Cheap as....!
Crazy. PNS won't be doing it for nothing....
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Okay... so my friends have been highlighting this one as a possible investment and at first glance the shares look stupidly cheap BUT meat processors have a truly shocking, actually notoriously shocking track record of massive swings in profitability (and I am still very time poor this week), so what I will do is pose some devil's advocate questions and seek feedback.
Co-op structure leads to an ill defined dividend policy.
What exactly is their policy in terms of payout's for patronage reward v dividends ?
Last year they paid a 3 cent patronage reward but no dividend ? Why were suppliers favored over shareholders ?
What evidence is there to suggest this is anything other than a pure cyclical stock ?
Normal PE valuation methods appear flawed in that there appears to be no set methodology for distribution of profits and a share is ultimately only ever worth the net present value of what it can pay you in dividends over its lifetime so a dividend yield valuation model seems most appropriate to me.
Assuming for a moment this is a pure cyclical company and looking at their dividend history over the last 3 years they have paid 2.8 cents, 0 cents and 5.4 cents, total 8.2 cents = average 2.73 cents. Grossing this up for imputation credits gives gross average payments of 3.79 cents per share per annum. If I expect a 7% gross return from a no growth cyclical company an average annual return of 3.79 cents suggests the shares to me are worth 3.79 / 0.07 = 54 cents.
I invite a full rebuttal from those invested as to why their investment thesis is different and a higher valuation is warranted and look forward to reading people's responses.
https://usx.co.nz/uploads/paperclip/...pdf?1586919432
https://usx.co.nz/uploads/paperclip/...pdf?1587091395
https://usx.co.nz/uploads/paperclip/...pdf?1595478544
So Silver Fern CoOp owns 50% of Silver Fern Farms Ltd.The other 50%owner is Chinese Shanghai Maling.
The CoOp's earnings are equity accounted.
SFF [Unlisted].
100,378,874 shares on issue at 65.1 cents gives a market cap of $65,346,647
eps 34.78 cps
PE..1.872 yes one point eight seven two....Note PE ratio is under 2 [two].
Net dividend per share 5.4 cps [in the bank this Friday]
Net dividend yield is 8.29% over 12 % gross.[ie fully imputed].
Equity ratio 81.93%
ROE 12.2%.This is based on their Total Equity of $304 mil.
Dividend policy of SFF Ltd.Minimum 30% of NPAT with target of 50% NPAT split 50/50 between CoOp and Shanghai Maling.
Note the latest payment was 37.5%.
I believe there is a strong future for "New Zealand grass feed red meats.".
My Valuation...$1.30....[note twice current share price].
Good points Beagle.
As percy has pointed out, the operating company has a clear dividend policy of paying out a minimum of 30% of NPAT to its 2 equal shareholders, SFF (Co-op) and Shanghai Maling.
You are correct that for the FY18 they paid out no dividend, due to a very poor year.
Once SFF receives its dividend from the operating company, its first step is to ascertain any need to cover operating deficits which includes cost of its own Board as well as its representatives on the SFF Ltd Board.
This year they also decided to keep $4.5m to replenish reserves to cover themselves should they not receive divies from SFF Ltd in future years.
Once they decide on a pool to be distributed, the formula they use to decide on a split is that a MINIMUM of 65% should be paid out as dividend and MAXIMUM 35% as Patronage Reward. As I said above, 2018 was an exception due to a low dividend.
Of interest is that SFF Ltd has a clear strategy that it has been implementing for a couple of years now, on where it is going and where it wants to be. There is a strong focus on capital investment to have best practice operation to deliver the "Plate to Pasture" market lead plan. They have clear goals on greenhouse gas emissions reductions and marketing. This focus has resulted in SFF Ltd being in the strongest financial position it has been in for the last 10 years with a goal of $150m aggregated profit over the 5 years period to 2023. It looks clear to me that Shanghai Maling has been a good partner and inserted some strong business focus to the company.
COVID has resulted in more consumer awareness and people now, more than ever, want to know where their food comes from and that it is clean and safe. Grass fed red meat meets that increased awareness perfectly.
Many thanks Percy and Iceman. I really appreciate you sharing your opinions and helpful links both above and by email..
My initial reservations include:-
I find Shanghai Malings effective control over SFF Ltd to be a concern here. They're part of the Bright Dairy group and as major shareholders of Synlait and with representatives on the board I'm on record several times as calling their strategy at Pokeno to not only be extremely risky but also the actions of progressing the building and commissioning of that facility, flying in the face of a high court ruling against them but proceeding to build anyway and risking the combined total of the last 6 years of Synlait's profits on a supreme court outcome...this is gross recklessness in the most extreme way I can recall for many many years.
