nz farming systems Uruguay

[Snoopy]

But my question is, what happens if a significant capital raising is completed?


This week a very important vote takes place. And I am not talking about the general election on Saturday! On Thursday 24th November at 3pm, the future investor direction of New Zealand Farming Systems Uruguay (NZS) will be decided at the NZS AGM. The vote is on the adoption of an extended loan package from majority shareholder Olam, and the associated downsteam consequences of that. Olam itself is not allowed to vote. So it will be up to we small shareholders to decide. Providing an evaluation of the proposal is an independent report issued by Grant Samuel (the GSR) dated October 2011. The revised funding package will allow the completion of infrastructure to support a total of 49 dairy sheds, up from 32 already operating at the end of June 2011, and 37 completed by October 2011.

SNOOPY

[Snoopy]

In the recent past Olam have adopted a somewhat combative attitude to the remaining 571 small shareholders. On November 9th 2011 there were newspaper reports of NZS small shareholders holding the company to ransom and possibly forcing their company into liquidation. As a small shareholder I resented that editorial tone. I didn’t even see potential liquidation of the current company structure of NZS as a great threat. NZS is EBIT positive already. With the company’s share price below net asset backing, an orderly sale of farm assets could be positive for small shareholders in the medium term. Nevertheless I believe that the investors left in NZS want to see this farm development project through to completion. My sincere hope is that Olam will now start to work co-operatively with the remaining small shareholders. Perhaps the acceptance of a director nomination from the small shareholder ginger group, the second largest shareholder by partnership and dairy farm owner Rob Poole, is an indicator of an olive branch being extended in this direction?

SNOOPY

[Snoopy]

Some on this forum keep posing the question, when will NZS ever be profitable? The answer depends ultimately on how much new capital shareholders are prepared to put into it.

The FY2012 projection is for an EBIT of $US8.541m. There will be no tax payable as NZS have reputably eight years worth of tax credits in the bank with the Uruguayan tax authorities. This consists of $US42m in tax credits and $US42m of additional ‘Project of National Importance’ tax credits (GSR p16). With no tax to pay for many years, whether there will be a real profit or not depends very largely on the company’s interest bill. That interest bill into the future in turn depends on how much capital the company raises over the next twelve months to pay down debt.

For illustrative purposes, I think it makes sense to look at three capital raising options (to be continued).

SNOOPY

[Snoopy]

If no additional capital is raised (lets call this capital raising option 1), the debt profile of the company is forecast to look something like this as at 30th June 2012 (GSR p9):

$US110.0m in 8.9% bonds payable to Olam (+$US40m over EOFY2011)
$US25.7m in 9-11% NZS Uruguayan bonds
$US20.0m in a 7.25% Banco Republica loan (+$US15m over EOFY2011)
$US7.0m in a bank syndicated loan. (-$US1m over EOFY2011)
$US1.5m to HSBC.

A total of $US164.2m in loans at an indicative interest rate of 8.9% means an interest charge of $14.61m and underlying profitability for FY2012 of:

$US8.541m-$US14.614m= a $US6.073m loss.

This is not a sustainable position for the company, in my opinion. The best way to reduce this loss would be to curtail spending on developing the farms, thus slowing up the improved cashflow resulting from farm development. I conclude that Option 1, inject no new capital, is not optimal.

SNOOPY

[Snoopy]

The highest cost of NZS company funding looks to be the NZS Uruguayan bonds set up under the previous management regime. However these cannot be fully redeemed until 2024. So the best medium term way to reduce the interest component of expenditure of NZS is to reduce the loan to Olam.

The projected net interest paid for FY2012 will be $US6.842m (GSR p18). With an end of year loan balance of $US164m, that gives an indicative gross interest rate of 4.2%. Even allowing for the fact that not all of these loans will be demanding interest for all of the year, this doesn’t add up. Declared interest loan rates that NZS is paying indicate something nearer to a $14.6m interest bill. Reading the last line of GSR p18 solves this incongruity:

“The cash flow statement has been prepared on the assumption that interest on the Olam loan will not be paid until the loan is repaid.”

So NZS is harbouring a hidden and compounding debt to Olam! Be careful about reading those cashflow statements superficially.

Olam’s preferred capital raising proposal was for $US120m. That would probably have wiped out Olam’s loan and any accrued interest. With the Olam loan repaid, NZS would have ongoing debt of $US54.2m as previously detailed. At an estimated overall interest rate of 8.9%, this means an interest bill of $US4.824m per year. So using our projected EBIT figure of for FY2012, we can work out an underlying FY2012 net profit of:

$US8.541m-$US4.824m= $US3.717m.

Assuming 172m new shares were issues at NZ70c (172m/0.75 x 0.70= $US), based on $NZ1=US75c this would produces earnings per shares on the enlarged share capital of:

$US3.717m/(244m+230m) = US0.8cps.

With net cashflow from operations forecast to improve to $US26m by FY2014, we could by then be looking at a much higher indicative distributable profit of.

$US26-$US4.824m= $US21.18m. $21.18m/(244m+230m)= US4.5cps

This capital raising proposal was rejected by most minority shareholders, partly because some shareholders felt that while some injection of capital was required, $US120m was more than necessary- i.e. the proposal was capital inefficient. The second reason for this proposal rejection was that the capital raising was structured so that minority shareholders were unable to trade their capital raising rights while Olam unilaterally put themselves forward as sole underwriter. Thus it was felt that Olam had specifically designed the capital raising to fail so that they could jump to the 90% compulsory acquisition threshold and delist NZS. In so doing small shareholders would be forced out.

SNOOPY

[Snoopy]

A third capital raising proposal has been floated in the GSR (p8). Here the GSR proposes a capital raising as small as $US80m, accompanied by a $40m shareholder interest earning bond. Such a bond would probably be at similar interest rates to the current Olam loan, because of similar risk. So 8.9% on $US40m equates to an incremental interest bill, post the Olam loan being repaid, of:

0.089x$US40m= $US3.560m

An extra 115m/0.75 shares issued at 70c would raise $US80m of new capital

So we can now calculate the projected net earnings for FY2012 under this third proposal:

($US8.541m-$US4.824m-$US3.560)= $US0.157m.
$US0.157m/(244+153)= US0.04cps

As farm cashflow improves, by 2014 we could be looking at a profit as high as:

($US26-$US4.824m-$US3.560m)= $US17.62m.
$17.62m/(244+153)= US4.4cps

Under this third proposal, income per share is lower than option 2, but shareholders would also have interest income from the co-proposed shareholder bond. With 244m NZS shares around pre issue, shareholders might expect $US40m worth of bonds to be issued at a rate of US16.39cents per share that exists now. This bond money would provide ongoing shareholders/bondholders with bond income of US1.46 cents per bond unit (of US16.39c) per year. Note that US16.39c for each of the 244m NZS shares that now exist will raise the bond’s required $US40m.

Furthermore if any shareholders did not have enough cash to fund this bond, because the bond has an income stream, they could even use borrowed money to do it. It is even possible that Olam or other third parties might agree to fund the bond, independent of existing small shareholders. Although the overall money raised would be the same as option 2, the lower amount of equity raised in this Option 3 would increase the chance of small shareholders being able to fully take up their rights and so allow NZS to remain listed.

SNOOPY

[Snoopy]

Option 2 FY2014 result is US4.5cps based on 474m shares being issued (new shares at 70c). Option 3 FY2014 result is US4.4cps based on 397m shares being issued (new shares at 70c).

Those eps results are surprisingly similar, and this is where the ‘capital efficiency’ argument comes in. If too much capital is issued, the overall earnings per share may not improve as much as the earnings in dollars. Ultimately as investors it is earnings per share that counts, not overall earnings in dollars.

Olam’s Option 2 is based on the premise that the more capital that is invested, the greater the profits and so the more tax losses they can access. Tax that doesn’t need to be paid is retained earnings in the pocket of the shareholder. Another plus point for Olam’s Option 2 is that because significant profitability comes sooner (in FY2012), there is more of a buffer of money should climatic conditions or a plunge in milk prices significantly affect NZS income over the next two years. However good a farmer you are, and second hand reports I have heard about MD David Beca indicate he knows what he is doing, a good clout by the climate will have an effect. Being marginally capitalized in farming is risky.

On the other hand, this same risk pendulum could swing the other way. It is conceivable that milk prices and volume could improve so much that less than $80m of new capital is needed.

Even as it currently stands, the interest on all borrowings for FY2012 will only apply for nearer to six than twelve months of the year. That means the FY2012 result for Option 1 is actually liable to be much closer to breakeven than the $US6.073m loss I am projecting. However, IMO businesses should not sail as close to the wind as this, and most banking syndicates would agree.

SNOOPY

[Snoopy]

I am prepared to take the business risk on ‘Option 3’ over FY2012 and FY2013. I don’t want to be forced out of the company, which more or less eliminates ‘Option 2’. I want the farm development to continue. So I will be voting to allow the Olam loan expansion to $110m. It goes almost without saying that this will only assist the company for about six months. I will expect that within the next six months, Olam will put an ‘Option 3’ up for the consideration of the shareholders.

Nevertheless this capital-raising question is not as clear cut as I paint it. If anyone thinks my calculation assumptions need re-examining I am prepared to do it. And if any shareholder has a somewhat different view on the future NZS capital raising and can explain why then I would be interested!

SNOOPY

[Well Fed]

Snoopy, your Capital raising / debt funding calculations are very in tune with logic.
Perhaps the ebit figures in the GS report may be modified upwards at the AGM and that may lead to a change in thinking with the preferred debt to equity ratio in option 3. Perhaps even bringing option 1 back into play.
I could be wrong but it appears GS has not accounted for the natural increase of around 11,000 dairy animals at $950 each. (page 15)

[Snoopy]

Perhaps the EBIT figures in the GS report may be modified upwards at the AGM and that may lead to a change in thinking with the preferred debt to equity ratio in option 3. Perhaps even bringing option 1 back into play.


The Fonterra milk solid price payout price of $NZ7.05/kg for FY2011/12 was recently cut to $NZ6.62 without much movement in the underlying spot market price. I have heard the theory that former Fonterra CEO Andrew Ferrier put the most optimistic spin on milk prices just prior to leaving, to make him look as good as possible. Then new CEO Theo Spierings revised the outlook to something a little pessimistic so that he in turn can look good later in the year announcing a milk price upgrade! Perhaps the true price of Fonterra milk will be half way between the two CEO’s forecasts? That makes it $NZ6.84.

In Uruguay the milk pricing is done per litre. There isn’t a straight conversion to milk solid weight pricing because the amount of milk solids per litre can vary depending on herd quality. But if we go back to the original December 2006 NZS Prospectus (p25), $NZ4.00/kg was equivalent to US18c/litre. Currency appreciation has turned that today to around $NZ3.50/kg. That means US37c/share (the budgeted milk price from Conaprole for FY2012) is roughly equivalent to $NZ7.20/kg of milk solids in New Zealand. Can the payout for FY2012 in Uruguay realistically be higher than that? Or are we looking to some step increase in literage from each cow?

SNOOPY

[Snoopy]

I could be wrong but it appears GS has not accounted for the natural increase of around 11,000 dairy animals at $950 each. (page 15)


That is the NZS Financial Performance Table you are referring to “Well Fed”, GSR p15. I too saw the change in fair value of livestock had been left out for the FY2012 forecast.

My initial reaction was “that makes sense”. We are assuming the milk price is ‘about the same’ as last year. So it makes sense to assume that the value of livestock will not change much either. Even so, the reality is there will be an adjustment in herd value, because of changes to the supply demand balance that we cannot accurately predict right now. I believe trying to guess what that will be might be trying to be a little too clever, and the figure is possibly insignificant anyway.

However on reflection, even if the values of individual cows are ‘about the same’ year to year, the increase in the number of cows is certainly a real gain. Why is no natural increase in herd number reflected in the Financial Performance forecast for FY2012? Perhaps a question to ask at the AGM for someone (sadly I won’t be there)? At least a projected overall increase in livestock value (from $57.575m to $70.167m, including category changes, herd improvement and fair value adjustments in addition to the net births and deaths) is shown on the projected balance sheet (GSR p17).

GSR p16 shows a dairy herd of 36,932 cows are expected at the end of FY2012. Yet at the end of FY2011, under note 18 in the FY2011 NZS Annual Report, we learn there were 58,502 dairy cattle. So why is the dairy herd dropping in number by over 20,000 this coming year? That makes no sense to me. Have I got this wrong, or is this another GSR mistake? Not sure where you got your 11,000 extra animal increase from Well Fed!

Due to my above outlined ‘herd number confusion’, I am not sure how to calculate the natural herd valuation increase due to the increase in the number of dairy cows only. However, even if I could do it, I am not sure that it helps to find the cash (be it new capital or loan) needed to finish the farm development in Uruguay. We need those extra cows to deliver milk don’t we? If we do sell dairy cows to raise some cash, then the milk they supply is sold with them!

SNOOPY

[duncan macgregor]

SNOOPY, What you only need to work out is that a dairy farm shows a profit on capital of no more than four PC, plus a capital gain at the end. Ask any dairy farmer in any country in this world about that. The next thing you might like to work out is corporate greed at the top lining their own pockets with your investment dollar. You have got this wrong thus far losing half your investment dollar at this point, simply because you invest in something you know nothing about. Do your self a favour, talk to a few farmers before rushing in wide eyed swallowing all the guff about we know best. Macdunk

[Snoopy]

GSR p16 shows a dairy herd of 36,932 cows are expected at the end of FY2012. Yet at the end of FY2011, under note 18 in the FY2011 NZS Annual Report, we learn there were 58,502 dairy cattle. So why is the dairy herd dropping in number by over 20,000 this coming year? That makes no sense to me. Have I got this wrong, or is this another GSR mistake?


