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PPCS bond yields leap in `scary' signal

By NZPA

Wednesday 2nd May 2007

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Bond yields for PPCS leapt 4 percentage points late last month around the time the Otago meat exporter reported another ugly half year result.

The rise in yields in the 2 year bonds to 15.5% from 11.5% prompted a "please explain" from the stock exchange.

PPCS chief executive Keith Cooper said he knew no reason for the rise. The bonds have since eased back to 14.5%.

In the three days before PPCS announced a $19.0 million pre-tax operating loss against a $7.3m loss a year earlier, there was a flurry of activity in the rarely traded bonds.

The rise in yield means any investor selling the 9% bonds on the secondary market would only get 91.6% of their money back.

Investment adviser Chris Lee of Project Resources told clients yield rise sent a scary signal to investors and he advised selling.

"PPCS, a meat industry leader, paid too much for Richmond, has too little equity, too much interest-bearing debt, and needs no headwinds. Perhaps a merger with Alliance might defer other issues."

PPCS traditionally has a poor first half when cashflow runs strongly negative. It has previously managed to turn things around in the second half.

Last year, it ended with an annual net profit at $31.4m, although that included a one-off gain of $19.4m from property sales. It may now be paying the price of the property sales with leasing and renting expenses doubled to $3.1m.

In the first half last year, it reported a pre-tax trading loss of $26.7m and breached its banking covenants.

Accounting analysts have been closely watching PPCS's receivables plus the rise of its unsold stock. Receivables -- what PPCS's customers owe -- rose to $192.3m at February 28 from $179.6m on February 28, 2006.

Inventory, however, fell to $361.2m from $373.3m a year earlier but up from $260m on August 30.

While cashflow in the period was negative to the tune of $82.3m, it was a $48.7m improvement on a year earlier.

Cooper said cashflow was affected by higher payments to suppliers and employees.

He said net borrowings had been reduced by $41m to $498m and shareholders equity had improved from 25% -- considered dangerously low by analysts -- to 30%.

Analysts will be watching for signs of an improvement in lamb prices. which have been hovering down at $3/kg as they were a year ago.

Last year they picked up to $4.25/kg by the end of the financial year, and given where the New Zealand dollar is, PPCS will be hoping for a similar revival.

Cooper said the New Zealand dollar was ahead of budgeted levels. Although trading had begun well in the second half, the currency remained a concern.

He said a highly competitive procurement environment saw prices for livestock reach unsustatinable levels in the early season.

PPCS announced a new procurement plan for 2007/8 to try and smooth out seasonal variations in prices.

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