Rural boom over as declining export returns hit listed firms

By Peter V O'Brien

Friday 31st May 2002

Share prices of rural service and land-based companies went from top performers last year to also-rans over the past six months.

The table shows the situation last Friday and on November 24, the latter being the cutoff date for The National Business Review's last examination of the sector.

All the companies have lost ground since November (Allied Farmers was not listed until May 9 this year) but percentage gains from March 2001 to last week were: Cedenco +59.2, Dairy Brands +22.0, Pyne Gould Guinness +20.0, Williams & Kettle +38.8 and Wrightson +58.8.

They all outperformed the NZSE40 capital index over the 14-month period. The index went up only 5.35%.

Land-use companies, such as vegetable grower and processor Cedenco and corporate dairy farmer Dairy Brands, differ considerably from the three rural service groups. The common element of eventual reliance on land-based operations made it convenient to include the former with the latter.

Strong profit growth on the back of the rural boom justified the solid increases in share prices. Land-use companies benefited directly from higher returns from pastoral and horticultural activities.

Rural servicers got a share of the boom through handling a rise in the volume of produce and taking their percentage cuts (where applicable) from improved price levels.

That was the situation when rural service companies reported for the six months ended December.

Business was buoyant, all companies reported a rise in profit and earnings for the full year ended June 2002 were expected to be comfortably ahead of last year's.

Confirmation of half-year trends came in mid-April when Wrightson issued a brief report for the nine months ended March. It said group net profit for the period was $16.6 million, a 45% increase on the $11.7 million earned in the corresponding period of one year earlier.

The nine-months' performance also reflected a significant lift in earnings since the half-year result, which was $6.3 million.

It was not unusual for a rural service company to record a third-quarter profit proportionately well ahead of the first half but Wrightson's gain appeared disproportionate on an historical basis.

Chairman John Palmer
summarised rural service companies' earnings trends when he said the business was seasonal. Wrightson's earnings in the second half were traditionally about two-thirds of the full year. The company's result for the nine months supported that pattern and it was expected to continue to year-end.

Wrightson's third-quarter report was issued on April 18, when the share price had come back about 10% in five weeks.

Mr Palmer said the company had no explanation for the recent decline in its share price.

His comment would have been made in the usual context of the company not having any information unknown to the market.

There was general information available to anyone who followed economic and business trends and it affected rural service companies' share prices.

Equity investors are not, or should not be, setting share prices on the basis of the past. The future matters.

It was becoming clear by April that the rural boom was easing, with commodity prices off the highs recorded last year and a probable plateau in sight for the immediate future.

Confirmation of that view came last week from agriculture and forestry ministry assessments of primary produce export returns over the next few years.

Any export returns are a combination of three factors: volume of products, actual prices and the effect of the exchange rate on realisations in terms of New Zealand dollars.

Recent returns were good, because all three factors were in New Zealand's favour. The dollar was low, international commodity prices were buoyant and there was an increase in production volumes.

Ministry predictions suggest a decline in returns in the short-term. It seem unlikely that rural industries are heading for a sudden slump but any possibility of a downturn would be noted on the sharemarket where reactions are quick and usually in advance of company announcements.

Commodity price tables in The National Business Review show a fall in most export prices and overseas product prices over the past three months, with substantial drops for dairy produce.

The dollar reached a two-year high last week and money market pundits expect more short-term appreciation.

Land use and rural service companies will report excellent profits this year but equity investors discounted those results and adjusted share prices for next year's likely figures.

That does not mean there is a massive potential downside for the stocks.

It suggests short-term capital appreciation could be minor.

LAND-BASED COMPANIES' SHARE PRICES

Company	Price 24.5.02	Price 23.11.01	2002 high	2002 low	% change 23.11.01 to 24.5.02

Allied	$2.10	N/A	$2.50	$1.95	-4.5*
Cedenco	$2.42	$2.25	$2.87	$2.25	-7.5
Dairy Brands	61c	66c	69c	56c	-7.6
PGG	$1.20	$1.24	$1.35	$1.15	-3.2
Wrightson	$3.50	$3.83	$4.55	$3.50	-8.6
Williams & Kettle	$1.11	$1.15	$1.30	$1.03	-3.5
NZSE40	2107	2003	2144	2042	+5.2

* % change from listing on May 9, 2000, to May 24, 2002

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