OK the powerpoint at the AGM may have just answered my question:

Herd breakdown at 30 June 2011 was:
31,845 x mixed age cows and milking heifers
15,272 x 13-30 month heifers
11,451 x 1-12 month heifers
3,915 x other livestock

That makes a heifer total of 58568. But the average 'dairy herd' is somewhat less than this total. Would be interested to know hold old a cow has to be before it is classed as 'part of the dairy herd'.

SNOOPY

[Snoopy]

In Uruguay the milk pricing is done per litre. There isn’t a straight conversion to milk solid weight pricing because the amount of milk solids per litre can vary depending on herd quality. But if we go back to the original December 2006 NZS Prospectus (p25), $NZ4.00/kg was equivalent to US18c/litre. Currency appreciation has turned that today to around $NZ3.50/kg. That means US37c/share (the budgeted milk price from Conaprole for FY2012) is roughly equivalent to $NZ7.20/kg of milk solids in New Zealand.


Update on convesrsion factor from AGM Powerpoint:

USD 39 c/litre (equivalent to NZD 7.05/kg milksolids at a NZD:USD exchange rate of 78c

SNOOPY

[Snoopy]

SNOOPY, What you only need to work out is that a dairy farm shows a profit on capital of no more than four PC, plus a capital gain at the end. Ask any dairy farmer in any country in this world about that.


MacDunk, maybe you only made 4% off your own farmlet. But now with the NZS farms in Uruguay on the cusp of profit, we have some believable forecasts that will challenge your accusations of shareholder wealth destruction in South America.

From the GSR, total assets at the end of FY2012 are listed to $US335m (p17). At this point most of the capital spending is complete, and depreciation on assets (p15) will likely offset any remaining asset appreciation via future capital spending (p13).

Positive cashflows from operations by FY2014 is expected to stabilize at $26m (GSR p8). Taking off the ongoing interest bills (assuming funding option 3), we can calculate the ongoing cashflow available for distribution

($US26m-$US4.824m-$US3.560m)= $US17.62m per year.

The ongoing after tax cash return on farming assets (ROA) is therefore forecast to be:

$17.62m/$355m= 5.0%

Of course this return assumes shareholders today hold assets priced at market value. As at 31st June 2012, shareholder equity is forecast to be $US151.713m (GSR p17). Over the 244m shares currently on issue, this equates to a net tangible asset backing per share of:

$US151.7/244.2m= US62c

Based on an exchange rate of $NZ1= US75c this equates to an NTA of NZ83c. Why is this important? Because if you own assets worth NZ83c and you only have to pay NZ70c for them on market, then this will significantly increase the free cash yield return on any assets you own. And the result is a return much better than 5%, let alone the 4% return you claim is inevitable Macdunk.

SNOOPY

[Snoopy]

Based on an exchange rate of $NZ1= US75c this equates to an NTA of NZ83c. Why is this important? Because if you own assets worth NZ83c and you only have to pay NZ70c for them on market, then this will significantly increase the free cash yield return on any assets you own. And the result is a return much better than 5%, let alone the 4% return you claim is inevitable Macdunk.


Another way to value the shares is on prospective after tax earnings. The tax bill is paid for up to eight years.

So on a ‘per share basis’; earnings are forecast ‘post capital raising’ as a steady:
$US17.62m/(244m+153m)= US4.4cps

Based on a share price of NZ70c, this gives a potential positive cash yield of 6.3% (after tax). I know it will take two years to get there. But this is a significantly better return than the 4% you claim as de rigeur for all farms, Macdunk.

The other part of the universal farm return you claim, the ultimate capital gain on farm (shares) sale is an additional ingredient in the return pot. If your 4% farm yield rule of thumb is indeed universal, we can expect the NZS share price to rise to around $NZ1.10 (because raising the share price will reduce the yield). And $NZ1.10 is a very healthy premium to today’s NZS share price!

SNOOPY

[Snoopy]

Do your self a favour, talk to a few farmers before rushing in wide eyed swallowing all the guff about we know best. Macdunk


I do agree with you that there have been errors of judgement in the way NZS has been managed. There was a naivete in assuming the Uruguayan power grid would be able to cope with the demands of New Zealand style irrigation techniques. The construction of high-tension power lines in the centre and east of Uruguay was not part of the business plan for NZS founding shareholders. Furthermore the prospectus diet of pure grass and no supplementary feed has been shown to be sub optimal. It seems the metabolisable energy from Uruguayan soils doesn’t match that available in New Zealand soils. But I believe these mistakes have been learned from.

Meanwhile Macdunk, your call to skim the sour cream from the top of the management milk trough has already been heeded. While you were off fishing, the Olam livestock truck was trundled up the Uruguayan farm driveway. Overnourished kiwi boars with the wasting disease ‘ PiGG Wrightson shadow’ were herded onto it. Amidst some squealing, and to get those pig trotters moving, a one off inducement -several million dollars worth of pork belly fattening- was needed. Nevertheless the truck departed bound for New Zealand, snuffling snouts and curly tails tucked firmly between the porker’s respective front and hind legs. The ‘we know best’ attitude has been banished. Downstream of MD David Beca, all the management is now Uruguayan.

SNOOPY

[Snoopy]

The next thing you might like to work out is corporate greed at the top lining their own pockets with your investment dollar.


Macdunk, I took your advice and set about putting some numbers on your alleged corporate greed.

For FY2012, employee expenses are budgeted at $US9.496m. Last year there were five executives paid more than $NZ100,000 per year (AR2011 p41). These salaries have a cumulative total of estimated at $NZ755,000. Add a 7% inflation pay increase to that and you get $NZ800,000, or $US600,000 for FY2012. That leaves $US8,896m to be shared around 600 lower rung employees. That averages out to $US14.8k each. The top five corporate managers digest 6.3% of the total wage bill. YMMV. But these ballpark pay figures seem more appropriate than excessive to me.

SNOOPY

[Snoopy]

You have got this wrong thus far losing half your investment dollar at this point


Not guilty as charged Macdunk.

Unlike some I did not rush into purchasing as many shares as I could at IPO time. I resisted the allure of the subsequent non-renouncable rights issue at $1.50. And I carefully accumulated shares at around the 50c level between July 2009 and July 2010 while the share was out of favour. As a result my average buy in price to NZS has been 80c per share. I am not going to pretend that overall this has been a good investment so far. However, I was always in this to tap into the cashflow once the farms were operating according to the original plan. It was always a long haul investment

With the NZS share price at 70c I have lost 12.5% of my original investment capital. That is far lower than the ‘half of capital’ lost spin that you incorrectly keep banging out on this forum. Furthermore I have absolutely no need to sell and crystallize my loss at this early stage in company development. In fact I have set aside more capital, which is parked up, just waiting to participate in the upcoming rights issue. Watch the share price go north when the company funding issues are sorted out.

SNOOPY

[percy]

Meanwhile Macdunk, your call to skim the sour cream from the top of the management milk trough has already been heeded. While you were off fishing, the Olam livestock truck was trundled up the Uruguayan farm driveway. Overnourished kiwi boars with the wasting disease ‘ PiGG Wrightson shadow’ were herded onto it. Amidst some squealing, and to get those pig trotters moving, a one off inducement -several million dollars worth of pork belly fattening- was needed. Nevertheless the truck departed bound for New Zealand, snuffling snouts and curly tails tucked firmly between the porker’s respective front and hind legs. The ‘we know best’ attitude has been banished. Downstream of MD David Beca, all the management is now Uruguayan.

SNOOPY[/QUOTE]


What a great post.most enjoyable read. lol.

[Snoopy]

I've been caught moving far too early myself. My view is that it is not about "crystallizing" a loss as you can always return at some point.


There is no guarantee you can return with this one. Liquidity is very tight.



It's about recognising the opportunity cost of having capital tied up and going nowhere for years.


In this case the opportunity cost is doubtful. I have made about 20% in just the last six months. There aren't many places on the NZX where I could have done better. Taking a two year view the performance has been incredible, with the recovery coming from as low as 40c. It is the best performing share in my portfolio over that time frame.



You may be thinking that NZS management will do things quickly, as this is what you and I would do given our set of ethics and goals. However, NZS majority owners may be quite happy to wait for ages while the remaining owners get tired of waiting and sell out.


Olam will certainly be keen to talk the company down as they want to take it over as cheaply as possible. The quick and dirty takeover did not work. When you hear negative thoughts on NZS in the media you might care to think who orchestrated them and what their motivation is. The problem for the disinterested outsider is that there is very little incentive to report what is going on inside this company in a balanced way.

Personally I will be very happy to sit on the share register for a few more years while the farm development is rolled out.



I think this is what is likely to happen as there does not appear to be anyone, (or indeed any reason for anyone), who is is prepared to build up a blocking stake.


There is a loose ginger group that already has a blocking stake and is currently headed by ex-Wrightson CEO Barry Brook. They won't be selling out for anything under full and fair value. I can assure you of that.



You may conclude, as I often do, that the opportunity cost is actually far higher than the 12.5% you'd crystallize by selling now. (Case in point - TEL split - which I sold shares at a loss and will buy back once the current run on TEL and CNU has run its course ... probably using the margin provided by TEL and CNU :

TEL is one of the few shares on the NZX that has done better than NZS over the last year. But I have been a TEL fan for years so already held a representative stake in that. My holding in NZS does not preclude me holding other shares that are doing very well.

SNOOPY

[Snoopy]

Update on convesrsion factor from AGM Powerpoint:
USD 39 c/litre (equivalent to NZD 7.05/kg milksolids at a NZD:USD exchange rate of 78c


In the news today a milk price upgrade from Fonterra.

"The cooperative lifted its estimate for the Farmgate Milk Price by 20 cents to $6.50 per kilogram of milk solids and kept the distributable profit forecast in a range of 40 cents to 50 cents."

That represents another informed view that the prices NZS shareholders have budgeted on in Uruguay are not out of line.

SNOOPY

[Snoopy]

In the news today a milk price upgrade from Fonterra.

"The cooperative lifted its estimate for the Farmgate Milk Price by 20 cents to $6.50 per kilogram of milk solids and kept the distributable profit forecast in a range of 40 cents to 50 cents."

That represents another informed view that the prices NZS shareholders have budgeted on in Uruguay are not out of line.


Good operational result for the first half year (HY2012) I thought. Milk volume a little lower than expected being balanced by the milk price being a little higher. I found the result a little confusing with a first half 'profit' announced, along with the comment they were on target to be EBIT positive for the year. That implies a loss in the second half, which probably explains why no-one was very excited about the results announcement.

A graph issued with the results showing:
1/ a natural and expected seasonal decrease in milk yield per cow AND

2/ the continued fast progression of capital spending to open eight new dairy sheds

helped straighten my head over this result.

I can't help but feel that Olam are continuing to turn the screws down on the small shareholders though. It looks like the so called critically needed capital raising has been postponed yet again. And why not postpone when all that farm productivity gain is being transferred in the form of very high interest payments on the 'interim loan' to parent Olam?

I believe that NZS minority shareholders have been lucky that the weather gods haven't turned on anything too serious in Uruguay this year (if you ignore the slightly drier than normal lead into the milking season). Until that capital raising is completed I think minority shareholders are vulnerable to a sudden milk price downturn. One thing that is sure is that if/when small shareholders do get into trouble 'Father Olam' will be there to 'rescue' them. Operationally the farms in Uruguay are starting to look very good. I would be a lot less nervous if that capital raising was finished.

SNOOPY

[Snoopy]

Operationally the farms in Uruguay are starting to look very good.


Have been reading the hardcopy HY report in my clawed little paws.

Zero coverage from independent analysts means ‘Sharetrader’ is now the only place you can go to get a third party opinion on New Zealand Farming Systems Uruguay.

The outlook of the NZS HY2012 report (page 4) says:
“the operating performance is still expected to achieve a break even position at the EBIT level for the full year before any livestock fair value adjustment.”

This is more specific than the previous ‘positive EBIT’ full year guidance given previously. I had assumed that the increase in cattle values formed part of this earlier prediction when in fact they did not.

The actual IFRS modest net profit for the current half-year was a surprise. I have been assuming that we shareholders would be looking at a net IFRS loss for the full year 2012.

Why? Because I don’t expect a correspondingly large increase in cattle valuation for the second half of the financial year as has occurred this half. Furthermore I had expected a deterioration in actual milk volume due to the seasonal factors of less grass grown food being available and the on average drying off of cows due to normal seasonal factors.

What has changed my view? We learn on p4 that the late spring and summer drought in Uruguay (first I’d heard of that!) has eased due to good rain falling on all farms in late February. That means the ‘second half’ supplementary feed costs may not be higher than the first. That is because less feed purchasing may be needed, even as the feed price falls as bought feed costs reduce from their cyclical highs. Since cropping and feed costs for HY2012 were $US14.9m (compare to the first half $US0.367m profit), any reduction could make a significant difference to the full year budget.

We also learn from p2 that:

“The high tension electricity line in the centre of Uruguay and in Los Novillas farm in the east are expected to be operational during February and March 2012. This will result in a significant reduction in costs as the diesel generators are comparatively expensive to operate.”

That means irrigation pivot operating cost is unexpectedly going down.

Finally on p11 we learn that it is not company policy to revalue the underlying land owned until the second half of the financial year. Anecdotally NZS is sitting on a significant land revaluation profits already that when reported will boost the balance sheet and bottom line, come full year result time.

Putting all this together: I think we are looking at an IFRS net profit this financial year, and that is a full year ahead of what I was expecting.

Current asset backing is US64.4c (around NZ75c) with none of those revised land price gains included. IMO this whole NZS development project is tracking rather better than Olam is letting on. This should come as no surprise.

It is in Olam’s interest to talk down the results because they want to eventually buy out the remaining small shareholders for as little money as possible. I thought the seller last week wanting $1 for his NZS shares was dreaming. I am now of the view that perhaps he is not far from the mark. Notwithstanding the upcoming cash issue, I think we shareholders are on the cusp of something significant.

