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Cedenco wrestles with uncertainty

By David McEwen

Friday 14th March 2003

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Cedenco Foods kicked into life in Gisborne in 1985 when Dean and Cedric Witters acquired a large and expensive tomato paste plant. The product range was expanded to include, among other things, sweetcorn powder and an even larger and more expensive plant was brought in to handle it.

In October 1993, Cedenco was listed on the market following an issue of shares at $2.30. But in what is a testimony to how difficult this industry is, 10 years later the shares are still trading below the issue price.

However, there have been tremendous advances within the company, culminating in a dramatic restructuring in 1996. This involved transferring all tomato growing and processing activities to the premier tomato growing region of Australia; establishing a joint venture with a major customer, Cerebos Australia; and reaching a four-year supply agreement with Cerebos and Simplot.

In 2002, Cedenco sold its 50% stake in the Australian Joint Venture to SK Foods, a leading Californian processor of bulk food ingredients and now Cedenco's controlling shareholder. An agreement with Heinz in 1999 saw it expand its manufacturing plant considerably. Its marketing efforts, combined with research into Japanese and other markets, and custom-made products have won Cedenco plaudits and marketing awards.

Through all these moves Cedenco was able to reduce the seasonal nature of its business and get closer to major customers. Cedenco's performance improved dramatically after 2000 and so did the share price, which had been sliding for years.

But in the year to end September, the company reported a 4% drop in profit after tax to $4.05 million. Operating revenues increased 11% to $30 million, compared with $27 million previously. But equity earnings from Cedenco Australia were below expectation.

There were also costs associated with the change in ownership of the Australian joint venture and with the departure of founder and CEO Dean Witters.

The year was also marked by significant investments in plant and equipment to provide additional capacity and increased efficiency, with new facilities available for the current season's production.

Cedenco managing director Richard Lawrence warns the current year could be a lot tougher than the last. The company is again encountering some of the seasonal and currency risks that had dogged it in the past.

"Without question challenges ahead for Cedenco will be the continual strengthening of the New Zealand dollar to the US dollar ... and our reliance on the climate ... " No matter how good its managers, there are some risks Cedenco will never totally overcome.

Meanwhile, the gloomy predictions for the current year have reversed one of the strongest market recoveries seen in a long while. Cedenco hit the low point at 50c in September 1998, rose sharply to over $2.70 within little over three years, and has now slid back to $1.59.

As shares go, Cedenco has never attracted a premium rating, as evidenced in a price-to-earnings ratio that seldom gets above seven. By contrast, the average New Zealand share trades at 16 times its underlying earnings.

Perhaps New Zealand's rain, Australia's drought and the exchange rates are more than most investors are prepared to cope with.

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


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