ALF - Allied Farmers Limited

[Vaygor1]

Is this a crazy question?

The difficulty in researching ALF is because over the last few years the real story on market cap, earnings ability, dividends, PE ratios etc etc has been totally warped by (a) their predicament and resulting loss reporting and (b) the concurrent massive amount of share issues/consolidations that took place over the period.

I have looked at it from various angles and have had trouble coming up with any numbers I can have any confidence in, so I decided to analyse ALF all the way from 2001 till the first signs they were falling off the rails (by buying sawmills etc) and finally got some pretty consistent results.

I will spare the detail for now and don't want to go too far into any assumptions made in arriving at the following (you can read my previous posts for some of that)...

Firstly, a million shares in ALF right now equates to 1.1% of the company.
To buy 1.1% of ALF over the last year or so would have cost an investor between NZ$20,000 to NZ$30,000.
In the years leading up to ALF's train wreck, the same 1.1% would have cost well in excess of NZ$20 million to buy.
In other words the market currently values ALF at around 1/1000 of what it used to.

Some things have changed now for ALF since their crash, some of which makes their future fundamentals and ability to earn more uncertain. But if ALF survives (and I most certainly think they will) then the chance exists for them to rise like the phoenix from the ashes.

What if, after all the dust has finally settled, they have only 1/10 of their historical earning capacity? That would make 1.1% of ALF worth NZ$2 million. Even if it takes them 13 years to get there, that would still represent a capital gain of 40% per annum compounding from a purchase price of NZ$25k. Dividends would be the cherry on top.

Using historical data and taking a pessimistic approach I broadly calculate that ALF's share price should be 11 cents for every $1million in equity it has.

I think there is a real possibility that ALF will have NZ$1M in equity by the end of this financial year. They might even have it now.

If ALF eventually get say $10M back from Watson/Hotchins if that is possible, then there's a nice bonus.

I would enjoy some devils advocate / independent calcs / different views etc feedback from those who read this.

After my previous posts on ALF, I'm not expecting much though.

Vaygor1.

[minimoke]

I wish minimoke still contributed to this forum 'cause he/she was brilliant. (I looked up his/her profile and he/she hasn't logged in for quite a long time).

With earthquakes and all I've had other things on my mind. The shame of it all is that as I pop back not much seems to have changed. We still have the spruikers and dreamers and those not prepared to do some elementary analysis. I’d just remind people if you chase a dog with fleas you’re bound to get bit – its just the size of the bite that’s yet to be determined.

[Snoopy]

Some things have changed now for ALF since their crash, some of which makes their future fundamentals and ability to earn more uncertain. But if ALF survives (and I most certainly think they will) then the chance exists for them to rise like the phoenix from the ashes.

What if, after all the dust has finally settled, they have only 1/10 of their historical earning capacity? That would make 1.1% of ALF worth NZ$2 million. Even if it takes them 13 years to get there, that would still represent a capital gain of 40% per annum compounding from a purchase price of NZ$25k. Dividends would be the cherry on top.

Using historical data and taking a pessimistic approach I broadly calculate that ALF's share price should be 11 cents for every $1million in equity it has.

I think there is a real possibility that ALF will have NZ$1M in equity by the end of this financial year. They might even have it now.

If ALF eventually get say $10M back from Watson/Hotchins if that is possible, then there's a nice bonus.

I would enjoy some devils advocate / independent calcs / different views etc feedback from those who read this.

Vaygor1, I have never held ALF but I write this as a long time PGW shareholder. ALF's sole remaining business is the Livestock trading arm - correct?

PGW are predicting a big drop in EBITDA from their Livestock division in FY2013. Not because they fear losing business to Allied Farmers. But because the price of stock units (sheep and cows) is expected to be much lower this financial year. One farmer shareholder who posts on this forum spoke of pulling his business from ALF in favour of PGW because of the fear of not getting paid at all in ALF went under.