Potential new investors in NZS should only buy about half the number of shares they want, because they will be asked to buy an approximate equal number of shares soon as part of the upcoming cash issue. However, don’t hold off and bank on being able to buy shares on market at rights issue time with this one. If Olam remains true to form, the coming rights issue will be non-renouncable. So if you want to be certain of being in on this, the only course is to buy your shares on the market before they go ex-rights. Sadly for new NZS investors the trading liquidity in NZS is so sparse, it is probably already too late to join the NZS party.

SNOOPY

[Joshuatree]

Snoopy really appreciate your informed analysis ;seeing the grass for the trees and joining dots. thanks

[Snoopy]

Snoopy really appreciate your informed analysis ;seeing the grass for the trees and joining dots. thanks

Quick comment on NZ milk price fall. Should not affect NZS this year as milk volumes decline at this time of year anyway. I think we are still on budget for next year despite the price fall.

SNOOPY

[Newman]

Some shareholders would be more comfortable to put additional capital into NZS than pay 8.9% interest on the loan from Olam because they can borrow at a much lower rate now. Why did so many small shareholders reject capital raising last year? Olam is more a lender than a major shareholder. Earning a return of 8.9% with little risk must be a good option to Olam. It is hard for me to understand why many small shareholders hold their shares and at the same time reject capital raising. Do they expect Olam make another takeover at more than 70 cents? Why should Olam make a takeover while it can earn 8.9%?

[Joshuatree]

Newman have you not read previous posts esp by Snoopy in 2011? One reason was that the rights were offered ABOVE the s/p at the time.

[Newman]

Newman have you not read previous posts esp by Snoopy in 2011? One reason was that the rights were offered ABOVE the s/p at the time.

Price does not matter as long as new shares are allocated in proportion of new capital raised. It was probably Olam's intention to get the proposed rights issue rejected. A few larger shareholders who might not be able to inject more capital actually helped Olam achieve its goal.

12 months have passed since last takeover. Why has not Olam bought more NZS shares on the market at 57 cents (the most recent price)? Because they know return on the capital invested in NZS would be lower than 8.9% at least for a while.

[stoploss]

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10824351

[Snoopy]

Some shareholders would be more comfortable to put additional capital into NZS than pay 8.9% interest on the loan from Olam because they can borrow at a much lower rate now. Why did so many small shareholders reject capital raising last year? Olam is more a lender than a major shareholder. Earning a return of 8.9% with little risk must be a good option to Olam. It is hard for me to understand why many small shareholders hold their shares and at the same time reject capital raising. Do they expect Olam make another takeover at more than 70 cents? Why should Olam make a takeover while it can earn 8.9%?


Newman, the shareholder ginger group was not against capital raising per se. They were balking at the size of the cash issue that Olam said was necessary. Some thought that Olam was specifying a larger amount of capital to be raised than was reasonably required. And using an Olam created backup guarantee to lever up their own shareholding percentage, this cash issue 'financial lever' was designed to replace any shortfall in minority shareholder funds raised with more sharess for Olam.

The shareholders group further invisiged that these new Olam shares would take Olam to the position where they would compulsarily acquire all the remaining listed NZS shares.

SNOOPY

PS Yes I do agree 8.9% interest is usuary.

[Snoopy]

Quick comment on NZ milk price fall. Should not affect NZS this year as milk volumes decline at this time of year anyway. I think we are still on budget for next year despite the price fall.


Readers might be interested to know that I have just returned form the UK where before this thing the Olympics came along, UK dairy farmers were headline news.

The UK villains in the piece were painted as the supermarkets, with their aggressive discounting of in shop milk. The milk processors have cut the price paid for milk not once but twice in a few months. Farmers have driven their tractors to barricade the processing factories in protest at being offered less money for their milk than it costs to produce. One farmer was on TV sending his capital stock two by two to the slaughterhouse in an attempt to keep going. He thought he could hang on for about six months with milk prices as they are. Some farmers have already walked off their land. One farmer whose neighbour had done just that was considering packing it all in after three generations. It really is desperate stuff, far in excess of any pain farmers in NZ are experiencing.

Before the Olympics broke a couple of supermarket chains got bonus points for increasing the amount the paid to processors to ensure their farm suppliers could keep in business. Nevertheless they added that the world price of milk largely dictated what they could pay long term.

Putting this in the NZS context, the efficient producers on a global scale are the ones that will do well. And that means farms in New Zealand and Uruguay.

SNOOPY

[duncan macgregor]

Readers might be interested to know that I have just returned form the UK where before this thing the Olympics came along, UK dairy farmers were headline news.

The UK villains in the piece were painted as the supermarkets, with their aggressive discounting of in shop milk. The milk processors have cut the price paid for milk not once but twice in a few months. Farmers have driven their tractors to barricade the processing factories in protest at being offered less money for their milk than it costs to produce. One farmer was on TV sending his capital stock two by two to the slaughterhouse in an attempt to keep going. He thought he could hang on for about six months with milk prices as they are. Some farmers have already walked off their land. One farmer whose neighbour had done just that was considering packing it all in after three generations. It really is desperate stuff, far in excess of any pain farmers in NZ are experiencing.

Before the Olympics broke a couple of supermarket chains got bonus points for increasing the amount the paid to processors to ensure their farm suppliers could keep in business. Nevertheless they added that the world price of milk largely dictated what they could pay long term.

Putting this in the NZS context, the efficient producers on a global scale are the ones that will do well. And that means farms in New Zealand and Uruguay.

SNOOPYIt Is a similar form of free market lunacy that has closed NZ factories and forced our young people to work in the Aussie mining sector. The UK farmer has a huge disadvantage in comparrison to his NZ counterpart. It Is better to support them than send them to the wall as we In Nz have done with the manufacturing sector. The Britts in the end will pay a high price for killing an industry for a bit of cheap milk. Macdunk

[Snoopy]

If Olam has a loan it is not claiming all its interest on couldn't they just keep upping the interest claimed on the loan to ensure other shareholders get nothing. No rush to take over the remaining shares if this is the case?
Appreciate the suggestion though thanks.

Aaron, I hope you don't mind me transposing your question from the 'What are your favourite 3 NZX stocks and Why?' thread. I think you bring up a very valid fear.

The Olam loan to NZS is currently jack potting as they are not collecting the interest, it is compounding. The current loan arrangement expires at the end of the year so this negative compounding (from a minority shareholder perspective) will continue only until the end of the year or the company is recapitalized and as a consequence the loan is replaced with new equity.

The NZX has rules that prevent minority shareholders being exploited. The current Olam loan arrangement was believe it or not voted for by minorities, albeit as a second choice for Olam who wanted a large cash issue last year.

I suppose it is possible that Olam will put up another usurious loan agreement as a fall back position to the cash issue not proceeding this year. However I do not think minority shareholders would agree to that this time. Why? Because farm development is almost complete. The reason that minority shareholders agreed to a high interest loan backed by Olam last time was because everyone wanted to see the rest of the milking sheds built and the bulk of the irrigation up and working and this was the only way that all shareholders would agree to do it. NZS is now 'proved of concept' so there would be no point ito agreeing to a new loan on usurious terms.

You may wonder if all the potential profits have been funneled off to Olam as loan payments just what have minority shareholders gained in the last year? In cash terms and present day valuation terms small shareholders have gained virtually nothing. However in terms of future earnings the path is now far more certain with much of the development risk out of the equation. This will reduce the discount factor that will be applied to future earnings when another takeover offer is put to small shareholders. So behind the scenes IMO, small NZS shareholders are actually in a much better position than last year.

SNOOPY

[Snoopy]

This company seems to have trouble hanging on to its directors. Th incumbent NZ based directors John Roadley and Graeme Wong opted not to restand last year.

This was the director line up as at 31st December 2011.

Board of Directors
Vivek Verma, Chairman
David Beca CEO
Richard Haire
Ravi Kumar
Robert Poole (NZ, newly elected)
Tim Storey (NZ, newly elected)
Peter Wilson (NZ, newly elected)

On 26th July we get this announcement:
"The Board of NZS advises that Krishnan Ravi Kumar has today resigned as a director of the Company following his resignation as Chief Financial Officer of Olam International Limited."

And now today
"The Board of NZS advises that Richard Haire has resigned as a director of the Company following his resignation as Olam International Limited Regional Chief Executive for Australasia."

That means Chairman Vivek Verma is the only surviving non executive director from last year. It also means the NZ based directors currently have an absolute majority on the board. Very interesting stuff with some important decisions to be made at board level over the next month.

SNOOPY

[Newman]

This company seems to have trouble hanging on to its directors. Th incumbent NZ based directors John Roadley and Graeme Wong opted not to restand last year.

.............

That means Chairman Vivek Verma is the only surviving non executive director from last year. It also means the NZ based directors currently have an absolute majority on the board. Very interesting stuff with some important decisions to be made at board level over the next month.

SNOOPY

Whom do the 3 NZ-based directors represent? Are they significant shareholders of NZS?

Given the poor performance of Olam investment in NZ (Open country dairy and NZS) I would guess Olam has plan B, which could be very different from its original plan to take a complete control of NZS.

[Snoopy]

Whom do the 3 NZ-based directors represent? Are they significant shareholders of NZS?


Tim Storey (NZ, newly elected), Peter Wilson (NZ, newly elected) are Olam approved appointees. They were put on the board to satisfy NZX requirements for having at least two NZ domiciled directors. They are classed as independent directors from an NZX perspective. To my knowledge neither hold any NZS shares.

Robert Poole (NZ, newly elected) is a slightly reluctant (from an Olam perspective) addition to the board. He is a member of the NZ based 'ginger group' that blocked a full takeover by Olam last year and together with his wife is the second largest NZS shareholder behind Olam.

SNOOPY

[Snoopy]

Given the poor performance of Olam investment in NZ (Open country dairy and NZS) I would guess Olam has plan B, which could be very different from its original plan to take a complete control of NZS.


Senior management shake ups within Olam could indicate a change in direction. But there has been no press release to date that indicates a change in strategy.

I don't follow Open Country Dairy but I see you are right Newman. They were effectively bailed out by Olam and Talleys earlier this year on troubles caused by the high price of their raw ingredient (milk) and their high debt burden. From an Olam corporate perspective, they might see their investment in NZS as a hedge against milk input costs, even though NZS and Open Country dairy operate in different countries.

As for NZS being a 'poor investment', it hasn't performed in share price terms. However Olam has never paid more than 70c for their NZS shares and the average entry price for Olam will be lower than that. The NZD/SGD exchange rate has remained remarkably stable over the 14 months that the 2011 takeover offer closed on July 1st. In fact the NZD has strengthened a couple of cents against the SGD so I would guess the current market value of NZS shares is close to the Olam book value.

Olam currently has a accumulated loan interest of $US7m for supporting NZS and this is compounding at a rate of 8.9% per annum. As at balance date the loan to Olam stood at $US95m. So Olam is actually doing very nicely out of NZS even if the share price, which is being depressed by a looming cash issue, would lead you as a casual observer to believe otherwise.

SNOOPY

[Under Surveillance]

Olam is actually doing very nicely out of NZS even if the share price, which is being depressed by a looming cash issue, would lead you as a casual observer to believe otherwise.

SNOOPY
I'm intrigued as to why the impending issue of rights is depressing the share tradingprice. Yesterday NZS closed at 59 centswith more available at that price, whereas the rights are signalled to have anexercise price of 69 cents. Shouldn’tthe rights issue tend to nudge the market price upwards, towards the exerciseprice?

Inearlier posts, you’ve recommended NZS and suggested punters buy half the NZSshares they want now, and acquire the balance through the rights issue free ofbrokerage. Surely as things stand in themarket, smaller punters not single minded about thwarting Olam gettingto 90% should buy all they want on market? 100% at 59 incurring brokerage is way better than 50% at 59 incurringbrokerage plus 50% at 69 with no brokerage. If the prospectus presents acompelling case to exercise the rights, punters with reserve cash might later become keen to take upsome or all of theirs.

[Snoopy]

I'm intrigued as to why the impending issue of rights is depressing the share trading price. Yesterday NZS closed at 59 cents with more available at that price, whereas the rights are signalled to have anexercise price of 69 cents. Shouldn’t the rights issue tend to nudge the market price upwards, towards the exercise price?


Under Surveillence, I agree that market forces should be pushing the price up towards the suggested rights price. The rights price will not be known until the NZ directors come up with a firm proposal, even though Olam have suggested 1:1 at NZ69c. Last year, after their rights proposal was rejected, Olam made noises of raising less equity and issuing a bond to shareholders as well, to provide shareholder debt and equity funded expansion capital. That wasn't suggested this time around, but if the NZ shareholders ginger group has any say, a combined equity bond issue could still be a goer.

I saw 14,000 NZS shares traded today at 59c for a total gross value of $8,260. I haven't checked the depth, but if that is now the end of shares available at 59c we are not talking big money - only two economic parcels at best. People sell shares for all sorts of reasons (e.g. death of holder, need money for an unexpected expense) that are not related to company specific market reasons. NZS so thinly traded I would be inclined to see most market behaviour as blips.




In earlier posts, you’ve recommended NZS and suggested punters buy half the NZS shares they want now, and acquire the balance through the rights issue free of brokerage. Surely as things stand in themarket, smaller punters not single minded about thwarting Olam getting to 90% should buy all they want on market? 100% at 59 incurring brokerage is way better than 50% at 59 incurring brokerage plus 50% at 69 with no brokerage. If the prospectus presents a compelling case to exercise the rights, punters with reserve cash might later become keen to take upsome or all of theirs.

Agreed, it does look good for new NZS shareholders to buy their fill of shares on market, and maybe even let their rights lapse.

However the 69c mooted rights issue price has not been agreed to. The NZ directors may settle on a 1:1 at 50c, together with a bond nominal value 20c/share paying interest at a 7% coupon rate. If that happened the 59c NZS on market would represent a premium to the rights issue price.

SNOOPY

[Under Surveillance]

People sell shares for all sorts of reasons (e.g. death of holder, need money for an unexpected expense) that are not related to company specific market reasons.
SNOOPY
A reason we can eliminate in this instance is selling to raise cash to take up rights (at 69 cents)!!

