Silver Ferm Farms

[percy]

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.

[Sideshow Bob]

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.

[Beagle]

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.

[Sideshow Bob]

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......

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.

[percy]

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.

[iceman]

Good posts SB and percy and nothing to add except to say that the operating company's goal is for $150m aggregate NPAT for a 5 years period, which makes the average for the Co-op 15c EPS. If the operating company can average that profit, they should pay out dividends at the upper end of the 30-50% range. The current cash balance and the sale of the Fairton property to Talley's (undisclosed price) , makes them well on their way to fund the $17m upgrade in Hawkes Bay.

I am using that 5 year forecast of theirs as a base average over the business cycle. As percy points out, that gives ample room for very juicy dividends, not less than this year. Whichever way we slice this one, fundamentally it is very cheap.

[Beagle]

Thanks Sideshow Bob. 1-2% margins makes airlines margins look fat !!
Nice ramp Percy
Agree Iceman, looks cheap on paper but needs to be VERY cheap with no growth, wafer thin margins, aging plant and equipment and the genuine prospect, (Ashley Bloomfield thinks this is more likely than not), of another breakout of Covid in the community potentially causing mayhem to processing.
High potential returns and high risk is my initial assessment. Could be okay for a modest portfolio allocation ?...I need to stop asking awkward questions, (thank you for your time and patience guys), and do more reading.

[iceman]

Thanks Sideshow Bob. 1-2% margins makes airlines margins look fat !!
Nice ramp Percy
Agree Iceman, looks cheap on paper but needs to be VERY cheap with no growth, wafer thin margins, aging plant and equipment and the genuine prospect, (Ashley Bloomfield thinks this is more likely than not), of another breakout of Covid in the community potentially causing mayhem to processing.
High potential returns and high risk is my initial assessment. Could be okay for a modest portfolio allocation ?...I need to stop asking awkward questions, (thank you for your time and patience guys), and do more reading.

No you don't need to stop "asking awkward questions". . It has brought out a great discussion on a little commented on share. Don't miss the boat :-)

[Sideshow Bob]

It is interesting to go back to consider late 2015 and when Shanghai Maling bought in. Certainly believe a great job was done by Dean Hamilton, and understand SM's price was massively better (perhaps up to double) that of next best option - at a time when SFF was under financial pressure and banks weren't too happy.

Shanghai Maling paid $261m for a 50% share - at a time when SFF total equity was about $360m.

If you look at the Coop today, which has 100m shares with 50%, they paid $2.61 per share say.

Close on to 5 years on, with the company in a much better place, can buy what SM paid $2.61 for, for only 66c, when the company has total equity of $571m.

As an aside, Chinese entities obviously have deep pockets and have a different investment horizon and other goals. Just need to look at Westland Dairy - different industry but they paid $588m, where by any traditional valuation would be a whole lot less.

[Sideshow Bob]

Thanks Sideshow Bob. 1-2% margins makes airlines margins look fat !!
Nice ramp Percy
Agree Iceman, looks cheap on paper but needs to be VERY cheap with no growth, wafer thin margins, aging plant and equipment and the genuine prospect, (Ashley Bloomfield thinks this is more likely than not), of another breakout of Covid in the community potentially causing mayhem to processing.
High potential returns and high risk is my initial assessment. Could be okay for a modest portfolio allocation ?...I need to stop asking awkward questions, (thank you for your time and patience guys), and do more reading.

Good discussion and definitely pertinent questions.

May not be a Percy holding, but definitely think worth consideration for at least modest dog-sized holding.