Affco and Richmond show meat industry in less than prime shape

Friday 25th May 2001

By Peter V O'Brien

The meat-processing industry has a history of showing the application of the two steps forward, one step back principle.

It might be better to refer to one step forward, two steps back in relation to some of its events, including last week's interim report from Affco for the six months ended March 31.

Affco's net profit fell from $7.4 million for the corresponding period of the previous year to $752,000 and the latter amount would have been negative without equity-accounted earnings from associate companies trading in various parts of the world.

The comments accompanying the report were as intriguing as the figures.

Affco's statements to the Stock Exchange in recent times concentrated on wide-ranging restructuring activities and explained them in detail.

The latest effort was brief, taking up about one page of typescript. Executive chairman Sam Lewis said it was "disappointing to report a disruptive interim period for the company" and, with it, a result significantly below expectations.

Mr Lewis said the half-year surplus represented a slowing in the pace of the company's recovery toward acceptable returns for its shareholders.

The rest of Mr Lewis' comments were covered in five relatively short paragraphs, which said nothing about what had happened.

He said the result had proved a "timely catalyst to review and reappraise some of the company's activities in the light of shareholder calls for more tangible returns from the restructuring programme in place."

Some of those calls were made at the annual meeting on February 21. The meeting was held six days before it was announced that then chief executive Ross Townshend was to resign.

Other executives followed Mr Townshend.

Affco reported a $15.15 million profit for the year ended September 30 but the amount included $4.47 million of unusual items related to asset impairment reversals and restructuring costs.

Even the $15.15 million could be considered unsatisfactory for a company which had shareholders' equity of $113.91 million in September, including outside equity interests and total assets with a book value of $256.77 million.

Shareholders' equity and total assets increased respectively to $115.09 million and $380.98 million at March 31.

That latter figure included a substantial rise in borrowings which occurs in the first half of each year, in line with an equally substantial increase in inventories, a common situation in the seasonal meat processing industry.

Mr Lewis comments about the company's review of its operations were also intriguing, because, on a reading-between-the-lines basis they seemed to indicate some fishhooks: "Mr Lewis said all new business proposals have been stringently reviewed, along with established projects with domestic and international emphasis. This review has resulted in the joint venture at the WuLiangYE Affco Golden Ox plant in Chengdu, China suspending operations until livestock procurement issues have been resolved."

"All of the company's other international initiatives will remain under close scrutiny to ensure they consistently meet performance targets," he added.

While a company usually keeps all activities under "close scrutiny" to ensure they consistently meet performance targets, the wording in Affco's case could be interpreted negatively, in the absence of any explanatory comment.

Affco's international activities have been described as "internationalisation," which meant sourcing of overseas product to meet customers' 12-month demand.

Dismal cashflow from operations, as opposed to investing and financing activities, also add to Affco's problems.

Negative operating cash flow can be expected from a meat processing company in the first half of its year - the same situation occurs in the other listed processor, Richmond, but Affco's cash flow from operation in the year ended September was only $1.88 million, of which interest received and dividends received accounted for $1.22 million.

The sharemarket responded to the bad news in its usual manner, cutting the share price to 31c at the end of last week, compared with a 2001 high of 46c and a low of 29c.

Richmond produced a buoyant comment with its interim report, issued on May 9.

The company was "delighted" to report a record net profit of $13.32 million for the six months ended March 31, which was $8.5 million ahead of the corresponding period last year and $1.7 million up on the result for the full year ended September 2000.

Maybe, but the result included a non-recurring $1.5 million contribution arising from Richmond's shareholding in New Zealand Lamb Co (North America) and the reversal of a $1.6 million litigation provision rebated to disputed assessments from Inland Revenue.

The $1.46 million arose from sales of shares in the lamb company and was treated as an unusual item, while the tax reversal was taken from tax provision in the interim accounts.

Profit before unusual items and tax was $11.49 million, down 15.2% on the corresponding period of the previous year, although the company said it "well on track" to deliver the net profit of $19.4 million forecast in the recent prospectus for the issue of $50 million of capital notes.

Richmond's shares were the target last week of an on-market offer from South Island processor PPCS after the latter bought shares off-market. The move followed last year's debacle when PPCS was forced to sell a 36% stake in Richmond.

It may be that little is as it seems in the meat-processing industry.

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