[Newman]

However the 69c mooted rights issue price has not been agreed to. The NZ directors may settle on a 1:1 at 50c, together with a bond nominal value 20c/share paying interest at a 7% coupon rate. If that happened the 59c NZS on market would represent a premium to the rights issue price.

SNOOPY

NZS has NOT suggested a price of 69 cents for right issue. It only said the new money to raise would be 69 cents per share. It could be 2 new shares at 34.5 cents!

I think many small shareholders are over optimistic about the future of NZS. Agriculture depends on weather. Futher, a 17% overspending on labour last year does not suggest the management is not as good as some believed.

[Snoopy]

NZS has NOT suggested a price of 69 cents for right issue. It only said the new money to raise would be 69 cents per share. It could be 2 new shares at 34.5 cents!


Good point. When NZS management tried to get away a 1:1 issue at 70c last year, I had just assumed 1:1 at 69c would be put up this time. Not necessarily so as you point out Newman.



I think many small shareholders are over optimistic about the future of NZS. Agriculture depends on weather.


I think all existing shareholders went into NZS with their eyes open on the weather dependence of 'growing milk'. This is one thing that annoys me about the previous Grant Samual valuation process on NZS. Annual weather variability is partly what caused GS to provide a very high discount rate to future farm earnings. While I accept weather variability in future financial earnings is something that should be considered, the GS assumption is that weather variability in one year implies that the next year's weather is also likely to be variable and so on into all future years and this is a bad thing.

IMO weather variation in farming is an obvious thing, and farms are developed over a multi year grand plan. The investment banker idea that each farm year is a 'separate event' (in statistical terms an 'independent trial') is not right, and is a misunderstanding of how farm management works. The work that is being done on those NZS farms now is not just to boost profits for FY2013. It goes way beyond that. I would not judge how well a farm is managed by the bare profitability figures at the end of a poor weather season, yet investment bankers think they can do exactly that.



Further, a 17% overspending on labour last year does not suggest the management is not as good as some believed.


I am interested in where you grabbed this statistic from Newman. And how you define 'overspending'

Regards,

Snoopy

[Snoopy]

I'm intrigued as to why the impending issue of rights is depressing the share trading price. Yesterday NZS closed at 59 cents with more available at that price, whereas the rights are signalled to have an exercise price of 69 cents. Shouldn't the rights issue tend to nudge the market price upwards, towards the exercise price?


The market must have taken note of your post U.S. No sellers below 70c now. Of course as Newman has pointed out, NZS management may not go for 1:1 at 69c, especially as they need the agreement of the minority shareholders to approve the rights issue terms.

I for one certainly hope the ginger group can come to an agreement. I note from the NZS annual report that all of the top twenty shareholders have remained firm, except for ACC who have sold off part of their holding. That seems odd. In overall terms going from 770,000 shares to 519552 shares would have released well under $200,000. Surely a drop in the ACC bucket?

Kudos for M P van Zonneveld, lifting his holding from 751,126 to 906,946 shares. The rights prospectus will purportedly be out in a couple of weeks.

SNOOPY

[stoploss]

OLAM Offering 75 cps .........for the balance of 14 %

[Snoopy]

OLAM Offering 75 cps .........for the balance of 14 %


Oh well I told you all that NZS was a far better prospect than PGW and so it has proved. I will be waiting for the independent directors report before doing anything.

NTA is $145.008m/244.236m x 1/0.83 = NZ71.5c

That means 75c is certainly in the ballpark. Although some will argue that coming out of a drought year and with the Kiwi/USD exchange rate high the bid timing is opportunistic.

SNOOPY

discl: hold NZS

[Snoopy]

OLAM Offering 75 cps .........for the balance of 14 %


Have dug out my Grant Samuel prospectus for the extension of the Olam loan dated October 2011. It is interesting to compare the budgeted figures for FY2012 compared to what actually happened.

It is interesting that NZS's key figure of productivity, kilograms of milk solids per hectare (kgMS/ha), did not rate a mention in the NZS AR2012!

All figures are in USD unless otherwise stated.

1/ Milk sales ($60.513m) were well down on budget ($69.922m). That is a result of volume loss as price per litre was higher than expected.

2/ Cattle sales were also much lower ($3.389m vs $6.827m budgeted), although selling surplus cattle is very much a by product of the milking operation.

3/ Depreciation and Amortization ($2.756m) were much less than budgeted for ($4.527m). That I believe is because the new milk shed build rate got behind schedule.

4/ Farm Operating expenses ($59.300m) were about 20% higher than budget ($51.865m). Yet inside that statistic , cropping and feed spending at $30.604m was 20% lower than the budgeted $35.824m. Offsetting the lower feed spend, more money went on pastures ($8.932m) than budgeted ($7.579m). Could that reflect a higher irrigation spend because of the drought?

Animal health breeding and calf rearing ($5.615m) was almost double the budgeted figure ($2.037m). Could that mean breeding cows were in a poorer condition than expected, and required more veterinary attention? If calf mortality was high that might explain the big drop in budgeted cattle sales.

5/ On the balance sheet inventories and consumable supplies held at $12.235m were well above budget at $8.237m. That may be a timing issue with utilizing them, or a higher than expected supplementary feed price or a combination of both.

6/ The cashflow statement shows acquistions of property plant and equipment cost the company $39.392m verses a budgeted figure of $61.590m. This is consistent with on farm development projects rolling out much more slowly than planned.

Good or not so good from a managment performance perspective? There is quite a lot here to mull over.

SNOOPY

[Snoopy]

Have dug out my Grant Samuel prospectus for the extension of the Olam loan dated October 2011.


The independent directors today announced that an analysis of the Olam offer will not be carried out by Grant Samuel. That must be almost a first for the NZ market! A look at the successful applicant, Simmons Corporate Finance, suggests that this might be their first company valuation job in around seven years. That Samueloid has certainly had a stranglehold on NZ M&A business for a long time.

Simmons did look at the partial takeover of Rural Equities in 2004 by H&G limited. So hopefully they have some idea on how to value farms. I could never come to terms with the Samueloid's Hong Kong banker perspective on this one.

SNOOPY

[Snoopy]

Simmons did look at the partial takeover of Rural Equities in 2004 by H&G limited. So hopefully they have some idea on how to value farms.


An interesting announcement came from NZs just as the market closed on Friday:

"NZ Farming Systems Uruguay Limited (NZS) advises that that the Board has recently reviewed and revised its Business Plan. It is now anticipated that full implementation of the Company's longer term farm development strategy will be delayed 2 years to 2016. The Board's view on the Company's long-term profitability has not changed, with anticipated increases in expenses likely to be offset by increases in long term milk price and additional livestock revenue over the period."

Since the capital spend is now something like 90% complete, it seems very odd to suddenly stop now. However if you can push those cash flows out by a couple of years, build in a suitable discount factor to rerate downwards the present value of those future earnings, then your company will be worth less. And that means you can offer minority shareholders a lower cash price for their shares and it will still be seen as fair. But Olam are a respectable company. They surely wouldn't seek to shaft the remaining minority NZ based shareholders so cynically like that, would they?

SNOOPY

[Under Surveillance]

Given the burgeoning number of milking cows in Uruguay, in small part from growth in NZS's herd, milk production volumes have hit strong headwinds for some reason. See http://www.clal.it/en/index.php?section=consegne_uruguay

[Snoopy]

Given the burgeoning number of milking cows in Uruguay, in small part from growth in NZS's herd, milk production volumes have hit strong headwinds for some reason. See http://www.clal.it/en/index.php?section=consegne_uruguay


Interesting website that I had not seen before.

Under Surveillence. I think it is the US drought, which looks as if it should be more correctly called the 'Greater Americas Drought' that has caused the growth in milk production to stall.

If you go back to the jumping off page and explore the other country links from there:

http://www.clal.it/en/index.php?section=world_map_consegne_latte

You will see that both in Argentina and the USA and Chile milk production dipped below the previous years production. The lesser decline in milk production from Uruguay is probably mostly due to NZS (NZS production is going up faster than Uruguay as a whole, and NZS are the largest milk produced in Uruguay) and their intensive supplementary feeding regime. Farming is a seasonal business and often hard work by farmers is subsumed by weather events. It takes a chart like the one you referenced Under Surveillence, to show how well the farm managers on those Uruguayan NZS farms are actually doing.

SNOOPY

[Snoopy]

OLAM Offering 75 cps .........for the balance of 14 %


Incredibly investors representing about 1% of the company have already accepted the 75c Olam offer! And this before the independent report on the value of or otherwise of the offer is tabled! Guys, you really should be a little more staunch than this. You will not get paid out any faster if you accept the offer early. And you are potentially reducing the leverage for the remaining shareholders should the independent directors declare the offer inadequate. Not smart behaviour at all.

SNOOPY

[Snoopy]

Incredibly investors representing about 1% of the company have already accepted the 75c Olam offer! And this before the independent report on the value of or otherwise of the offer is tabled! Guys, you really should be a little more staunch than this. You will not get paid out any faster if you accept the offer early. And you are potentially reducing the leverage for the remaining shareholders should the independent directors declare the offer inadequate. Not smart behaviour at all.


The independent valuation report is out and the fair value for NZS is determined as NZ52c to NZ65c per share. However NTA is NZ75c which exactly matches the Olam offer price.

Of most interest is the sensitivity analysis on page 50 of the Target Company Statement.

I would argue that the discount rate is too high at 10.5%. If this discount rate was reduced to 9.5% that would increase the valuation by $US42m or $NZ51m or 20c per share. That puts the value of NZS at between NZ72c and NZ85c. I would argue that the discount rate should be even lower than 9.5%, but I don't want to cause a banker reading this to get a heart attack.

The whole idea of putting such a high discount rate on these farms irks me. Grant Samuel did the same thing in last year's valuation report when global interest rates and risk premiums were even higher. Sure short term farm earnings are volatile. But if farmers were worried about this then no one would ever go farming.

Farmers build up their assets for the long term in a way that doesn't seem comprehensible to merchant bankers. The work they do on their farms does not get 'cashed out' at the end of each financial year. It cumulates such that over the farm cycle a return is derived from those farm inputs. Land does not recognize 'balance dates'. Land recognizes a considered and cumulative multi-year application of resources to produce quality pasture.

Simmons report makes sense if you are a banker in a glass tower in Hong Kong. How many NZS shareholders fit that description? I think this valuation report is selling minority shareholders out with inappropriate assumptions.

SNOOPY

discl: hold NZS

[Romulus]

Hi Snoopy,

My initial concerns about the NZS t/over offer was who was doing the indepedent report (Simmons) as they did the Dorchester Pacific bond buyback justification that allowed DPC to buyback the bonds at a low ball offer of 92c as opposed to the face value of 100c. It was justified on a high discount rate when comparable listed bonds yields were and had fallen to 5-7% range and also that it was better to take 92c now (Sept 12) rather than May 13 due to uncertainity of repayment on maturity. I found the whole report flawed as it appeared to be framed to ensure the buyback when ahead( no different in my opinion to a low ball offer except you were forced to accept even if you voted against the buyback).

So getting back to NZS and Simmons, another party and I agreed once we knew who was doing the independent report that there wouldn't be a chance in hell of the report recommending a higher value or offer. Unfortunately again proved right and having no idea how many NZS shares you hold, I can report that being shafted twice in few months tells me nothing in market has changed except perhap how the story is told.

Have appreciated your comments on NZS over the years

[Snoopy]

Hi Snoopy,

My initial concerns about the NZS t/over offer was who was doing the indepedent report (Simmons) as they did the Dorchester Pacific bond buyback justification that allowed DPC to buyback the bonds at a low ball offer of 92c as opposed to the face value of 100c. It was justified on a high discount rate when comparable listed bonds yields were and had fallen to 5-7% range and also that it was better to take 92c now (Sept 12) rather than May 13 due to uncertainity of repayment on maturity. I found the whole report flawed as it appeared to be framed to ensure the buyback when ahead( no different in my opinion to a low ball offer except you were forced to accept even if you voted against the buyback).

So getting back to NZS and Simmons, another party and I agreed once we knew who was doing the independent report that there wouldn't be a chance in hell of the report recommending a higher value or offer.

Have appreciated your comments on NZS over the years


I will go for a bit more appreciation then, with a few more comments :-)

I share your concern with the use of high discount rates and "bird in the hand" logic seeming to favour low ball bids. However, whether we fully agree with these techniques is to an extent irrelevant. If Grant Samuel had been give the job of Simmons, they would have used similar techniques and come up with a similar result IMO. IOW, no point in shooting the messenger in these situations. But that doesn't mean you can't question the assumptions of the business valuation model used, without assuming the model is flawed.

I don't see any point in protesting against Simmons on a judgment level. After all many people can run the numbers. In the end it is the judgment that we are paying for. But I think the independent directors may have some more disclosure to make yet. Let's just see what happens over the next few days.

SNOOPY

[Snoopy]

I would argue that the discount rate is too high at 10.5%.


Here is some substance to back up the above claim.

The 10.5% quoted above is from the Weighted Average Cost of Capital (WACC) that comes out of the Capital Asset Pricing Model (CAPM).

It is calculated as follows:

WACC=Rd(1-Tc)(D/V) + Re(E/V)

Where:

Rd = Cost of debt, before taxes
Tc = Corporate Tax rate
D = Market value of Debt
E = Market value of Equity
V = Market value of Firm (D+E)
Re = Cost of Equity

Simmons has supplied to us the values he used for this calculation. He is assuming that going forwards the company will be recapitalized, such that the debt ratio (D/V) is 20% and the equity ration (E/V) is 80%.

We are told the Uruguayan tax rate is 25%. So (1-Tc)= 0.75

The cost of debt is noted as 6.8% and the cost of equity is noted as 11.7%.

