Australian Agricultural Company Limited (AACo) recently forecast a $23.2 million net profit for the year ending June 2002, 10 percent higher than the prospectus forecast of $21.1 million but below a more recent projection of $28.1 million. The swing in profit forecasts is largely due to movements or anticipated movements in cattle prices. Can you outline the cattle price swings since the prospectus was issued?
CEO PETER HOLMES A COURT
The indices show that by December 2001, cattle prices had risen 30 percent from the start of the financial year, and have come back 15 to 20 percent since then. But, those swings are not entirely relevant to AACo. The reported indices are generic indicators and don't accurately reflect the price of higher quality cattle. The indices are more a benchmark for commodity product. Our product has much lower price volatility.
Our cattle prices are tracking at a net increase of 7 percent since the start of the financial year, versus the 3 percent we forecast in the prospectus.
It's important to note that mark-to-market accounting reflects the value of our cattle, which is also a product of weight and number. Price is only one variable.
CORPORATEFILE.COM.AU
What has driven the recent cattle price movements and what factors are likely to drive future cattle prices?
CEO PETER HOLMES A COURT
The price we receive for our cattle always reflects a combination of international factors and domestic demand and supply. Internationally, we've seen demand reduced as a result of the BSE outbreak in Japan, confusion around allocation of the US import quota, and the economic uncertainty after September 11. Domestically, the dry conditions in Queensland and New South Wales have resulted in a lot of low quality, light cattle being put onto the market, which has increased supply.
As we look forward, we see demand returning in Japan, we see US quota issues being resolved positively and we see the oversupply of light cattle coming to an end as farmers complete off-loading their excess. We therefore see supply tightening and demand increasing.
CORPORATEFILE.COM.AU
AACo's share price has weakened from the $1 issue price to a current level of 80 cents. EPS of 12.5 cents is derived from the forecast net profit of $23.2 million in June 2002 implying a PE ratio of about 6 times. How do you intend to restore shareholder value?
CEO PETER HOLMES A COURT
By demonstrating the efficiency and resilience of our core business, which is one of the best cattle-producing systems in the world. As well, our prudent move into value-added beef markets, at retail and wholesale level, will eventually be a major contributor.
CORPORATEFILE.COM.AU
Was the company over priced at the time of the IPO?
CEO PETER HOLMES A COURT
We went public at a prospective PE of 8.5 times, with a projected, fully franked dividend yield in the region of 6 percent and net assets at or around the IPO price. I'm very comfortable the IPO represented fair value.
We'd expect a higher share market rating as we deliver on our full-year forecasts and are able to demonstrate returns from our value-added initiatives.
CORPORATEFILE.COM.AU
Self-Generating and Regenerating Assets (SGARA) accounting standards require you to mark the value of your cattle herd to market at the end of each accounting period. Reported earnings don't necessarily reflect cash earnings. Do you consider the SGARA standard appropriate for your company?
CEO PETER HOLMES A COURT
No accounting standard matches reported profit with cash and therefore wise investors always look through P&Ls to a company's cash-generating capacity. I'm a broad supporter of mark to market and the rigour of reporting what the market value of an asset is, not some obscure accounting book value.
Therefore I'm comfortable reporting mark-to-market earnings and focussing investors' attention on the cash-generating abilities of the company. When we look at an investment, we look at it on a cash-generating basis and on the return on capital employed, which is how wed hope wise investors will look at us.
CORPORATEFILE.COM.AU
Given the SGARA impact on reported profits, what measures do you employ to assess the performance of AACo management?
CEO PETER HOLMES A COURT
Our KPIs are production driven, to ensure management makes and creates the greatest value out of the herd. The indicators tend to be very specific to each sector of the company. For managers in the breeding sector, indicators relate to increasing calving percentages and branding percentages, while for those in the feed lot sector, they'd relate to decreasing feed costs, increasing conversion rates and increasing weight gain.
CORPORATEFILE.COM.AU
What KPIs do you monitor to measure the company's performance?
CEO PETER HOLMES A COURT
Three issues. The first is cash, cash and cash. The second is return on capital employed and the third is progress toward our strategy goals.
In terms of cash, we forecast operating cash flow in the current year in the low $20 million range and we've reiterated we're on track for that.
On return on capital employed, we're in the region of 12 to 13 percent, but have targetted 15 percent, which is our hurdle for every incremental investment we look at. It should be said that our capital employed includes assets that we mark to market, as opposed to the historic cost used by many other companies.
Finally, on strategy progress, we've said we want to bring new skills into the group and capture more of the value add, and we've said we're going to do that carefully. To date, we've made two small moves in that area that are showing early signs of positive progress.
CORPORATEFILE.COM.AU
In the July 2001 prospectus, AACo forecast a fully franked dividend of 5.9 cents per share. To what extent is the dividend likely to be covered by cash earnings (as distinct from SGARA EPS) and what will be the priorities in allocating any surplus cash?
CEO PETER HOLMES A COURT
Our cash earnings are well in excess of the dividend. The priority for surplus cash is to expand the business, expand the herd under management and to create more value for our shareholders by capturing more of the value chain.
CORPORATEFILE.COM.AU
Nearly 35 percent of AACo's beef production goes to the Japanese market, which has been negatively affected by the recent BSE scare. Are there any signs of a recovery in demand from Japan?
CEO PETER HOLMES A COURT
There are very clear signs of a recovery in demand from Japan, which is now in the region of 70 percent of its pre-BSE levels. We believe the market is on track to reach 80 to 90 percent by the end of the calendar year. Our beef goes into the chilled, grain-fed sector of the Japanese market, towards the middle-to-top end of the market, but because of its quality it's also in demand in the domestic and American markets. This versatility means we can target, and aren't tied to the Japanese market.
CORPORATEFILE.COM.AU
Where are your international growth opportunities and what is your competitive position versus your peers in international markets?
CEO PETER HOLMES A COURT
The competitive advantages of Australian cattle production are significant and sustainable. There's the scale of our production, which is many times that in any other country. And the low capital cost of our land, which on a beast-area basis is a fraction of land cost in Europe and North America.
Cheers Cerberus
AAC Price at posting:
0.0¢ Sentiment: None Disclosure: Held