ALF - Allied Farmers Limited

[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

Quite right Snoopy.
2005 was not an easy year for ALF.
2005 was also a bad year for their merchandise division.
This makes 2005 a good year to select when trying to get a handle on what ALF might be able to recover to in the medium to long term.
Vaygor1.

[Vaygor1]

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

Hi Snoopy.
1/3 the agents than required in 2005 generating 1/4 of 2005's income sounds like a 7 hour day to me (or a less efficient 8 hour day).
I wish I had more time in my days too!
Certainly ALF is currently a smaller operation but I don't see any difference in what ALF is doing now in comparing its business to 2005 (apart from of course no merchandising).
Vaygor1

[Balance]

Hi Snoopy.
1/3 the agents than required in 2005 generating 1/4 of 2005's income sounds like a 7 hour day to me (or a less efficient 8 hour day).
I wish I had more time in my days too!
Certainly ALF is currently a smaller operation but I don't see any difference in what ALF is doing now in comparing its business to 2005 (apart from of course no merchandising).
Vaygor1

Big difference between 2005 and today is that ALF today is flat broke and surviving on the whim of the Crown.

[winner69]

Big difference between 2005 and today is that ALF today is flat broke and surviving on the whim of the Crown.

Some might say that even in 2005 ALF was close to flat broke as well ... or heading that way anyway

[Vaygor1]

Big difference between 2005 and today is that ALF today is flat broke and surviving on the whim of the Crown.

Some might say that even in 2005 ALF was close to flat broke as well ... or heading that way anyway

Winner & Balance.

Well ALF is still pretty much flat broke I agree.... even more than flat broke in recent times.
In many ways, I am astonished they didn't go completely belly-up in the past few years.

Somehow they have hung on, and I have wondered if the government wants some kind of success story out of this.
Its collapse with Hanover was a very public affair, farmers and National have always had a thing going over the decades, Watson & Hotchins are still to go through the court process, CMAL seem to be very obliging to ALF.

Your views raise an issue that does concern me and that is one of technology... transportation technology, internet technology, quality control technology.... buying and selling over the internet, stock information and index availability, freezing works automatically determining fat-content of animals and paying a $/beast accordingly.

Are traditional sales yards needed to the extent they used to be? Do farmers and freezing works still have to view the herd or flock before buying? Are stock brokers needed to the same extent as pre 90's and is this reflected in 2005 and earlier? Have the fundamentals that formed the basis of ALF's traditional business changed? In today's world, standing still is going backwards.

The above are the issues that worry me the most. ALF's results over the last few years have gone from disastrous, to incredibly bad, to very bad, to bad, to (potentially) promising. And they really do seem to have hauled themselves out of the sh*t finally in the last 6 months.

Last financial year their revenue was over NZ$20M. The huge annual interest bill they have been paying is virtually gone, along with the massive asset right-downs and the onerous cost of managing all those septic assets. At their last AGM their existing business appears to be heading towards a success story.

Last year I bought an enormous amount of ALF and it cost me next to nothing... in fact a lot less than I gain or lose on paper virtually every day on the NZ stock market with my other holdings. In my mind I've already written off the amount I put in. I just think there is very good potential here given the current price, a new board, new CEO, and ALF's trend of late.

If they have survived to now (which they have) I can't see them going broke just yet. I am looking forward to their 6 month result end of this month (maybe early March).

[Balance]

Good luck.

I read the same thing about Feltex and Fortex before they went broke.

[Vaygor1]

Good luck.

I read the same thing about Feltex and Fortex before they went broke.

So did I Balance.

There are a few differences between Feltex, Fortex, and Allied Farmers though.

Feltex took 18 months to go from IPO to liquidation, with large questions still remaining today on Directors' alleged breaches of acts, negligence, dishonesty, and deception.

The Fortex demise caused a huge shock. In 1987 it was a darling stock, and wasn't it named Company of the Year in 1990?... Anyway, eventually the true extent of fraud emerged. Graeme Thompson was convicted in 1996 and sentenced to six-and-half-years' jail for falsifying the Fortex accounts along with other accomplices.

The jury is still out regarding any dirty business re Hanover but for ALF I think they just lost their way, seriously lost their way... possibly negligent but I don't think so.

ALF's position now is orders-of-magnitude better than it was at it's lowest point post Hanover. I think the chances of ALF going completely down the gurgler were much much greater then than now.

So I have dared to chance that ALF's teeth might just have some skin on them. Not expecting anything brilliantly positive in the 6-month report due out soon but I do expect to see improvement....The trend is your friend.

[RazorX]

This report out today. https://nzx.com/companies/ALF/announcements/232797

Does that affect your assessment of ALF Vaygor?

[blobbles]

The beginning of the end? I suppose you could argue the beginning was about 3 years ago... sell sell sell... there's a very real chance of belly up here...

[minimoke]

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.

The dog is whining, the Camels braying and the fat lady's gargling in the wings.