The O'Brien Column: Sanford should bounce back after problems and profit fall

Friday 27th April 2001

Fishing company Sanford's interim report for the six months ended February 28 was an example of the problems companies face when they are substantial exporters of commodities, have a large amount of sales priced in US dollars and prices for their products fall while the currency is also weakening.

The report listed the main reasons for a profit fall from $19.7 million in the corresponding period of the previous year to $12.1 million.

Foreign exchange losses occurred because most sales in US dollars were hedged at currency rates of about 52USc well above the average daily rate of about 42USc for the period.

Sanford took a market position on orange roughy and did not sell into the market when other producers were prepared to accept lower prices.

There were lower catches and sales of hoki as the company accumulated stocks before certification of the hoki fishery by the Marine Stewardship Council.

Skipjack catches were about 4000 tonnes less than the previous year's record catches and there were very low market prices in the January/February period.

The company built up orange roughy and hoki inventory compared with the first half of the previous year and the 2000 year end which would be shipped in the second half.

Foreign exchange losses were $15.9 million and the after-tax effect of the losses for the first half was $10.36 million compared with $1.94 million in the first six months last year.

The willingness of some highly geared and speculative participants to sell orange roughy at lower price levels than necessary exaggerated price decreases for the species.

The orange roughly market recovered in March and regular sales and shipments are now being made.

The situation in skipjack tuna fishing had a two-fold effect on profitability. Catches were lower and the market fell to its lowest level for 10 years in January before "recovering dramatically" in February and March.

Revenue for skipjack tuna was more than $4 million less than the previous first half.

Sanford expected a better second half, based on existing conditions in major economies, current exchange rates and the current improved market for the company's main species of hoki, orange roughy and greenshell mussels.

The company's share price fell 45c in the week to last Friday, with 35c coming the day after the announcement. It stabilised on Friday at $6.05, compared with a 2001 high of $6.55 and its 2000/01 low of $4.15 reached last year.

Sanford is not alone in facing currency changes and their effect on hedging programmes, increased fuel prices (fundamentally and after the effect of exchange rate fluctuations) and lower world prices for commodities.

While the company has aquaculture farming for greenshell mussels, oysters and salmon, its general fishing operations are subject to less controllable factors.

The profit fall of 38.6% in the latest six months was obviously a setback for the group but, as the report effectively said, there is no reason it should not bounce back, assuming its forecast of industry conditions prove correct.

It has the financial strength to weather a profit downturn.

The balance sheet had no non-current liabilities, current borrowings of $33.24 million, total current liabilities of $60.11, million, shareholders' equity of $388.43 million and total assets with a book value of $448.52 million.

The ratio of shareholders' equity was 86.6%, a very high figure, as it has been for many years.

Sanford has been in business for a long time, being founded in 1880 and would be aware of all the problems the fishing industry and its participants are likely to face in the future.

Some of those problems are peculiar to fishing, some affect all dealers in commodities and others are common to all forms of business.

The latest report brought several together at the same time.

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