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Meat processors go off

By Peter V O'Brien

Friday 16th May 2003

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Market reaction to the latest interim reports from listed meat processing companies suggested a low level of interest in the sector.

Affco Holdings announced on May 1 a profit of $10.8 million for the six months ended March 29, a major turnaround from the $14.7 million loss in the corresponding period of the previous year and a solid improvement on the $12.25 million deficit for the year ended September 30.

The comparative figures showed Affco had a profit in the second half of last year, but the latest figures showed a good gain, after the industry's earnings slowdown in the April-September period are taken into account, particularly the final three months.

Affco's share price was static after the announcement.

There was a similar muted response to Richmond's $14.2 million profit, despite the company lifting its performance from a $1.5 million loss in the first half of the previous year.

Richmond's share price was $3.14 on May 8, the day of the interim announcement, unchanged on the previous week.

The price rose substantially this year in the wake of the takeover offer from South Island company PPCS, so the lack of movement last week was understandable.

More telling was the comment from chairman Sam Robinson that "one notable outcome" of the PPCS bid was a significant change in the share register, with shareholder numbers falling from 2200 in September to a current figure of about 550.

It seems many Richmond shareholders took the money, after waiting patiently for the company to improve performance.

Affco and Richmond spent much time, money and effort restructuring operations over the past two years, initially for little result.

The industry is volatile, being subject to climatic conditions, stock procurement battles and historic overcapacity.

Companies in the latest reporting period had to deal with a rising New Zealand dollar, which affected all exporters but had an offset from power prices paid for stock.

Prices for North and South Islands lamb last week were roughly 6% lower than a year ago, while beef prices in both islands were well down on May, 2002.

Affco's operating revenue in the latest six months fell $50.7 million (10.2%) to $466.1 million.

The company said the drop was wholly attributable to the strengthening New Zealand dollar but there was an increase in sales' volumes.

Richmond's revenue was $663.4 million, a 2% decline from the previous corresponding period, reflecting the appreciating dollar.

Both companies referred to the benefits of restructuring.

Richmond's Mr Robinson said a major part of the change at his company was due to higher livestock flows but the overall improvement in operating performance was a significant factor in the profit.

He said the result vindicated the investments in upgrading value-added facilities, staff training, a strong focus on cost control and the elimination of "many of the negatives of last year."

Affco said it benefited from additional capital expenditure, significant cost reductions and changes in marketing strategy.

There were the usual warnings about the future, a normal aspect of meat companies' reports.

Richmond was concerned about the "general malaise" in the US economy, which affected the outlook for manufacturing beef.

The Sars virus was threatening prime beef supplies into the Asian hotel and restaurant market.

Chief executive Graeme Milne said US problems and Sars were threats to the business which were unable to be assessed accurately and fully at the time of the report.

Lack of response to the companies' reports was understandable. The days have gone when meat processing was a guide to general sharemarket health.

Investor attitudes changed over the years.

Arrogant directors and executives of companies in a protected industry have gone. Their successors are no longer held in awe.

Some people will remember when one needed a licence to run a meat processing company and how existing licence holders used financial and political clout to ensure there were no new licenses.

A useful tale has still to be written about the cosy relationships between the effectively monopolistic meat companies and their mates at the then UK-based Conference Lines shipping companies who, from personal experience of their activities, pressured ministers and the processor-dominated Meat Board to preserve the status quo.

That is history.

Meat processors these days operate in a free market. Producers can shop around for the best procurement deals and investors see little sense in staying with shareholdings for generations if there is low performance.

The listed meat processing sector is down to two companies but there is considerable competition from unlisted operators, including what could be called "boutique" companies.

Affco and Richmond have volatile records, partly, but not totally, as a result of their past decisions.

Investors need continuing profit increases before they will buy the companies' shares in confidence of solid capital and dividend gains.

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