The jury is out, (almost literally, awaiting a decision by the Supreme court) on whether this is one of the greatest corporate risk management fiasco's of recent years or not. I would have expected them to exert their influence as major shareholders and with directors on the board to manage the risk more proactively.
I assume there are different Chinese executives involved in SFF ltd than Synlait ? Even so I see effective Chinese operational control of SFF Ltd as a real negative most especially in the current extremely hostile, (effectively almost a cold war), geopolitical climate. The risk of corporate malfeasance such as for example transfer pricing at inappropriate prices, (sales of large quantities of products to friendly parties in China at below their true open market export value), has to be considered as being a serious risk here especially in the light of historical razor thin margins in this industry. Do I trust Shanghai Maling to run a clean and honest operation ?...that is the $64,000 question.
I have an elephants memory for deals where Kiwi shareholders have been treated very badly by Chinese controlling interests so I will tread very, very carefully and slowly looking further into this one.
http://www.silverfernfarms.co.uk/ass...6-2015-web.pdf
Pages 25 and 26 sets out the safe guards of the Shanghai Maling casting vote.
Look more than satisfactory to me.
Page 26 of what percy ? Your link is to a 2 pages media release
I found it I found it.
Was not where i expected it.....
Long story but I found it.
Try it again....it really works..
Thank you Wilkipedia.......lol.http://www.silverfernfarms.co.uk/ass...6-2015-web.pdf
Thanks percy. I agree. This looks satisfactory.
Like Mr B have had similar results in business dealings with PRC & wary of businesses tying up with a Chinese partner
But in SFF case the partnership has been a win win for both parties & has been good for SFF NZ shareholders
Not directly but most of China's corn and soy is used to feed chickens and especially pigs which were decimated last year by swine flu and are only just recovering. NZ meat exporters have done well as replacement protein and can expect to continue to do so.
Above posted by Jaa on Chinese/NZ trade relationship thread.
In terms of history, Beagle is correct - the meat industry does have a notorious shocking track record. Plenty of train wrecks and particularly corporate investments I think were almost always a disaster - Fletchers, Brierleys, PGW etc. Very much a checked history.
But at the same time, people definitely do make money out of the meat industry - just a few years ago Craig Hickson was EY Entrepreneur of the Year (ok so was Peter Harris but we'll gloss over that). There are plenty of smaller companies who make money, and of course Talleys own Affco - and for sure they ain't no mugs. A well-run, disciplined business with decent capitalisation in the meat industry does have profitability.
I think one of the big differences now is the old business strategy of "screw the opposition" has gone. While the industry is still very competitive, there appears to be less short-termist behaviour to do whatever to hurt competitors. While livestock numbers have been drifting lower, capacity is a whole lot less. SFF at least appear to be less about market share/volume than what they were in the past.
Senior management has basically changed completely in the last few years (and they had a couple that staff would have been pleased to see the back of). New thinking coming in from other industries is important - while balancing with industry experience is important because it is different to alot of other industries - deconstruction/seasonal/fickleness of supply. But at the same time, their debt levels are something completely different to what they were a few years ago - SFF were near enough to bust pre-Chinese buying 50% share, and this situation drove alot of short-term behavior and made them very vulnerable to competitors. They always struggled post buying Richmond in early 2000's - which while the strategy was right, way they did it wasn't and saddled them with alot of debt and drove away NI farmers - ie driving away supply.
I would expect that a large chunk of profit has been made out of beef, particularly in the North Island - and alot from the Chinese market. While SFF have had their lamb business shrink in relative size, they have defended their beef business - and when gets to the peak season, this is where the money can be made. They do a good job with bobby calves, and that helps get cull cows. Have been consistently around 30% of NZ's beef, and that has expanded with dairy, where as lamb & deer has been declining for years.
With SM, I believe different executives on the board to Synlait. Also, they still deal with other customers in China - not as if they only sell to SM. Believe they have to pay the market price, just like anyone else. Last year at CIE, SFF had a separate stand to Bright/SM. However certainly in terms of market access and in particular plant listings for China, no advantage being part-owned by a Chinese SOE - SFF have had plants waiting for quite a few years.
Can understand the supplier rebate share wariness - however the majority of their shareholders are suppliers - and SFF require supply. They are still at some level a Coop - albeit now a quasi-Coop. Farmers can be fickle beasts, and it is a PR/investment in the business. Consistency will help drive supply and shareholding - albeit for most farmers financially it wouldn't make a substantial financial difference.
Looking at their competition, while difficult to compare, fully capitalised they are well placed - especially against the likes of Alliance & ANZCO.