I think ALF has an absolute mountain to climb to gain any creditability with rural NZ.

Your statement "Some things have changed now for ALF since their crash." is IMO the understatement of the year. Your guess that Allied Farmers might have 1/10 of their previous earning capacity is based on what? Personally I wouldn't base that on historical data, because the company is now so different history really is bunk in this case.

The stock and station business is I believe built on trust and personal relationships. If a few of those trusted employees decided to go it alone then I would say Allied Farmers is finished for good. I would estimate the chance of losing everything you put into this business is greater than 50%. And I can't see how the 50% 'success possibility' could deliver anything like the returns to mitigate the 50% bankruptcy risk.

SNOOPY

[Vaygor1]

Vaygor1, I have never held ALF but I write this as a long time PGW shareholder. ALF's sole remaining business is the Livestock trading arm - correct?

PGW are predicting a big drop in EBITDA from their Livestock division in FY2013. Not because they fear losing business to Allied Farmers. But because the price of stock units (sheep and cows) is expected to be much lower this financial year. One farmer shareholder who posts on this forum spoke of pulling his business from ALF in favour of PGW because of the fear of not getting paid at all in ALF went under.

I think ALF has an absolute mountain to climb to gain any creditability with rural NZ.

Your statement "Some things have changed now for ALF since their crash." is IMO the understatement of the year. Your guess that Allied Farmers might have 1/10 of their previous earning capacity is based on what? Personally I wouldn't base that on historical data, because the company is now so different history really is bunk in this case.

The stock and station business is I believe built on trust and personal relationships. If a few of those trusted employees decided to go it alone then I would say Allied Farmers is finished for good. I would estimate the chance of losing everything you put into this business is greater than 50%. And I can't see how the 50% 'success possibility' could deliver anything like the returns to mitigate the 50% bankruptcy risk.

SNOOPY

Hi Snoopy.

Thanks for your comments. I appreciate the feedback.

Allied Farmers have 2 business units now.
1) Their Livestock Division. Through MyLiveStock.
2) Their Real Estate Division. Through FirstNational Real Estate.

I too am aware of the comments and decisions made by ALFs shareholders/customers in this thread. I am very interested in their viewpoints on whether or not they would utilise Allied Farmers' services again if they thought (or knew) that ALF would not go broke while their buying/selling of livestock was in the 1 or 2 day transition phase, which is the only perceived risk that customers were exposed to.

This perceived risk is now almost non-existent due to CMAL's buying the remainder of the Hanover assets and the funding arrangements they have put in place with ALF. Even before this occurred, plenty of farmers have been more than happy to deal through ALF to buy/sell livestock and feed, take out insurance, and use as agents to buy/sell farm real estate. You can visit www.mylivestock.co.nz and see for yourself.

ALF never lost its credibility from a traditional customers viewpoint. The way it has conducted business over the last 120 years and is conducting business with its farmers now holds a reputation that remains intact. It is the Board that lost its credibility from a shareholders viewpoint because it got into businesses (like sawmilling and financing) that it knew nothing about.

Choosing 1/10th of their earning capacity is a hypothetical, but a very conservative one. Giving them 13 years to get there is more than feasible. 13 years is a long time.

I have performed a detailed analysis between ALF as it was reported in YE 30 June 2005 (1 month after it bought the sawmill disaster) and now. Based upon a lot of measures I should realistically have chosen 1/5th the earning capacity. 1/10th is pessimistic. i.e. Turnover now is 1/4th of 2005, Employed livestock agents (excluding independent contractors) is now a 1/3 of what it was.

With its merchandising division now gone and Hanover now essentially concluded, choosing 1/10th suggests that merchandising contributed 90% of it's historical earnings. It never got anywhere near that.

Apart from not merchandising, I would like to know in what way ALF's business is any different now from what it was in 2005. I would be more than happy to be enlightened.