So putting all of this together:

6.8%(1-0.25)(20/100) + 11.7%(80/100) = 10.38%

That is near as dammit the 10.5% figure quoted in the Simmons report, and shows I am on the right track with this. But don't tune out yet under the mass of numbers folks. Things are about to get interesting...

SNOOPY

[Snoopy]

The cost of debt is noted as 6.8% and the cost of equity is noted as 11.7%.

So putting all of this together:

6.8%(1-0.25)(20/100) + 11.7%(80/100) = 10.38%

That is near as dammit the 10.5% figure quoted in the Simmons report, and shows I am on the right track with this. But don't tune out yet under the mass of numbers folks. Things are about to get interesting...


At issue here is the Cost of Equity (Re) Figure that Simmons has quoted at 11.7%.

In truth there is no universally agreed standard as to how to do this. In its most basic form, this calculation is done using what is termed the "Sharp Linter CAPM Specification", the formula for which is quoted below:

Re = Rf + Be(Rm-Rf), where

Rf = Risk free rate of Interest
Be = Equity Beta
Rm = Expected return of Market

More explicitly (Rm-Rf) is the 'Market Risk Premium' of the investment.

Now let's see what happens when we pump Simmons own derived figures into this formula. Simmons has told us he is assuming a company premium 6.0 and a Uruguay country premium of 4.5 (based on the estimated Uruguayan bond default spread and the ratio of local equity market volatility and country bond volatility). The risk free rate of return is noted at 2.7%

That implies the total expected market return to cover all risks is:

2.7%+6.0%+4.5%= 13.2%

More importantly the market premium risk is:

(13.2%-2.7%)= 10.5%

So we can now Calculate the Cost of Equity using Simmons own figures and the "Sharp Linter CAPM Specification"

Re= 2.7% + 0.6(13.2%- 2.7%) = 9.0%

That is rather a different figure to the 11.7% that Simmons quotes.

It is just possible I have made a mistake in the above calculation (could someone please verify what I have done). It is also possible that Simmons has used a different approach to calculate Re.

It is well known that there are problems with the "Sharp Linter CAPM Specification", particularly when considering the effect of imputation credits. For this reason Price Waterhouse Coopers do not use it. However since we are considering income from Uruguay not imputation credits will be payable. So I feel in this situation Sharp Linter should yield a realistic result.

SNOOPY

[Snoopy]

So we can now Calculate the Cost of Equity using Simmons own figures and the "Sharp Linter CAPM Specification"

Re= 2.7% + 0.6(13.2%- 2.7%) = 9.0%

That is rather a different figure to the 11.7% that Simmons quotes.


OK time to put the Re figure back into the WACC equation

WACC=Rd(1-Tc)(D/V) + Re(E/V)

6.8%(1-0.25)(20/100) + 9%(80/100) = 1.02% + 7.2% = 8.22%

This is nearly a full 2% different to the 10.38% rate used by Simmons. According to the sensitivity analysis on p50 of the Target Company statement that equates to an increase in the valuation by $US83.2m ($NZ101.5m), assuming each 0.5% reduction in discount rate equates to $US20.8m. This increases the value for each share by a staggering NZ41c (assuming 244.2m shares on issue and $1NZ =US82c).

Thus in my opinion fair value for NZS is really 52c + 41c = 93c (lower bound) and 65c + 41c = $1.06 (upper bound).

Thus using Simmons own figures using "Sharp Linter CAPM Specification" the Olam 75c offer is woefully inadequate.

What do you all think of that?

SNOOPY

[Romulus]

Snoopy, accept much of what you say and discount rate can be very subjective and somewhat skewed if you want to arrive at a certain answer. I had done a calc way before Olam made the offer and I arrived at 75c as being the most probable offer. So from my point of view it is spot on what I expected so will be taking it up.

Regards

[Snoopy]

Snoopy, accept much of what you say and discount rate can be very subjective and somewhat skewed if you want to arrive at a certain answer. I had done a calc way before Olam made the offer and I arrived at 75c as being the most probable offer. So from my point of view it is spot on what I expected so will be taking it up.


With the NZS share trading at less than the 75c asset backing over the last few months it was certainly undervalued IMO. So in that regard I would understand you accepting the 75c per share offer. However I always thought once the business plan was fully executed that NZS would trade at a higher price than that.

As for being shafted twice in recent months, well the Dorchester business is history. Whether you get shafted over NZS at this point is purely voluntary on your part. You have until the 30th November to accept the Olam offer. You will not get paid out early if you accept early. I would suggest you hold off posting in that acceptance envelope in for a couple of weeks yet.

Am interested in what you will be doing with your NZS capital Romulus. Paying down debt? Or has some other opportunity in the agricultural arena taken your eye?

SNOOPY

[Snoopy]

So from my point of view it is spot on what I expected so will be taking it up.


Around 30% of the remaining minority shareholders have now done what you did Romulus.

http://www.just-food.com/news/olam-secures-ownership-of-nzfsu_id121144.aspx

SNOOPY

[Anonymous]

I think it is a shame that this investment wasn't allowed to run its full course despite some of the poor managerial decisions that plagued it. It was always going to be a very long-term investment and I am sure Olam will do well with it in the future.

Snoopy, thanks for your (often solo) efforts and in depth analysis on this thread. I have enjoyed learning about your style of analysis and investment.

[Joshuatree]

Think i will wait for more clarity on this.Am wondering if Barry brook, Rob Poole and the rest of the group of minority shareholders who helped us scupper the last 70c bid have sold?

[Anonymous]

Think i will wait for more clarity on this.Am wondering if Barry brook, Rob Poole and the rest of the group of minority shareholders who helped us scupper the last 70c bid have sold?

I believe they have.

[Romulus]

I see OLam announced today they have 0ver 90% hence unconditional- so very little to said.

Snoppy, I will use the funds to pay down debt and believe that opportunity in equities will lesson, so look to reinvest in other areas. It appears to me that unless you have inside information, very hard to pick successful shares. Too many people ahead of you taking money off the table before you get a look in.

[Snoopy]

I see Olam announced today they have 0ver 90% hence unconditional- so very little to be said.


The information was released overseas on Saturday, so not sure why the NZ market was not informed until three days later.

But not quite all over. If enough of the remaining shareholders band together, we could still request an alternative binding valuation.



Snoopy, I will use the funds to pay down debt and believe that opportunity in equities will lesson, so look to reinvest in other areas. It appears to me that unless you have inside information, very hard to pick successful shares. Too many people ahead of you taking money off the table before you get a look in.


Sorry you feel that way about others getting in ahead of you re equities Romulus. In this age of the web, it is far more equal than ever before in terms of the level playing field for information IMO. But paying down debt is probably a very sensible move in today's market IMO. Better luck to you on your next investment venture.

SNOOPY

[stoploss]

I think it is a shame that this investment wasn't allowed to run its full course despite some of the poor managerial decisions that plagued it. It was always going to be a very long-term investment and I am sure Olam will do well with it in the future.

Snoopy, thanks for your (often solo) efforts and in depth analysis on this thread. I have enjoyed learning about your style of analysis and investment.

You might get a chance to buy back in.....OLAM was down 21% yesterday in NY according to a Bloomberg report.
A short seller called Carson Block is betting against the company because he questions the company's accounting methods. He has a pretty good record at this sort of thing.
Sure to be elsewhere in the press if you google it.

[Under Surveillance]

You might get a chance to buy back in.....OLAM was down 21% yesterday in NY according to a Bloomberg report.
A short seller called Carson Block is betting against the company because he questions the company's accounting methods. He has a pretty good record at this sort of thing.
Sure to be elsewhere in the press if you google it.

Here is a link to an article: http://www.businessweek.com/news/2012-11-19/olam-plunges-after-muddy-waters-carson-block-questions-accounts

The implication that Olam's accounting methods overstate how well it is doing, whereas there has been criticism on this thread that Olam is understaing how well its subsidiary NZS has been doing.

An interesting sideline is that Olam was founded in Nigeria.

[Snoopy]

I see Olam announced today they have 0ver 90% hence unconditional- so very little to said.


Given the current plight of Olam (shares suspended in Singapore) I am considering not accepting the offer, because I don't fancy having to go to a court in Singapore to get my money. The offer went unconditional on 13th November and Olam promised to pay out within 5 days. So I have a question to put to former shareholders who accepted into the offer. Has the money arrived in your bank account or not?

SNOOPY

[Snoopy]

You might get a chance to buy back in.....OLAM was down 21% yesterday in NY according to a Bloomberg report.
A short seller called Carson Block is betting against the company because he questions the company's accounting methods.


Carson Block is complaining about the valuation of Olam's biological assets. I calculate around $US17m of those questioned valuations are from NZS. I can't answer for the rest of Olam. But Carson Block seems to be saying that biological assets are something on the company's books just waiting for sale. This is not the case with dairy cows.

The product for sale is milk, not the cow. Of course there are some cows that are culled and other bobby calves sold off. Carson Block could be right in that these cows are on the books at a certain valuation and that price might change by the time those cows go to the works. But I can't see any other way to value cows than what the market price is at the time. How do the accountants of dairy farmers in NZ handle this?

Once thing I will agree with Carson Block on though is that Olam is very heavily indebted. The last full year accounts looked like 20% equity 80% debt, if you accept Olam's biological asset valuations. Olam looks like a rather risky investment from that angle alone.

SNOOPY

[n908671]

So I have a question to put to former shareholders who accepted into the offer. Has the money arrived in your bank account or not?

SNOOPY

Sent my acceptance in last week and got paid on Monday night.

[Snoopy]

Carson Block's open letter to the Olam Chairman:

-------

To Olam CEO Sunny Verghese and the Board of Directors:

In the two and one-half years Muddy Waters, LLC has been openly criticizing publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest. On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event. He presented facts about Olam along with Muddy Waters’s opinion that Olam is at risk of collapsing due to multiple factors, including its debt load. As Olam has since said, his comments were not overly substantive. But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a “fly-by-night company”. It has further evidenced a bizarre fixation on baseball caps.

Olam’s disproportionate reaction is extraordinary in our experience. Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders. We also note Olam’s attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action. In no way does it make Olam stronger. The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet. Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million. In other words, you did the exact opposite of what you should have done. Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege. Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable. Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can. Our research into Olam has been exhaustive, and we plan to resolutely stand by it regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage. The clock is likely ticking.

Warmest Regards,
Muddy Waters, LLC

-----

SNOOPY

[Romulus]

Yes I accepted along with others in the group and we all have received full payment in our accounts on Monday 19th. If what is half true about Olam, we can forget about the usually reasons to accept or not.

[Snoopy]

At issue here is the Cost of Equity (Re) Figure that Simmons has quoted at 11.7%.

In truth there is no universally agreed standard as to how to do this. In its most basic form, this calculation is done using what is termed the "Sharp Linter CAPM Specification", the formula for which is quoted below:

Re = Rf + Be(Rm-Rf), where

Rf = Risk free rate of Interest
Be = Equity Beta
Rm = Expected return of Market

More explicitly (Rm-Rf) is the 'Market Risk Premium' of the investment.

Now let's see what happens when we pump Simmons own derived figures into this formula. Simmons has told us he is assuming a company premium 6.0 and a Uruguay country premium of 4.5 (based on the estimated Uruguayan bond default spread and the ratio of local equity market volatility and country bond volatility). The risk free rate of return is noted at 2.7%

That implies the total expected market return to cover all risks is:

2.7%+6.0%+4.5%= 13.2%

More importantly the market premium risk is:

(13.2%-2.7%)= 10.5%

So we can now Calculate the Cost of Equity using Simmons own figures and the "Sharp Linter CAPM Specification"

Re= 2.7% + 0.6(13.2%- 2.7%) = 9.0%

That is rather a different figure to the 11.7% that Simmons quotes.

It is just possible I have made a mistake in the above calculation (could someone please verify what I have done). It is also possible that Simmons has used a different approach to calculate Re.


Olam posted a notice to the NZX that with the close of takeover offer they hold 97.995% of the shares. Unfortunately that means there is no path of resistance left. There aren't enough disgruntled shareholders remaining to get an alternative valuation. I am one of those shareholders still holding out. The Olam sheep dog is after me, but I have done a 'Shrek' and am hiding under a rock.

I didn't accept because I wanted to make it clear in my own mind about the cost of equity. After some coaxing I have managed to figure out how Simmons got his figure. The formula used was a bit different.

Re = Rf + Be(Rm-Rf) + Rc

Also, the asset Beta (at 0.6) has to be altered to become the equity Beta (at 0.75, based on an 80% equity 20% debt target leverage of the planned for recapitalised company).

So putting the Simmons number into this modified equation we get:

Re = 2.7% + 0.75(6.0%) + 4.5% = 11.7%

That clears up the mystery. It doesn't mean I am comfortable over the answer though!

SNOOPY

[Snoopy]

That clears up the mystery. It doesn't mean I am comfortable over the answer though!


I wouldn't go so afar as to suggest Simmons is wrong, but there are two points that do not feel right about this Simmons calculation.

1/ Why does the cost of equity, contain a factor (the equity Beta) that depends on the cost of debt? Is not the cost of debt already taken into account in the WACC calculation under the 'cost of debt' header? Why is it in there twice?

2/ Why is the 'Market Risk Premium' given different treatment to the 'Currency Risk Premium'? Obviously both are risks of business. But the market risk premium is modified by the equity Beta, yet the currency risk premium is not?

I may sound like a pointy head dancing on the end of a pin with these points. But both make an enormous difference to the valuation of NZS!

SNOOPY

[Xerof]

Its a long time since I used WACC, but it is exactly that, a weighted average cost of capital, and each contributing liability should have a Beta, implied rate of return, and risk free rate.

Perhaps in this case (I haven't looked), Simmons used 10.5% as the implied real rate of return required for both equity and debt. I find that a bit odd, as cost of equity should always been significantly higher than debt.

A Beta, asset, at 0.6% is good. It means the Company's price volatility is less than the total market, but moves in the same direction.

But you know that already......

[Snoopy]

Its a long time since I used WACC, but it is exactly that, a weighted average cost of capital, and each contributing liability should have a Beta, implied rate of return, and risk free rate.

