The below is from the annual report. All looks okay, except I wish there was some discussion on the consequences of breach of the forecast covenant (second last paragraph). There is not much room for error. Of course, it is something that might just be waived, but I would like to understand the worst case scenario. Any thoughts?
1.2.2 Going concern
The Group’s operating loss before tax result of $159.5m for the financial year resulted from a downgrade in quality of the 2022 crop, lower almond pricing, high operating costs and poor bloom and growing conditions impacting the net volume of the 2023 crop. As a result of these challenges, the Board and management have considered the Group’s ability to continue as a going concern for the next 12 months from the date the consolidated financial statements are issued (“forecast period”).
As of 30 September 2023, the Group has non-current bank debt of $185.0 million and current debt of $6.3 million. During the financial year, the Group successfully secured credit approval for an increase in banking facilities, adjusted covenants (refer note 4.3) and incorporating the seasonal facility into its overall banking facility. The Group was in compliance with the revised covenants for the period ending 30 September 2023. The Group has reviewed its cash flow forecast and its ability to operate within the net debt limit for the forecast period.
In undertaking this review, the Group considered the critical assumptions in relation to the forecast and performed a sensitivity analysis on the forecast cash flows.The Group’s forecast cash flows include critical assumptions relating to crop quality, crop volume and almond pricing and operating costs. Crop volumes and pricing A critical assumption is the 2024 crop volume. The cash flow includes the assumption of the 2024 crop tonnage returning to historical average harvest volumes and quality profile, and an increase of at least 15% on the 2023 crop almond price. The increase in the almond price is on the basis of a significant increase in quality and resulting increase in the inshell portion of the crop sales, alongside upward movements in market pricing. There are a number of positive indicators for almond pricing and positive upward movement in recent contracted sales.
Operating costs
The forecast includes the impact of inflationary increases on input costs, offset by cost savings related to key input costs such as fertiliser.
Sensitivity of cash flows
The Group has considered the downside scenarios of changes to almond pricing and volumes. Based on downside scenarios, the Group is satisfied that reasonable changes to key assumptions would not create a liquidity issue. If the sales volume and pricing were to adversely impact the cash flow, the Group has other cash flow initiatives to maintain the headroom in the debt facilities. These include divestment of certain assets (e.g. water) and other cost saving initiatives and business efficiency projects.
Compliance with forecast covenants
The Group’s Fixed Charge Cover (‘FCC’) ratio will be tested for the period ended 31 March 2024 and 30 September 2024. The compliance with the FCC ratio will be based on the estimated profit for the FY2024 crop. There is limited headroom in the forecast FCC covenant for the FY24 testing dates, and hence any downside change to the forecast almond price, quality of the harvest or the forecast tonnage could result in a breach of the FCC covenant in FY24. The FCC ratio is sensitive to changes in the 2024 crop forecast. A change in the 2024 crop almond price assumption of 5.6% or a drop in yield of 5.6% would result in a FCC covenant ratio breach at 31 March 2024.
1.2. Critical Accounting Estimates and Judgement (continued)
Based on this analysis the Group would continue to trade within the limits of the available funding facilities and comply with financial covenants throughout the going concern forecast period. It has been concluded that the Group will continue to operate as a going concern and as a result, the consolidated financial statements have been prepared on this basis.
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