At ALF's AGM on 27th November 2012 the Livestock division was looking very profitable compared to annual report YE 30 June 2012.

ALF's 6-month report to 31-Dec-2012 will be out in approx 1 month from today. It will make very interesting reading. I am craving for data.

Vaygor1.

[stoploss]

" I would like to know in what way ALF's business is any different now from what it was in 2005. I would be more than happy to be enlightened."

They issued millions of shares , so I am not sure if your numbers stack up .You talk of 1/10 of the earnings but before they has the 10:1 reverse they literally issued millions and millions of shares.

[Snoopy]

Allied Farmers have 2 business units now.
1) Their Livestock Division. Through MyLiveStock.
2) Their Real Estate Division. Through FirstNational Real Estate.

I too am aware of the comments and decisions made by ALFs shareholders/customers in this thread. I am very interested in their viewpoints on whether or not they would utilise Allied Farmers' services again if they thought (or knew) that ALF would not go broke while their buying/selling of livestock was in the 1 or 2 day transition phase, which is the only perceived risk that customers were exposed to.

This perceived risk is now almost non-existent due to CMAL's buying the remainder of the Hanover assets and the funding arrangements they have put in place with ALF. Even before this occurred, plenty of farmers have been more than happy to deal through ALF to buy/sell livestock and feed, take out insurance, and use as agents to buy/sell farm real estate. You can visit www.mylivestock.co.nz and see for yourself.

ALF never lost its credibility from a traditional customers viewpoint. The way it has conducted business over the last 120 years and is conducting business with its farmers now holds a reputation that remains intact. It is the Board that lost its credibility from a shareholders viewpoint because it got into businesses (like sawmilling and financing) that it knew nothing about.

Thanks for your comeback Vaygor.

I notice that nowhere on the www.mylivestock.co.nz website is any mention of it being owned by 'Allied farmers'. Instead the website says it is operated by NZ Farmers Ltd, an NZX listed company. Is this some attempt to try and unstick some of the Allied Farmers mud? It is only in the small print in the terms and conditions that 'Allied Farmers Rural Limited' are listed as the operators of the website.

SNOOPY

[Snoopy]

Apart from not merchandising, I would like to know in what way ALF's business is any different now from what it was in 2005. I would be more than happy to be enlightened.

At ALF's AGM on 27th November 2012 the Livestock division was looking very profitable compared to annual report YE 30 June 2012.

ALF's 6-month report to 31-Dec-2012 will be out in approx 1 month from today. It will make very interesting reading. I am craving for data.

Vaygor1.

Vaygor, I was a PGW (or WRI as it was then) shareholder in 2005, the same time period you are assessing for ALF. That was the year that Rural Portfolio Investments took a controlling stake in WRI. Back in those days WRI was not as it is now (they had not yet merged with Pyne Gould Guinness and were in the throws of swallowing Willaims and Kettle). However the Grant Samuel compiled, Wrightson commissioned takeover report of the time does have some interesting comments on the outlook for trading livestock in FY2005. The report is dated September 2004 and I quote from page 9.

"Wrightson is New Zealand's largest and only nationwide livestock business serving the needs of farmers, meat processors and others in the livestock industry. The livestock operations include a core sale agency business, a live export operation, Wrightson Velvet and Integrated Livestock management. The business is primarily based on a sales margin/commission model, and accordingly when sales volumes or sales prices reduce income to Wrightson is also reduced. Given the heavy reliance on the agency business, profitability of the livestock division is impacted by the changing values and volumes of livestock being sold. Livestock prices peaked in 2002 and since then have progressively declined (Snoopy note: PGW EBIT for livestock subsequently rebounded in FY2005, but I don't know if this was a 'market effect' or a 'merger effect'). Accordingly the EBIT of Wrightson Livestock has reduced from $11.9m in 2002 to $4.2m in 2004. Livestock has a high fixed cost structure which further exacerbates the the variability in earnings."

