AAC 1.78% $1.11 australian agricultural company limited.

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  1. 184 Posts.
    AUSTRALIAN AGRICULTURAL COMPANY LIMITED

    CORPORATEFILE.COM.AU

    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



 
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