Perhaps in this case (I haven't looked), Simmons used 10.5% as the implied real rate of return required for both equity and debt. I find that a bit odd, as cost of equity should always been significantly higher than debt.


If you go back to my post 560 Xerof, you will see that Simmons used the cost of debt as 6.8% and the cost of equity as 11.7% in his WACC calculation. So no grounds for thinking the calculation 'a bit odd' on those grounds.

The odd bit (in my eyes) is that the 'equity beta' has been modified from the 'asset beta', to allow for the fact that after the proposed capital restructuring each 'asset' will be financed by 80% equity and 20% debt.

My gripe is that the 'cost' of the proposed 20% of debt has already been factored into the WACC in the first bit of that calculation via the term 'Rd' (the cost of debt), and it doesn't seem right that the cost of debt should increase the cost of equity via the equity term 'Re' of the WACC equation. It looks like double counting to me.

SNOOPY

[Snoopy]

Interesting, note the part about "subsantial capital raisings if nzfsu reamains listed". I guess the question is assuming it remains listed, is nzfsu worth more or less than 55 cents after the offer? I suspect 55 cents could be a short term peak in the share price, and then following on from it the SP drops down a little until capital raisings are finished. In which case maybe take the 55cents now and buy back in at a discount later? a risky strategy as we could reach compulsory takeover territory if everyone does it. In my view if you only get 55cents maybe we should force a vote on liquidating the company? that could return us as much as 70 cents.


75c was certainly a big improvement on the first Olam offer of 55c. Sometimes in these situations if you can't beat them it pays to join them. I have to admit to having thoughts of buying Olam shares myself. But given all the Carson Block business, I thought it might be interesting to run the 'Z-factor' test on Olam for FY2012.

A=(Working Capital)/(Total Assets)

WC= (Inventory+Biological assets)+(Trade Payables-Trade Receivables)= ($631m+$4,410m)+($1,597m+$321m)-$1,133m= $5,826m

So A = $5,826m/$13,828m = 0.421

-------

B= (Retained earnings/Total Assets)

($628m-$125m-$96m)/$13,828m= 0.0294

--------

C= (EBIT/ Total Assets) = $875m/13,828m = 0.063

--------

D= (Market value of Equity/Total Liabilities) = (1.58 x 2,442m)/$10,300m = 0.375

--------

E= (Sales/Total Assets) = $17,094m/$13,828m = 1.236

--------

Z= 1.2A+1.4B+3.3C+0.6D+1.0E
= 1.2(0.421)+1.4(0.0294)+3.3(0.063)+ 0.6(0.375)+1.0(1.236)= 2.215

--------

This is a very similar number to PGW. While I was prepared to invest in PGW with a 2.2 Z value (because I know there is a path set for paying down PGW debt) , I am less inclined to do so for Olam. So another potential investment of mine doesn't make the cut :-(.

SNOOPY

[duncan macgregor]

Since no one is answering might i be allowed to ask a question?. Why in all the hell would you be silly enough to think that other people might confess to this stupidity. Surely you can pour your money down the drain in a more enjoyable activity. macdunk

Thats what makes the market you think this i think that. Farming world wide has a very low capital return on investment. Take any country in this world then show me a decent return other than a capital gain at the end if you can. Farming is a family life style business not a company business, just ask the russians.
Good luck with your investment, i expect of myself much higher returns than you could possibly hope for with this one. MACDUNK

Hey Macdunk amazing how the economics of this investment have changed over the last year, trust you have had a lot of stocks finish over 100% up in the last year. Its great how bad investments get souped up to catch the vulnerable into a false sense of security as the smart ones bail out. What I notice is the the accountant types trying to work numbers on a simple practical farm company . Farming is not a hands off business run by over paid managers with clean hands. Its a family well paid life style that returns 6% on capital nothing more nothing less that pays wages to its members plus a capital gain at the point of sale. I would guess that even my old mate snoopy one day will agree with that. Simple equation dont borrow to much at 7% for a return of 6% long term. I dont invest in the market the way I used to but still interested to see my long term predictions trying to save others coming home to roost. Snoopy and I have always had our battles of interest with some heated moments now and again but we always spoke our minds without fear or favour. Told you at the start Snoop get down on the farm and shovel a bit of cow sh*t out the cow shed and listen to what the farmer has to say about finances. QUOTE from page two of this thread. Macdunk

[Snoopy]

Simple equation dont borrow to much at 7% for a return of 6% long term.


This is the best gem of truth in your post Macdunk. I had very few shares compared to some in this. However, it does appear that many of those farmer shareholders with shares in the hundreds of thousands did not have the money to buy those shares. They simply borrowed it. Then when things got a bit tougher on the real farm at home they had to make the choice of selling off some assets to keep those home cows milking for them. The cows in Uruguay had to go!

I have been saving up for two years for the well signaled, now cancelled NZS cash issue. This is a very disappointing finish for me. Despite your criticisim Macdunk, and one or two hiccups along the way (droughts, underresourced power grid) I would say that NZS has proved itself. If I got a chance to invest in dairy farms in Uruguay again I would do so tomorrow. However, I would be more careful as to who my fellow shareholders were. Fewer NZ dairy farmers would be good!

The crazy bit in all this is that with Olam as the 100% shareholder, debt attributable to these assets will go up not down, due to the indebted nature of the Olam balance sheet. That is crazy and makes a mockery of the Olam claim that NZS should have more equity and less debt blah blah blah. If Olam do go under as Carson Block would have everyone believe, then I would like to see NZS refloated on the NZX. To me that would make far more sense than the twisted Fonterra float that everyone seems so keen about.

SNOOPY

[Snoopy]

How Simmons got his figure. The formula used was a bit different.

Re = Rf + Be(Rm-Rf) + Rc

Also, the asset Beta (at 0.6) has to be altered to become the equity Beta (at 0.75, based on an 80% equity 20% debt target leverage of the planned for recapitalised company).

So putting the Simmons number into this modified equation we get:

Re = 2.7% + 0.75(6.0%) + 4.5% = 11.7%

That clears up the mystery. It doesn't mean I am comfortable over the answer though!


I have had some more thoughts on this cost of equity calculation. The 'Re' that is calculated above is a feeder figure that goes into the cost of equity calculation.


WACC=Rd(1-Tc)(D/V) + Re(E/V)

Where:

Rd = Cost of debt, before taxes
Tc = Corporate Tax rate
D = Market value of Debt
E = Market value of Equity
V = Market value of Firm (D+E)
Re = Cost of Equity

I feel part of my problem here is that 'debt' and 'equity' reside in different parts of the balance sheet. Thus I tend to think of these as separate quite distinct things, not to be muddled up. However, it is clear that a company with lots of debt and little equity is going to have a much more volatile share price than a company in the same industry group, but with no debt.

So although I am correct in saying that debt and equity should not be muddled up, the market behaviour of that equity is influenced by the debt, even if the paid up equity itself remains distinct. IMO that means the term 'Cost of Equity' is not a good description of what is being measured. In fact what 'Re' is measuring is the 'cost of equity under the influence of company borrowings'.

Of course in practical terms this only matters when a company wants to raise new equity on the market. The more up and down the share price is, then the greater the discount any newly issued shares will need from market price, for it to be worthwhile for investors to take those new shares up.

The fact that this same measure (Re) is also used as part of the background calculation when evaluating a takeover bid is I think unfortunate. Unfortunate because no new shares are being created. So as I see it the volatility of any existing shares should not affect what a third party is willing to pay for those shares at the particular time of any bid.

SNOOPY

[Snoopy]

Professor Keith Woodford, professor of farm management and Agribusiness at Lincoln University published this article yesterday

http://keithwoodford.wordpress.com/2012/12/16/the-veil-comes-down-on-nzfsu/

A pretty sobering quote here.

"My estimate is that the initial shareholders invested at an average price of about $NZ1.17 in 2006 and 2007. I also estimate that Olam progressively bought out these shareholders between 2010 and 2012 to achieve an average buy-in price of about 65c. So on average the original shareholders lost more than 40% of their investment."

Makes my own 6% loss of capital overall seem rather insignificant!

And here is a condensed version of the profs views:

"I knew a little about the sub tropics myself, having spent nearly 20 years in southern Queensland, and I came away from that 2006 trip uneasy that the NZFSU people were not seeing some aspects of sub-tropical reality. Too many technical questions were quickly brushed away. This was clearly a trip to drum up the enthusiasm of potential investors and not a visit to expose potential challenges."

"My personal view is that as Kiwis we tend to be a little arrogant about our farming expertise. Related to this, we also tend to under-estimate our good fortune in New Zealand to have a temperate and maritime climate. Continental climates are much more challenging. We also tend to under-estimate the importance of the supporting industries and institutional environment here in New Zealand. And we don’t listen enough to what the locals in foreign countries have to tell us about the realities in their countries. We think we can blast through."

"Here in New Zealand we tend to give insufficient thought to the need for farming systems to be resilient. One of the messages to be learned from pastoral farming in Uruguay is that it is easy in the good seasons. The real test of appropriateness is the ability to withstand the bad years. Linked to this is a fundamental truism that under Uruguay conditions the typical Uruguayan dairy systems, based on crop and pasture rotations rather than permanent pastures, are indeed more resilient in dealing with the bad years."

"In comparison with many areas of the world, pastoral farming in New Zealand is somewhat easy."

SNOOPY

[duncan macgregor]

Snoopy the sad part about it is you can see it all coming from a practical view point, and cant convince others with little practical knowledge of the out come. The greedy manipulaters smart enough to take advantage of the situation end up being the only winners. Farming will always be a family run business, no more no less. This business in the end will be sold off in dribs, and drabs with the profit at the end coming off the backs of the initial gullable investors. The capital gain will far exceed the very small return that this business will generate taking into account the snouts in the trough. Stick to what you understand when investing if you cant work out who the PATSY is then its probabely you. Macdunk

[Snoopy]

If what is half true about Olam, we can forget about the usually reasons to accept or not.


Olam has instituted a bond issue, with an attached right to apply for more Olam shares in the future. It is underwritten by Temasek, an investment arm of the Singaporean government.

Here is what reader Thermopylae said on line about this bail out at the financial times website:

-----

Such an interesting saga, that the underwritten bond/warrant issuance will cut short. Beyond the murkiness of Olam's accounts and limited disclosures, questions raised and unlikely ever to be answered include:

- if the accusations were as false as Olam claims, then why the sudden refinancing?
- if the proceeds are simply to prudently refinance upcoming maturing debt, no questions asked (or answered), then paying for a full underwrite AND giving away equity warrants seems quite an expensive way to go about it;
- on the other hand, this action could be a sign of prudent longer term financial strategy in which bondholders are to be kept whole at the expense of shareholders;
- in either scenario above, Muddy's strategy will have been vindicated, and many valid questions will remain unanswered. Prudent shareholders and rights holders should be wondering how much more delevering may be in store, as non-redeemed bond holders begin to wonder if their own repayment/exit is clear and unobstructed;

------

However Carson Block who started the saga comes in for some critical comment as well

------

- but is Muddy just an honest information broker (who also happens to be a short fund), or was this an attempt by an unregulated trader to distort market prices for the bonds and shares of a company whose business model exposed it excessively to this type of "damned if you do / damned if you don't" indirect extortion; if the latter, which other companies could be in line for similar mudslinging?

-------

SNOOPY

[Snoopy]

Simple equation dont borrow too much at 7% for a return of 6% long term.


Only a one liner on the former NZ Farming Systems Uruguay in the Olam FY2013 result update.


http://www.agrimoney.com/news/olam-flags-funding-progress-even-as-profits-tumble--6220.html

"The underperformers included Gabon timber, Indian sugar milling, and the Russian and Uruguayan dairy operations."


The Olam International share price hovers around a two year low. Hedge fund manager Carson Block is keeping up the pressure on Olam, after Olam dropped their legal action against him. This from 1st September 2013.

http://www.valuewalk.com/2013/09/muddy-waters-olam-report/

"Muddy Waters has just issued a new report attacking Olam and stating that the company likely cannot repay its debt and shares are worthless."

"We continue to believe that, in a world where capital is allocated to maximize economic efficiency, Olam’s shares have no value. The Company has simply borrowed too much money, and then invested in projects that will not generate sufficient returns to repay its debt obligations."

"Adjusted return on average assets was only 1.8%. (We adjusted net income to S$261.8 million by excluding from Olam’s operational profit after tax all biological gains and changes in measurement of derivatives."

Perhaps the best person to elect to the Olam board might be Macdunk?

SNOOPY

[Snoopy]

"The underperformers included Gabon timber, Indian sugar milling, and the Russian and Uruguayan dairy operations."


A bit more detail from the FY2013 annual report for those who follow the dairy industry globally.

-------

Dairy

Poor global production output, coupled with increasing demand for dairy products, resulted in supply constraints and this in turn led to a higher price environment in FY2013. Although strong milk prices were favourable to the upstream dairy business, the positive impact was offset by lower milk production at our dairy farming operations in Uruguay (NZFSU) as a result of poor weather conditions persisting through the year. Since our 100% acquisition of all the shares in NZFSU was completed in December 2012, we have embarked on a restructuring programme to focus our management team on improving the operational metrics. In Russia, our dairy farming also faced operating challenges which impacted margins for the upstream business. While our upstream business remains attractive in the long-term, we are undertaking a review of the asset intensity of the overall dairy portfolio and expect to implement a restructuring plan over time.

Outside of the upstream business, our dairy processing in New Zealand through Open Country Dairy generated positive returns in FY2013. Given the global shifts in international trade with reduced intervention buying and the withdrawal of export quotas, we concentrated on building a stronger origination platform in the USA and EU markets, while extracting maximum value from our downstream dairy processing investments in Malaysia and Côte d’Ivoire.

-------

The bit put into italics was done so by me. Code perhaps for the potential selling down of those Uruguayan farm assets?

