.11.00	2000/01 High	2000/01 Low	% change 24.11.00 2.3.01

Cedenco	152	133	156	79	+14.3
Dairy Brands	50	42	54	22	+19.0
Grocorp	14	13.5	24	10	+3.7
Reid Farmers	100	89	102	60	+12.3
Tasman Agriculture	150	129	154	71	+16.3
Williams & Kettle	308	265	310	196	+16.2
Wrightson	70	55	78	35	+27.3
NZSE 40 capital index (rounded)	2000	1965	2174	1875	+1.8

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