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How high can the Wrightson rocket fly?

By Shoeshine

Friday 29th August 2003

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If Wrightson has finally run out of steam, the market doesn't seem to have noticed.

Following a three-year hike in earnings that saw the company shoot from a $9.3 million loss in 1999 to a $21.2 million profit in 2002, the Porirua-based rural services company last week booked a 13% profit fall to $18.5 million.

The share price hasn't faltered, hanging on to its 40% gain for the year.

Investors are presumably interpreting Wrightson's predictions for the coming year as a "steady as she goes" message, with an upside from its strategic initiatives, tight cost control and its interminable restructuring.

It cited lower livestock values, reduced rural spending and, inevitably, the weather as reasons for the profit decline from 2002's exceptional year and picked similar conditions this year.

Product prices and farm incomes might fall further, it reckoned, but would still be well above 1990s levels.

As the company's profit drop was caused by the very influences it is working hard to escape ­ exposure to commodity price cycles through its traditional livestock trading and rural supplies businesses ­ shareholders would be churlish to question its direction.

Chairman John Palmer talked of a "quiet reshaping of the business from an old-style stock and station agency into a modern agribusiness."

Not all of the strategy is easy to understand.

A central plank, for instance, is the development of the Solutions business. This as high-tech as it sounds. The idea is to use a combination of information technology, proprietary products and intellectual property to help clients boost productivity and profits.

Packages already deployed are on-farm solutions with inspiring names such as Whole Crop Silage, Elite Grazing and Integrated Farm Solution and industry solutions such as Integrated Fibre Management and Integrated Livestock Management.

Wrightson isn't saying how much revenue these produced, how fast that income is growing or what sort of margins it's getting, so it's hard to judge how much the new businesses can insulate the company from commodity price swings in the future.

It remains to be seen whether they are truly independent of the rural feelgood factor or whether farmers experiencing a downturn will simply stop spending on these sorts of things as well as Toyotas and tractors.

Nor is Wrightson specific about the re-entry into finance beyond saying it has been "successful." Why this division was sold off in 1999 remains a mystery.

The seeds business looks like a winner, with good margins and high scaleability into international markets. But again, it's hard for investors to judge how big a business this could become because Wrightson doesn't break out its revenue or profit contribution.

Joining the rural supplies and livestock businesses on this year's list of losers was the logistics management project, which fell behind schedule because, surprise, the challenges and complexities had been underestimated.

Wrightson said the project was now back on track and would be used to drive improved performance from rural supplies over the coming year.

As ever with Wrightson, there were several interesting side-shows.

While the big companies get all the press, New Zealand's rural economy has long been the scene of battles whose ferocity makes anything GPG gets up to look like the vicar's tea party.

One of this year's interesting stoushes is Wrightson's courtroom clash with Williams & Kettle and Elders.

The two claim Wrightson has breached a 1993 Commerce Commission ruling requiring it to give access to the 16 North Island stock saleyards in which it holds the dominant shareholding.

If Wrightson wins it will be in a position to charge higher access fees and it might be able to squeeze some competitors out of the yards altogether.

Then there are the manoeuvrings in biotechnology and specifically seed research.

Wrightson, which has its own profitable seed business, has had a long association with Genesis Research & Development. It hasn't really explained how this is enhanced by its acquisition earlier this year of 15.4% of Genesis' shares other than saying it "strengthens [our] ability to secure value from new biotechnologies."

But not this year. It equity-accounted $700,000 of Genesis' loss.

Linked, somehow, to this is Fonterra's 19.9% Wrightson stake.

This is held in Fonterra Enterprises, a ragtag bag of assets including biotechnology. Fonterra last year insisted the Wrightson stake, which is $11 million in the money, wasn't under review but new broom Andrew Ferrier may decide differently as it's small beer to Fonterra and hardly fits into the new focus on dairy products.

The company also has an interesting approach to executive remuneration. It last year junked the EVA (economic value added) option plan despite the $7 million EVA gain, replacing it with a "senior executives securities plan" using "a recognised valuation methodology."

Shareholders will have to wait for the annual report to see the effect on managing director Allan Freeth's pay packet, which came to $532,000 last year. The real point is that Freeth has turned a value-destroyer into a value-creator.

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


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