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Rural firms iron out the profit hills

By Peter V O'Brien

Friday 28th November 2003

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Rural service companies have outperformed the two main sharemarket indices since May after indifferent price movements in the preceding six months.

The table includes gross dividend yields for the four listed companies, because those figures are one clue to the price movements.

When last surveyed in May, price changes since the previous November were minor in relation to those for several other companies but reflected investor decisions on the effects of drought in some areas and then declining commodity prices.

Commodity export prices have improved since May and overseas product prices are generally up, subject to currency complication when converting back to New Zealand dollars.

The companies have reported for the year ended June 30 (Allied Farmers, Pyne Gould Guinness and Wrightson) and July 31 (Williams & Kettle), and the first three held annual meetings.

Williams & Kettle's annual meeting was yesterday, falling outside the National Business Review timeframe.

The financial results are well known. Static profit, or declines, had to be compared with the particularly buoyant 2001-02 year.

Comments at the annual meetings were more relevant to prospects for the current year.

There seemed to be "cautious optimism" about this year. Pyne Gould Guinness chairman Bill Baylis said his company's results for the three months ended September were encouraging and ahead of last year.

Allied Farmers chairman Brian Train told his shareholders that profitability for the first half would be behind the same period of last year.

Setup costs related to reorganisation of the recently acquired Wanganui timber miller Allied Pine would be the main factor in the decrease.

Allied Pine was formerly NDG Pine (in receivership), which had operated as a timber exporter.

Mr Train said trading results for Allied's core business were expected to be "in line with budget," the interpretation of which depends on where the company set the budget.

Figures for the first three months of a rural services company's year are only a rough guide to the full result.

Wrightson chairman John Palmer noted the point at the company's meeting when he said the business was seasonal. Wrightson traditionally earned the majority of its first half-profit in the October-December period.

It was difficult to predict whether that would be the pattern this year, given the difficult spring weather experienced over much of the country.

Wrightson's earnings before interest and tax were then about 10% last year and are forecast to be down 20% in the six months ended December 31. The main problem has been the dollar's rise.

Rural services groups are accustomed to the ups and downs of their cyclical, agriculture-based industry, although now putting more emphasis on ironing out the hills and valleys.

Among other matters, they have a deep awareness of operating cashflows aligned to strong balance sheets.

Every preliminary announcement and formal annual report referred to operating cashflow and the matter was mentioned again at annual meetings.

The companies are conscious of the need to move even further away from being mere commission agents and to increase the provision of more sophisticated services.

Wrightson tackled the issue with development of its "Solutions" business, although other companies are aware of, and moved toward, similar approaches.

The Solutions approach at Wrightson has been distinguished in the company's comments from "stock and station agency" but seems, at least to an outsider, to have its roots in the old-style agency's provision of advice and assistance to clients, albeit with new, holistic ways of adding value to agriculture.

Wrightson managing director Alan Freeth said the company had strengthened its capability to "develop new Solutions for boosting on-farm profitability."

It had also seen "strong growth in the demand for the industry Solutions that benefit both farmers and processors."

Investors did well over the past six months, but there is a longstanding fickleness attached to trading in rural service companies' shares.

A comment made in the May NBR discussion is worth repeating: It is whistling in the wind to tell investors they should stay for the long term, given the apparent desire for instant capital gain.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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