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Dairy Farms NZ encouraged to pursue IPO

Wednesday 11th September 2019

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Dairy Farms NZ is being encouraged to pursue an initial public offering as controls on land sales depress farm prices but also restrict the firm's ability to raise funds from foreign investors.

The company, which counts US billionaire Sam Zell as a cornerstone investor, was set up in 2014 as a direct investor in dairy farms and has seven properties with a peak milking herd of 6,187 cows. Dairy Farms NZ has always flagged an IPO as the eventual goal, and chair David Belcher noted in the company's annual report the board's frustration at the slower than expected progress.

The company's management team has reviewed more than 100 farms as potential acquisitions and identified groups in Waikato and Southland as fitting its portfolio, Belcher said. Dairy Farms had planned to raise capital in the first quarter of 2019, but that fell through when one of the parties involved in the proposed transaction effectively withdrew by making an unacceptable offer. 

In previous years, Dairy Farms NZ said it planned to raise $30-50 million prior to a public offering to fund the purchase of additional farms and repay debt. 

In his latest report, Belcher said tighter rules for overseas investment limits equity raisings to New Zealand investors only. However, he said the firm's lead advisor, Deutsche Craigs, gained more confidence that it's an attractive IPO candidate provided it can grow its asset base. 

"We are progressing multiple opportunities to work with vendors whose previous route to monetisation through a traditional sale is now also severely restricted," Belcher said. 

"The opportunity of participating in a stock exchange listing as part of DFNZ is increasingly compelling, as potentially the only route for them to exit or monetise part or all of their farm investments." 

He said the company should undertake its capital raising by issuing shares as partial consideration for farm assets, so farm vendors can crystallise their investment in an IPO. 

Dairy farm prices have dropped about 10 percent during the past two years with fewer sales since the Labour-led coalition introduced tighter restrictions for foreign investment in rural land. It is also planning greater environmental controls, including on freshwater quality, animal welfare and methane emissions. 

Real Estate Institute figures show the average sale price for dairy farms was $32,701 per hectare in the three months ended July 31, down from $36,332/ha in the same period in 2017. Twenty-five farms were sold in the latest period compared to 36 two years earlier. 

Dairy Farms NZ noted the impact of lower farm valuations in its 2019 annual report and recognised a net $638,000 loss on revaluations and asset sales compared to a $1.2 million profit a year earlier. It valued its land and buildings at $45,525 per hectare, down from $46,947/ha a year earlier. 

The company reported a loss of $131,000 in the 12 months ended May 31, compared to a profit of $2.5 million a year earlier. Operating revenue fell 4.7 percent to $7.7 million, which Dairy Farms said was due to the lower milk price paid by Fonterra Cooperative Group. The price the company received for its A2 milk supplied to Synlait Milk was also lower. 

As a result, the board decided against declaring a dividend for the year. 

Belcher said the company is more upbeat about the 2020 season. Production is set to exceed the 2.4 million kilograms of milk solids produced in the May year and the major banks are projecting a $7/kgMS milk price, he noted.

"This projection is currently being borne out by the most recent dairy trade auctions and should see the company in a position to resume paying fully imputed dividends for the current year," he said. 


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