SNOOPY

[noodles]

Why do you care? They are no longer listed.

[Snoopy]

Why do you care? They are no longer listed.

I guess it is the kid leaves home syndrome. Just because they are gone (from my portfolio in this case), doesn't mean you lose interest in them. But also because the dairy market is global, it is a useful benchmark for NZ dairy based investments that I might be interested in buying.

SNOOPY

[Snoopy]

Olam has instituted a bond issue, with an attached right to apply for more Olam shares in the future. It is underwritten by Temasek, an investment arm of the Singaporean government.

Here is what reader Thermopylae said on line about this bail out at the financial times website:

-----

Such an interesting saga, that the underwritten bond/warrant issuance will cut short. Beyond the murkiness of Olam's accounts and limited disclosures, questions raised and unlikely ever to be answered include:

- if the accusations were as false as Olam claims, then why the sudden refinancing?
- if the proceeds are simply to prudently refinance upcoming maturing debt, no questions asked (or answered), then paying for a full underwrite AND giving away equity warrants seems quite an expensive way to go about it;
- on the other hand, this action could be a sign of prudent longer term financial strategy in which bondholders are to be kept whole at the expense of shareholders;
- in either scenario above, Muddy's strategy will have been vindicated, and many valid questions will remain unanswered. Prudent shareholders and rights holders should be wondering how much more delevering may be in store, as non-redeemed bond holders begin to wonder if their own repayment/exit is clear and unobstructed;

------



An interesting postscript is playing on the Olam (now full owners of NZFSU) /Temasek relationship over the past week. Temasek has made an offer of 100% of Olam, but not all market commentators are sure it makes sense for them.

http://m.todayonline.com/business/temasek-units-offer-olam-credit-negative-moodys

-----


Published: March 17, 7:44 PM

SINGAPORE – The offer by Temasek Holdings’s unit to take over Olam International is credit negative for the Singapore investment firm, Bloomberg news agency reported Moody’s Investors Service as saying.

The acquisition, which values one of the world’s top three coffee and rice traders at S$5.3 billion, will put pressure on Temasek’s “portfolio liquidity”, said Moody’s, which rates the investment firm at Aaa. Olam’s 2 per cent dividend yield in 2013 is also lower than Temasek’s return of about 3 per cent, it said.

“Bringing a new company under the Singapore umbrella negatively pressures portfolio liquidity,” Mr Alan Greene, a senior credit officer at Moody’s, said in the report, which estimates 65 per cent of Temasek’s S$215 billion investments are in Singapore dollars.

The bid by Temasek’s unit reflects growing interest in agricultural assets as rising global populations and emerging middle classes boost food demand. Breedens Investments offered S$2.23 cash per share, a 12 per cent premium to Olam’s closing price of S$1.995 before the bid was announced on March 14.

Temasek, which owns 24.6 per cent of Olam according to Moody’s, is the company’s biggest shareholder.

------

On the surface the deal makes little sense. If however the underlying structure of Olam is really very weak, despite director denials, then shoring up the capital structure to save Temasek's existing 24.6% stake makes a lot of sense. After all being under the umbrella of the principal investment arm of the Singaporean government should lower Olam's interest bill.

Perhaps Carson Block's nightmare vision for Olam as it stands now is given credibility by the Temasek takeover proposal? Other commentators see the Temasek offer as mean. So maybe Temasek is not really trying for 100% and will be happy with 51% control? That would allow Temasek to sell off parts of the business to avoid any perceived liquidity trap. Perhaps the ultimate refloating of what was NZFSU got a little closer today?

SNOOPY

[Snoopy]

From www.olamgroup.com

-------

New Zealand Farming Systems Uruguay To Invest US$80.0M In New Dairy Processing Facility -

Olam International Limited (“Olam’’), a leading agri-business operating across the value chain in 65 countries, announced today that its wholly owned dairy farming subsidiary New Zealand Farming Systems Uruguay (“NZFSU”) will be investing US$80.0 million to establish a new dairy processing facility in the central region of Uruguay, accessible to its farms.

The project enables Olam to fully integrate its dairy supply chain and realise the full potential of NZFSU’s dairy farming operation by leveraging its global trading and distribution network. The greenfield dairy processing facility will initially have a capacity to process 600,000 litres per day, going up to one million litres of milk per day – the level of milk production that NZFSU dairy farms are expected to reach at steady state.

Olam’s Managing Director and Global Head for Dairy, Coffee and Commodity Financial Services, Vivek Verma said: “The proposed dairy processing investment is part of our strategy for NZFSU to realise the full value of dairy farming. The processing plant will be uniquely positioned and differentiated with the control on milk supply through captive milk production and well-placed to meet our customers’ call for high quality dairy products with complete traceability and stringent food safety standards.”

The facility will produce a combination of dairy products, including whole milk powder, skim milk powder and butter, which will be exported to key markets where Olam currently supplies to, including China, Russia, Middle East, Eastern Europe and Africa, as well as neighbouring countries, such as Brazil, Paraguay and Venezuela.

Olam’s Executive Director of Finance and Business Development A. Shekhar said: “Our Dairy business had restructured its supply chain operations as well as optimised its balance sheet, freeing up resources to focus on margin accretive projects. In time to come, if we execute this well, the expansion of NZFSU into midstream processing will be a prized integrated farming and processing model that will truly leverage Uruguay’s comparative advantages and unlock the full intrinsic value of the assets we have built in this business.”

Olam’s Senior Vice President and Regional Head for South America M. Sathyamurthy said: “This investment signifies our continued commitment to Uruguay’s dairy sector. In particular, we would also become one of the largest employers in the sector, supporting the growth in export revenues of this country.”

Approximately US$5.0 million of the investment will be allocated for the purchase of a 94.0% stake in BG Industria Láctea S.A., a company based in Uruguay, in order to acquire the land, licences and permits required for the construction of the plant. The dairy processing plant is expected to commence operations in 2017.

-------

Shame on those NZ shareholders who capitulated in the sell out!

SNOOPY

[Snoopy]

From www.olamgroup.com

-------

New Zealand Farming Systems Uruguay To Invest US$80.0M In New Dairy Processing Facility -

Olam International Limited (“Olam’’), a leading agri-business operating across the value chain in 65 countries, announced today that its wholly owned dairy farming subsidiary New Zealand Farming Systems Uruguay (“NZFSU”) will be investing US$80.0 million to establish a new dairy processing facility in the central region of Uruguay, accessible to its farms.

The project enables Olam to fully integrate its dairy supply chain and realise the full potential of NZFSU’s dairy farming operation by leveraging its global trading and distribution network. The greenfield dairy processing facility will initially have a capacity to process 600,000 litres per day, going up to one million litres of milk per day – the level of milk production that NZFSU dairy farms are expected to reach at steady state.

Olam’s Managing Director and Global Head for Dairy, Coffee and Commodity Financial Services, Vivek Verma said: “The proposed dairy processing investment is part of our strategy for NZFSU to realise the full value of dairy farming. The processing plant will be uniquely positioned and differentiated with the control on milk supply through captive milk production and well-placed to meet our customers’ call for high quality dairy products with complete traceability and stringent food safety standards.”

The facility will produce a combination of dairy products, including whole milk powder, skim milk powder and butter, which will be exported to key markets where Olam currently supplies to, including China, Russia, Middle East, Eastern Europe and Africa, as well as neighbouring countries, such as Brazil, Paraguay and Venezuela.

Olam’s Executive Director of Finance and Business Development A. Shekhar said: “Our Dairy business had restructured its supply chain operations as well as optimised its balance sheet, freeing up resources to focus on margin accretive projects. In time to come, if we execute this well, the expansion of NZFSU into midstream processing will be a prized integrated farming and processing model that will truly leverage Uruguay’s comparative advantages and unlock the full intrinsic value of the assets we have built in this business.”

Approximately US$5.0 million of the investment will be allocated for the purchase of a 94.0% stake in BG Industria Láctea S.A., a company based in Uruguay, in order to acquire the land, licences and permits required for the construction of the plant. The dairy processing plant is expected to commence operations in 2017.


From June 2015 Quarterly Report:

Given the continued underperformance of the Dairy farming operations in Uruguay, Olam has decided to further restructure this business and defer its planned processing investment there. These actions are likely to result in a one-time restructuring cost in H2 2015 (July - December 2015)

SNOOPY

PS More detail from the press conference on the June 2015 quarter:

------

(Previous quarter prelude: The upstream business in Uruguay is the one that is dragging the segment down
and that we see will have continuing profitability issues for the remainder of this financial year, I'm talking about the new financial year going until December. Various measures are being taken to arrest the decline and recover the operation and that you will start seeing the results only from the following year. So we've submitted and got approval for a two year revival plan for the Uruguay dairy farming operation that will include 2015 and 2016 which would be the turnaround year for us as far as Uruguay dairy farming operations are concerned)

Coming to dairy, I think there we have two issues. One is the operating performance of Uruguay that we have talked about in the past. We've been talking about that over the last few quarters. We had made various changes in terms of the operating structure, which again I highlighted in my last quarterly briefing, and we have seen improvements in May and June in our operating performance and in yield and productivity.

But in the last two months, as most of you would be aware, dairy prices have taken a hammering. They were bearish for the last over nine months, but in the last two months they have taken a further steep fall. And current dairy prices and the outlook of dairy prices remains very, very weak, so much so that even in a place like New Zealand, which is the most cost-effective producer of milk, there is large scale culling being contemplated. So clearly we have moved up the changes we are making in Uruguay beyond the operating aspects that we were focused on. We are now taking some far deeper cuts in terms of restructuring the number of farms, bringing down the number of farms, rationalizing our herd again, both by a mix of culling as well as moving herds into more centralized farms, and also cutting out due to that some parts of the infrastructure and overhead costs that we have. This is all happening as we speak. We believe and we want to call this out right upfront that in Q3 and Q4 there will be some one-off restructuring costs that we will have to take. It is still not something that -- we are working on it and hopefully by the next time we meet for the next quarterly briefing we'll have a better sense.

But what we want to do -- we don't see the current bearishness in milk prices. It's cyclical in some ways because of excess supply and the fall-off in demand, but we don't think this will correct in the next six to nine months. And we want to take some actions ahead of the curve, both to address the operating bleed in Uruguay as well as rationalize and position ourselves when the prices do pick up in the early part of next year. So that's potentially had, has had, a big impact for the first half as well as a continuing impact for Q3 and Q4, which we are really focused on. And I want to just assure you that the plan that we are drawing out right now, which we'll be in a better position to announce when we meet next quarter will hopefully address both the bleed as well as the long-term business model in our participation in Uruguay.
I'd also like to point out that we have in light of this current situation deferred the processing investment that we had announced previously and we have put that on hold. We have just taken; we have not spent too much and therefore it won't be a major impairment. But we have put that on hold until we resolve the basic farming structure.

----------

[Snoopy]

From June 2015 Quarterly Report:

We had made various changes in terms of the operating structure, which again I highlighted in my last quarterly briefing,


More detail on the above in a question from the floor:
"Hi. I'm Rafael from Bloomberg. I think you mentioned you will have -- might have some one-off restructuring cost in Uruguay in the next half. So what sort of range can we expect this cost to be?

Sunny Verghese- Olam International Ltd - Co-Founder, Group MD and CEO

"It's difficult to give you a precise range at this point in time. What Shekhar told you is that by Q3 that will get clearer. But the plan is to reduce our total farms from the current roughly 49 farms that we have to about 32. And that will include then culling of cows from the 87,000 herd population that we currently have to somewhere around 50,000 cows. That will make it a more focused and closer, tighter operation. And then we will focus in building up the productivity in terms of milk production per cow per day and also reduce our overall cost."

"In that context our milk production will come down from what we had thought at full scope of 49 farms and 87,000 cows of between 200m and 225m of liters of milk, that will come down to about 150m liters of milk. So we will shrink and then we will decide whether we want to grow again at an appropriate time. That shrinking will result in some restructuring costs. Today we have not crystallized that because as we're speaking we are establishing which farms and how many and where and all that stuff. By the third quarter that will become a little bit more clearer and we will share that with you at that time."

"As Shekhar mentioned, it's important to also note that at current dairy prices -- I don't know how many of you are following the strikes in the UK by dairy farmers or the strikes in France by dairy farmers, or the suicides that have been reported in New Zealand, that farmers absolutely struggling to repay their loans. So the dairy industry -- and, as we all know in the commodity business, the cure for high prices is high prices and the cure for low prices is low prices. When prices in dairy remain below the cost of production for prolonged period of time, there will be a massive supply response. And if prices are high for a long period of time, there will be a massive supplier response, which will lead to lower prices. And therefore we see these cycles in the emerging markets. That has always been the case. It will never change going forward as well. That will be the scenario."

---------

Looks like some fairly drastic stuff going on behind the scenes in Uruguay!

SNOOPY

[Snoopy]

Sunny Verghese- Olam International Ltd - Co-Founder, Group MD and CEO

"The plan is to reduce our total farms from the current roughly 49 farms that we have to about 32. And that will include then culling of cows from the 87,000 herd population that we currently have to somewhere around 50,000 cows. That will make it a more focused and closer, tighter operation. And then we will focus in building up the productivity in terms of milk production per cow per day and also reduce our overall cost."

"In that context our milk production will come down from what we had thought at full scope of 49 farms and 87,000 cows of between 200m and 225m of liters of milk, that will come down to about 150m liters of milk. So we will shrink and then we will decide whether we want to grow again at an appropriate time. That shrinking will result in some restructuring costs. Today we have not crystallized that because as we're speaking we are establishing which farms and how many and where and all that stuff."


Reporting on the year ended 31st December 2015

-------

The Dairy farming operation in Uruguay was substantially restructured on account of the continued depressed market conditions in dairy and operational underperformance. We closed a significant number of dairy farms and reduced herd population from approximately 87,000 to 56,000 which resulted in a one-time restructuring cost of S$76.9 million in Q4 2015. We are encouraged by the improvement in farm operating costs and milk productivity post the restructuring. Subject to dairy prices, the business is expected to turn profitable from 2017.