There are still risks and an industry that can be very fickle, based on demand, market access, seasonality, FX, weather etc, and a business that you pay your supplier in 7 days, but at very best you'd get money back in in 30-40 days. Their financial year end is to align with SM, and is nearing peak season - so now in the off-season, their debt would be likely alot less.
Part of it is that the old "one swallow doesn't make a summer" - which the industry is again a little notorious for. But I would fully expect that they were conservative with their stock valuations etc end of FY 2020 (Covid/China), but they've got through lockdown OK, and recently said they'd made a "strong start" to the year - which would be their bigger financial/throughput half of the year.
Percy has covered off the financials - and I think alot of those figures are compelling. Wouldn't bet the farm on them, but in todays market as one of the few investments can make in NZ agriculture, and have to take a long-term view.
Thank you Sideshow Bob for your very good overview of the situation.
Can I ask you this $64,000 question. If someone put a gun to your head so too speak and you had to make a best guess on average earnings per share in the next 5 years what do you see as a reasonably conservative average eps, (knowing this will vary significantly between years) ? Surely any assessment of this stock has to embrace its notoriously cyclical nature ? There's no growth here right ? This is a pure cyclical play ? If so wasn't last year the top of the cycle.
What other reason for the co-op to retain so much of the dividend other than they are worried the current year or next year they won't get much so they want to ensure their operational costs are covered for several years ?
I'm lost at sea here. I don't see any other way to estimate earnings going ahead than to take the average since SM came on board.
What assurance is there that the current year will anything like 2019 ?
What operational / structural / processing matters have been put in place so a repeat of abysmal profitability like 2018 doesn't happen again ?
Sorry for the 101 questions.
I'll have a crack......:eek2:
2019 was a record profit, but in an ordinary year, I'd say $20-40m, 50% share for the Coop, $10-$20m. So earnings of 10-20cps. Looking back over history is not completely applicable now with no long-term debt - which at peak season would blow out. But as a % of turnover, profit margin is typically 1-2% - so it is thin, and certainly vulnerable if some sort of shock or unforeseen event.
Growth from existing operations is difficult. Turnover has grown as a result mainly of prices etc - rather than more volume and have natural constraints with capacity at peak season. Extremely difficult to grow business off-peak. Not sure if any acquisition or similar is on the radar (would highly doubt it), and have pulled back from in-market presence in a number of markets (under previous management). Would largely ignore their retail branded initiatives as won't make a major contribution to the bottom line.
With the dividend, the FY was 31/12 and the dividend was delayed by Covid - and would see that they have paid out a minimal amount - and kept the remainder in the business. A number of companies have cancelled dividends and understand some reinvestment going on in plants/infrastructure - but mostly stuff with return (I think) rather than just things that they need just to keep going. Pre-SM when money was tight, they didn't reinvest into their plants as much as they should of. But with the Coop retaining money, ultimately I think they want that to be self-sustaining financially - not reliant on dividends from SFF Ltd. But in this environment not easy and better to salt some away for a future rainy day and then replenish when they can.
2018 wasn't abysmal profitability in comparison to history......but overall I think have much more discipline in the business, new management at key levels (none from 2015 are still there). Like I said, they aren't driven by volume or procurement share - but seems like if they can't make a dollar from it, why would they process? They shut a number of plants over the years which really costs, but seem to be the right size - and just sold their Fairton site - so more cash.
There is still a number of risks and issues in the macro environment - but certainly not alone in that.
Great post Sideshow Bob.
So eps.at last sale price of 65 cents.
10 cps gives a PE of 6.5
15 cps gives a PE of 4.34
20 cps gives a PE of 3.25
28 cps gives a PE of 2.27.SFF ltd are targeting a 10% ROE.At last year's $571mil it would mean 28cps to the CoOp.
30.75cps gives a PE of 2,11.That is equity of $571 plus retained earnings of $44.1875 total equity $615.18 mil 10%ROE on $61.51 mil equity is eps to CoOp of 30.75 cps.
This year's eps was 34.78 cps......The CoOp held back nearly $5mil rainy day money,and still paid a fully imputed divie of 5.4 cents per share.
So looking at eps from 10 cents to 30.75 cps, they look to have the capacity to pay the same fully imputed divie 5.4cps [8.3% net],or a lot bigger divies in future.
To add a bit of juice.SFF Ltd should receive approx $18mil from the sale of Fairton property.
Lets say they do have another pretty good year,and earn 28 cps.[this year 34.78 cps ]No need to hold back more rainy day money.Divie 8 to 10 cents fully imputed.At a share price of $1.30 net yield would be 6.15% or 7.69%.Double those yields on today's cost price of 65 cents.