"A relatively new initiative is for the Livestock business to procure specified live weight sheep for processors. Wrightson enters into agreements with farmers for the supply of product to very specific parameters through the season (Snoopys note: this sounds like a forerunner to the more recent Silver Fern farms supply agreement that went disasterously wrong for PGW - resulting in a multi million dollar contract write down- when they realized that would not be able to get the volume of stock they signed up to purchase for Silver Fern farms). As processors become more demanding in their requirements, this method of livestock procurement is expected to become more common. This method provides Wrightson with a more certain income stream (Snoopy adds: except when the shortage of supply of stock means an agreement like this causes a major default, with multi million dollar writedown implications)."

I realise that none of the above directly relates to ALF, but I do believe the comments are general enough to point to the same kind of market pressures that ALF woudl have been facing at the time, and indeed faces now.

SNOOPY

[Snoopy]

Choosing 1/10th of their earning capacity is a hypothetical, but a very conservative one. Giving them 13 years to get there is more than feasible. 13 years is a long time.

I have performed a detailed analysis between ALF as it was reported in YE 30 June 2005 (1 month after it bought the sawmill disaster) and now. Based upon a lot of measures I should realistically have chosen 1/5th the earning capacity. 1/10th is pessimistic. i.e. Turnover now is 1/4th of 2005, Employed livestock agents (excluding independent contractors) is now a 1/3 of what it was.

With its merchandising division now gone and Hanover now essentially concluded, choosing 1/10th suggests that merchandising contributed 90% of it's historical earnings. It never got anywhere near that.

Apart from not merchandising, I would like to know in what way ALF's business is any different now from what it was in 2005. I would be more than happy to be enlightened.

Didn't you just answer your own question above Vaygor? Employed Livestock agents are only 1/3 of what they were once (your figure). So in order to stand still in terms of dollars generated each remaining employee is going to have to generate three times the business they did in 2005, to get commission levels back up to 2005 levels. This should be easy to achieve. Instead of working 8 hours per day the emplyees could work 24 hours per day ;-P.

SNOOPY

[Vaygor1]

" I would like to know in what way ALF's business is any different now from what it was in 2005. I would be more than happy to be enlightened."

They issued millions of shares , so I am not sure if your numbers stack up .You talk of 1/10 of the earnings but before they has the 10:1 reverse they literally issued millions and millions of shares.

Hi Stoploss.

Regarding massive share issues and the 100:1 consolidations (not 10:1), I have taken all that into account in my analysis.

Company earnings in terms of straight dollars/annum (as opposed to earnings measured in $/share) is unaffected by the number of shares issued. If someone owned 1% of ALF before and they own 1% of ALF now the number of shares on issue falls off.
Buying 1% in 2005 would have cost you over NZ$20MIllion. Buying 1% in 2012 would have cost you NZ$25k.
Their revenue is now only 1/4 as much as it was back then but that is only 1 small measure. It is equity and profit that counts and these numbers are a bit vague at the moment. Roll on their 1/2 year report in 30 days from now.

[Vaygor1]

Thanks for your comeback Vaygor.

I notice that nowhere on the www.mylivestock.co.nz website is any mention of it being owned by 'Allied farmers'. Instead the website says it is operated by NZ Farmers Ltd, an NZX listed company. Is this some attempt to try and unstick some of the Allied Farmers mud? It is only in the small print in the terms and conditions that 'Allied Farmers Rural Limited' are listed as the operators of the website.

SNOOPY

Hi Snoopy.
ALF have made no secret of this.
The reason for the different entity (NZFL) is to ensure that its affairs are immune to whatever was happening in ALF so Joe Farmer can trade through them in confidence.
Also, NZFL (at YE 30 June 2012) was 30% owned by Livestock Agents and Staff. This too was needed to retain their best staff, and along with it, the relationships and loyalties with their traditional customers... a very important aspect you pointed out below.
Vaygor1