------

At balance date the NZD and SGD were roughly at par. So a $76.9m hit spread over 87,000 cows means a downsizing cost of:

76,900,000 / 87,000 = $884 per cow

This is a similar price drop to the NZ Dairy cow price dip from mid 2014 to mid 2015. Over that time prices in NZ fell from $2100 to $1500 per dairy cow.

SNOOPY

[Newman]

[At balance date the NZD and SGD were roughly at par. So a $76.9m hit spread over 87,000 cows means a downsizing cost of:

76,900,000 / 87,000 = $884 per cow

This is a similar price drop to the NZ Dairy cow price dip from mid 2014 to mid 2015. Over that time prices in NZ fell from $2100 to $1500 per dairy cow.

SNOOPY[/QUOTE]
Here is the link to the article:
http://www.fwi.co.uk/business/dairy-farmers-should-forget-about-russia-ban-end.htm

It seems that milk is overproduced everywhere and a third year of low farmgate payout is very likely.

[Snoopy]

Reporting on the year ended 31st December 2015

-------

The Dairy farming operation in Uruguay was substantially restructured on account of the continued depressed market conditions in dairy and operational underperformance. We closed a significant number of dairy farms and reduced herd population from approximately 87,000 to 56,000 which resulted in a one-time restructuring cost of S$76.9 million in Q4 2015. We are encouraged by the improvement in farm operating costs and milk productivity post the restructuring. Subject to dairy prices, the business is expected to turn profitable from 2017.

------

At balance date the NZD and SGD were roughly at par. So a $76.9m hit spread over 87,000 cows means a downsizing cost of:

76,900,000 / 87,000 = $884 per cow

This is a similar price drop to the NZ Dairy cow price dip from mid 2014 to mid 2015. Over that time prices in NZ fell from $2100 to $1500 per dairy cow.


From p25 of the Olam International Annual Report

-----

Unlocking value: the sale-and-leaseback model

Since 2013 Olam has adopted a sale-and-leaseback model for its upstream operations across the USA, Australia, Uruguay and Africa. This asset-light model involves selling land, plantation assets, and related processing assets to investors who believe in their long-term value and then leasing them back for a rental fee over their remaining useful life. Through this model, not only do we unlock the value of these assets at a premium, we also enhance our returns by reducing asset intensity, thereby releasing cash and lowering our gearing. We still retain the production economics of an upstream operation as we continue to operate these assets and realise their value of the production output. This model has so far been adopted for our almond orchards in the USA and Australia, dairy farms in Uruguay and most recently for our palm plantations and milling assets in Gabon – the first of its kind in Africa, setting the template for us to do similar transactions to optimise our balance sheet going forward.

--------

Meanwhile Olam is looking to cut all ties with New Zealand

http://www.scoop.co.nz/stories/BU1609/S00612/nz-farming-systems-uruguay-to-cut-ties-with-nz.htm

"Olam has retained a New Zealand registration for the South American subsidiary since buying out minority shareholders and delisting it from the NZX in late 2012, with its registered office care of law firm Buddle Findlay in Auckland. But the latest annual report of Farming Systems says the group "has the intention to deregister the parent company from the NZ Companies Office and migrate to Uruguay."

"Farming Systems appears to have been hard hit by the downturn in global prices of dairy products, with its net loss widening to US$74.5 million in the year ended June 30, from US$69.5 million a year earlier. Sales fell 34 percent to US$48.9 million."

"The latest accounts show the Singaporean parent is still propping up the Uruguayan business, with US$206.9 million of interest-free loans, up from US$126.5 million a year earlier. At the same time, short-term bank loans in Uruguay fell to about US$55 million from US$124 million, resulting in total loans and borrowing rising to US$272.6 million from US$250.9 million."

This looks like a disastrous unfolding train wreck in Uruguay. I was annoyed to be forced out of the company taking a small loss in 2012 at the time. But I might have dodged a receivers bullet!

SNOOPY

[Snoopy]

From p25 of the 2016 Olam International Annual Report

-----

Unlocking value: the sale-and-leaseback model

Since 2013 Olam has adopted a sale-and-leaseback model for its upstream operations across the USA, Australia, Uruguay and Africa. This asset-light model involves selling land, plantation assets, and related processing assets to investors who believe in their long-term value and then leasing them back for a rental fee over their remaining useful life.

Six and a bit years on from the end of the NZX listing: 'NZ Farming Systems Uruguay' is still going, albeit under Olam International stewardship! Olam has retained the subsidiary name, despite cutting ties with NZ. I suppose when things have gone wrong since, it is corporately savvy to still blame New Zealand, while gains can be attributed to the new Singaporean ownership. Sometimes it is interesting to look back and see what has changed in those intervening years



Farms Operated Nov 2102Farms Operated Dec 2108


West


Cabure Dairy Farm (O)Cabure Dairy Farm


Menafra Dairy Farm (O)Menafra Dairy Farm


Valle de Soba Dairy Farm (O)Valle de Soba Dairy Farm


Catern Livestock


Gamarra Livestock (R)


Iruleguy Livestock (R)


Centre


Cardo Azul Livestock (R)Cardo Azul Dairy Farm


Cunyatay Dairy Farm (O)Cunyatay Dairy Farm


Donya Celia Dairy Farm (O)Donya Celia Dairy Farm


Gandara Dairy Farm (O)Gandara Dairy Farm


La Leticia Dairy Farm (O)La Leticia Dairy Farm


Naranjalas A Dairy Farm (O)Naranjalas A Dairy Farm


Naranjalas B Dairy Farm (O)Naranjalas B Dairy Farm


San Pedro Dairy Farm (O)San Pedro Dairy Farm


Santa Elvira Dairy Farm (O)Santa Elvira Dairy Farm


Arin Livestock (R)Arin Livestock


Benedeck Livestock


Cerro Zarco Livestock (R)


Danulia Livestock (R)


Don Sebastian Livestock (R)


Estancia Mendoza Livestock


Landa Livestock


Los Peralas Livestock


Mariezcurrena Livestock (R)


Masetapal Livestock


Olalquiaga Livestock (R)


Rava Livestock


San Francisco Livestock


Santa Rita Livestock (R)


Sastre Livestock (R)


East



Cerco de Piedra and Monasterio Dairy Farm (O)Monasterio Dairy Farm


Novillas Dairy Farm (O)Novillas Dairy Farm


Tobay Dairy Farm (O)Tobay Dairy Farm


Cuatro Cerros Livestock (O)Cuatro Cerros Livestock


El Higueron Livestock (O)El Higueron Livestock



Note: (O)= Owned, (R)= Rented

It is interesting to see that since 'we' sold out, there has only been one new dairy farm developed (Cardo Azul). In the west and central areas, the livestock rearing properties from 2012 (all rentals) have been largely 'swapped out' with others.

Subsequent to taking over, Olam have committed to spending $80m to building a dairy processing plant in Uruguay with the capacity to take the output from all of their dairy farms, The facility will initially have a capacity to process 600,000 liters of milk per day, going up to one million liters - the level of milk production that NZFSU dairy farms are expected to reach at steady state. The plant became operational in 2017, with the aim of making NZ Farming Systems Uruguay a vertically integrated producer and manufacturer. The plant is in San José, Uruguay (100 kilometers from the capital Montevideo).

From AR2017 p38 "Dairy farming in Uruguay continued to report improved financial and operating results year-on-year"

Further on in AR2017 p56

"Individual cow productivity achieved the highest levels compared to previous years. The improvement derives from better body condition of the herd at calving. Livestock management protocols implemented during 2016 significantly reduced livestock mortality and continued to prove successful during 2017."

Fast forward to the FY2018 management commentary p17 and we learn:

"the farming operations in Uruguay experienced drought conditions, leading to higher feed costs."

SNOOPY

[Snoopy]

Subsequent to taking over, Olam have committed to spending $80m to building a dairy processing plant in Uruguay with the capacity to take the output from all of their dairy farms, The facility will initially have a capacity to process 600,000 liters of milk per day, going up to one million liters - the level of milk production that NZFSU dairy farms are expected to reach at steady state. The plant became operational in 2017, with the aim of making NZ Farming Systems Uruguay a vertically integrated producer and manufacturer. The plant is in San José, Uruguay (100 kilometers from the capital Montevideo).


The former "New Zealand Farming Systems Uruguay" looks like it has come to a sticky (or should that be powdery?) end. I am a bit late in reporting as this article came out on October 23rd 2021

https://www-eltelegrafo-com.translate.goog/2021/10/salida-y-venta-de-olam-genera-gran-preocupacion-en-la-cadena-lactea/?_x_tr_sl=es&_x_tr_tl=en&_x_tr_hl=en&_x_tr_pto=sc


-------------------------

Exit and sale of Olam generates great concern in the dairy chain

"The departure and sale of fields of the multinational based in Singapore, Olam, one of the main milk producers in Uruguay -it has 20 dairy farms- generates concern in the dairy chain, sources in the sector revealed to IT Lechería."

"The information was released this week by Tiempo de Cambio on Rural radio. It is that the departure of a heavyweight from production, at a time when the sector seeks to come out on top, is bad news and a negative sign for the entire chain. As IT Lechería learned, up to now it is not clear how many of these dairy farms will be able to remain standing, but there are farms where these dairy farms are located, and they will not continue with dairy production, although at least three establishments would remain in dairy activity despite the change of owners the land."

"Olam had already reduced its production in 2020 when it handed over leased fields in Rocha and Lavalleja. The bulk of Olam's production is in Florida, while the Rio Negro area has the rest. Specifically, one of the industries that could be affected by the potential closure of dairy farms in that area is Alimentos Fray Bentos (producer of infant formula and milk powder). The other company that is also affected is Conaprole headquartered in Uruguay, the leading dairy manufacturer and exporter of milk in South America."

"Last August, the latest data published by the National Milk Institute (Inale), the price of milk sent to the plant in Uruguay was US$ 0.355 per litre. With respect to the aforementioned floor of March 2020, the recovery is a robust 26% or 7 cents per litre. This is the highest price since the beginning of 2015, when those records of more than US$ 40 cents that prevailed in 2013 and 2014 were left behind."

"The price of milk, expressed in US dollars, is in clear recovery from the floor it touched in March 2020, when the pandemic began and the dollar jumped in the domestic market. However, the increase in many of the costs does not allow this improvement in the price of the product to be translated into profits of a similar proportion for the dairy farmers."

"Perhaps one of the most emblematic cases in recent months is urea which, hand in hand with the rise in energy costs, is reaching its highest values ​​in several years. The Customs data for the import of urea in September 2021 is at a value of US$ 525 per ton, almost double the US$ 269 at which it was imported in March 2020."

--------------------------


I notice the article was still using the "New Zealand Farming Systems Uruguay" logo. That will be a perpetual reminder to Uruguayans of how stupid we NZers were thinking we could go over to another country and tell native farmers how to run their farms under a New Zealand engineered corporate model. Craig Norgate has been put to rest, and now, finally, so have his dreams.

SNOOPY

[whatsup]

The former "New Zealand Farming Systems Uruguay" looks like it has come to a sticky (or should that be powdery?) end. I am a bit late in reporting as this article came out on October 23rd 2021

https://www-eltelegrafo-com.translate.goog/2021/10/salida-y-venta-de-olam-genera-gran-preocupacion-en-la-cadena-lactea/?_x_tr_sl=es&_x_tr_tl=en&_x_tr_hl=en&_x_tr_pto=sc


-------------------------

Exit and sale of Olam generates great concern in the dairy chain

"The departure and sale of fields of the multinational based in Singapore, Olam, one of the main milk producers in Uruguay -it has 20 dairy farms- generates concern in the dairy chain, sources in the sector revealed to IT Lechería."

"The information was released this week by Tiempo de Cambio on Rural radio. It is that the departure of a heavyweight from production, at a time when the sector seeks to come out on top, is bad news and a negative sign for the entire chain. As IT Lechería learned, up to now it is not clear how many of these dairy farms will be able to remain standing, but there are farms where these dairy farms are located, and they will not continue with dairy production, although at least three establishments would remain in dairy activity despite the change of owners the land."

"Olam had already reduced its production in 2020 when it handed over leased fields in Rocha and Lavalleja. The bulk of Olam's production is in Florida, while the Rio Negro area has the rest. Specifically, one of the industries that could be affected by the potential closure of dairy farms in that area is Alimentos Fray Bentos (producer of infant formula and milk powder). The other company that is also affected is Conaprole headquartered in Uruguay, the leading dairy manufacturer and exporter of milk in South America."

"Last August, the latest data published by the National Milk Institute (Inale), the price of milk sent to the plant in Uruguay was US$ 0.355 per litre. With respect to the aforementioned floor of March 2020, the recovery is a robust 26% or 7 cents per litre. This is the highest price since the beginning of 2015, when those records of more than US$ 40 cents that prevailed in 2013 and 2014 were left behind."

"The price of milk, expressed in US dollars, is in clear recovery from the floor it touched in March 2020, when the pandemic began and the dollar jumped in the domestic market. However, the increase in many of the costs does not allow this improvement in the price of the product to be translated into profits of a similar proportion for the dairy farmers."

"Perhaps one of the most emblematic cases in recent months is urea which, hand in hand with the rise in energy costs, is reaching its highest values ​​in several years. The Customs data for the import of urea in September 2021 is at a value of US$ 525 per ton, almost double the US$ 269 at which it was imported in March 2020."

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I notice the article was still using the "New Zealand Farming Systems Uruguay" logo. That will be a perpetual reminder to Uruguayans of how stupid we NZers were thinking we could go over to another country and tell native farmers how to run their farms under a New Zealand engineered corporate model. Craig Norgate has been put to rest, and now, finally, so have his dreams.

SNOOPY

Yes and so many Kiwi farmers bought into this dream as a way of expanding their empires without getting their hands dirty, lesson for them , " stick to your knitting " which you are very good at !