Ann: Pause in Trading, page-28

Hi @vic_wattle

A positive ROE (whether it's small or large) implies a profit (rather than a loss). Remember, the change in book value will be equal to the net profit (less any dividend). The balance sheet is meant to tell us where we are, and the P&L is meant to tell us how we got there. What I am saying is that regardless of how far the ROE falls, as long as it stays positive, and no dividend is paid out, then the balance sheet will grow. A 5% ROE will mean it grows by 5% (if there is no dividend), and a 20% ROE will mean it grows by 20% (1).

The reason the book value fell in H1 FY19, is indeed that the business recorded a loss in that period (negative ROE).

I see no issue with the high ratio of PPE to equity. Whilst PPE as a ratio of total assets has gone up a little, the main issue here is that the balance sheet has become more geared (higher ratio of liabilities to assets, means a higher ratio of assets to equity).

Wrt the possible risks due to changes in caged eggs, I would really need someone closer to the industry to comment. In the 2018 AGM presentation, management made a comment about the WA state Agriculture minister proposing a state ban on cage egg production. Presumably the minister had some kind of phase out period in mind (one would hope). How on earth the nations egg demand would be met in such an eventuality is the obvious question, especially when the substantial capex sums required would need to be funded by an industry that is already under strain.

This adds to the uncertainty here, and is yet another reason to be cautious and to seek a generous margin of safety.


(1): This is not exactly correct. The growth will equal the return (R) on year-start equity (E), less any dividend. Whereas ROE normally designates the return on the average annual equity. For a small ROE (such as 5%), the difference will be negligible. Nevertheless, the principle remains.