A farmers qustions to the board

Hi Mr Chairman and fellow directors

I have a few questions and concerns regarding the upcoming note issue (I've heard it's now called the Unity Trust?)
Q1. My first question is regarding the share standard (1 share/kg/ms). How many shares would be on issue to current suppliers if they were all fully shared up?
Q2. How many kg/ms are not currently fully shared?
What I am asking is the total amount of standard shares that could be on issue and what is currently the status quo regarding the share standard?

Having just looked at the capital share structure booklet, pages 24 – 32 are completely inadequate when it comes to a working model and how it will affect farmers’ milk pay. The graph in 4.1.3 page 29 is virtually useless without any real figures, both historical and projected. I find page 25 regarding the allocation of milk pool under the profit sharing mechanism as confusing and misleading. To make any sense of this, farmers need to have various (IPO) share prices, e.g. listing at $1.50, $2, $3, $4, $5, etc. because without this it’s impossible to work out how the formula on page 25 will impact farmers’ current and future milk pay.

I assume a retail investor would want to achieve a return of 4-5% at a minimum. From my research, large companies involved in the food-processing sector historically yield 4-5%. That is whom we are competing against. The most important aspect of this whole process is – what milk price will be the neutral point? Farmers need to see the stress testing models that you must have used to formulate what is on page 25. The dividend for the majority of suppliers currently averages between 1.2 and 2% of total income. So if this were the case, the amount of our income that will be shifted over to the dividend side of the equation is quite large. In my opinion, not an ideal place for a dairy farmer to be.

The neutral milk price needs to, from an outside investor’s point of view, return 4%. The break-even point for a typical SG dairy farm is approx $6.20. So this has to be the neutral point (or, in my opinion, slightly lower than the neutral point). In reality, the new neutral point should be the $7/kg milk price that this whole process is aiming to achieve for farmers. To keep the status quo in regard to dividend payments to farmers, these shares cannot list for more than $1.50 and pay roughly a 4% return for outside unit holders. If they list at $4 they can only pay a 2% return to keep the status quo. So, we farmers are going to be seriously disappointed if we are expecting to see the real value of shares unlocked and retain the current value of dividend to milk price. Anyone who is not fully shared up will pay a big price when it comes to total milk price. I still fail to understand why we didn’t just issue long term 20 year bonds. These would’ve cost us the same amount. It would’ve been a more simple process, we’d more than likely already have the money in the bank. 20 years must be long enough to achieve what we want to do and pay the money back! With the way the current financial market is, they must be screaming out for companies like MG to invest in.

Below are a few assumptions/calculations I have made regarding milk price, share price and dividend yield.

80,000kg milk solids x 8% = $6,400 which is the current share dividend at $1 unit cost

$7 kg/ms x 80,000kg = $560,000 $6,400/$560,000 = .012 = 1.2% of total milk price
$6kg/ms x 80,000kg = $480,00 $6,400/$480,000 = .014 = 1.4% of total milk price
$5kg/ms x 80,000kg = $400,00 $6,400/$400,00 = .016 = 1.6% of total milk price
$4.50kg/ms x 80,000kg = $360,000 $6,400/$360,000 = .018 = 1.8% of total milk price

Below are examples of dividend yields at $4 share/unit price

$4 20c/$4 = .05 = 5% return

80,000 kg/ms x 20c = $16,000
80,000 x 10c = $8,000
80,000 x 8c = $6,400 roughly the status quo of the existing ratio of dividend to milk price
80,000 x 6c = $4,800
80,000 x 4c = $3,200

$4 @ 5% dividend 20c/$4 = .05 = 5%
$4 @ 2.5% 10c/$4 = .025 = 2.5%
$4 @ 2% 8c/$4 = .02 = 2% (roughly status quo)
$4 @ 1.5% 6c/$4 = .015 = 1.5%

From the above, listing at $4, would only allow a 2% return on those $4 shares against what we will call the break even milk price. This is really unacceptable to outside investors.

Examples yields at $1.50 share/unit price

$1.50 8c/$1.50 = .053 = 5.3% return

80,000kg/ms x 8c = $6,400 (status quo)
80,000 x 7c = $5,600
80,000 x 6c = $4,800
80,000 x 5c = $4,000
80,000 x 4c = $3,200

$1.50 @ 5.3% dividend 8c/$1.50 = .053 = 5.3% (roughly status quo)
$1.50 @ 4.7% 7c/$1.50 = .047 = 4.7%
$1.50 @ 4% 6c/$1.50 = .04 = 4%
$1.50 @ 3.3% 5c/$1.50 = .033 = 3.3%
$1.50 @ 2.7% 4c/$1.50 = .027 = 2.7%

My concern is regarding expectations we suppliers have for the listing price. We're expecting somewhere between $3-4. So if I have this right, if we list at $4 and pay a 20c dividend, that's a 5% dividend yield, which is what I assume outside investors are looking for. If we multiply the 20c by our 80,000 share standard, we get $16,000. That's a huge swing away from fundamental milk price along with profits over to non farmer unit holders. To keep somewhere near the current ratio of dividend to milk income, these new units cannot list for anything more than $1.50. This is starting to feel uncomfortable. We are beginning to give away a lot in monetary terms for very little gain when it comes to realising this so called locked up value in our $1 shares. As yet we have been given very little detail of how all this is going to work. We need a detailed model with real life examples! The same models that you must have stress tested this with.

My next concern is regarding the formula for linking milk price to the unit holder dividends. Where and how is the formula/matrix that will be implemented to calculate the various ratios of milk price vs dividend yield. This is the most critical aspect to this whole deal and we are completely in the dark as to how this is going to work long term. What terms and conditions are going to be applied to suppliers, and how does retained earnings fit into all this?

The other thing I’d like some clarity on is how any future bonus share issues are going to be handled if the asset backing of the company increases and how this will be distributed. Will the unit holders be entitled to be part of any future distribution or will they no longer function as they have in the past.

My next concern is the impact, as stated in the prospectus in section 4.3.10, on the dilution of shareholders’ economic interest. I was under the assumption that this was a closed unit trust. The issue of re balancing needs to explained in detail to suppliers and how this works, and how and why the Board can issue new shares or units. Will this require farmers’ approval?

I have more questions but this will do for a start, as I cannot frame them properly until I have answers to the above.

Yours sincerely