FRM (ASX) Ann: Pause in Trading

Originally posted by stefanis: ↑

Yes note 2 is sobering reading.

This is a tough game and the real problem Farm Pride has is that it has two stronger competitors playing across the east cost as well as stubborn state competitors in its home turf.

Eggs industries world wide experience periods of oversupply but Australia seems to be even more susceptible to long periods of the down cycle. There is two reasons that I would highlight for this occurring. The 1st and most significant is that the transition from cage production is being entirely market driven and not driven through regulatory change. No state of federal laws have to date required the removal of cage production. Therefore as supermarkets position more towards cage free and free range the cage production remains in the total supply chain exacerbating over supplies. Contrast this to Europe where the cage production was forced to be removed under EU directives which created a supply gap for the reorientation to cage free.

The 2nd reason is that creating new production sites in Australia is easier to achieve due to remoteness than countries that have more difficult consenting requirements with higher population densities through their rural areas. To highlight the above two points FRM's own bird numbers have increased by over 30% since 2013, and this would be typical of the industry in general. The short point is that egg consumption in Australia is growing but supply in increasing faster.

This oversupply has been happening for a number of years but had a respite in 2016 and 2017 mainly due to the bird flu outbreak that wiped out a large farm. The current situation coupled with high grain costs for feed inputs is producing a particularly difficult period. The industry needs some medium size player to fall to quickly correct the imbalance, or a prolonged period of no new capacity investment so that demand catches up with supply.

Its interesting watching the market try and market value this company. In 2016 the market at one point assigned a market cap of $149m today it thinks its worth $19.5m

I think this stock is really a cyclical play and only to be bought if you know the cycle has turned, particularly given it current debt levels. It has not paid a dividend since the year 2000 and so the pay out ratio for any attempt to model a value should be considered to be 0 into perpetuity.

The approach to consider value I believe needs to be around the build in book value over time. Specifically the increase in land and building assets. In 2014 the company had land and buildings worth $12.6m and at the last half year the land and buildings were stated at $26.2m. Realistically this is all a long term owner of the business has received over the last 5 years. How you assume value to this as a business owner is debatable as the assets don't have transferable uses. The land value is likely understated as its represented on a historical cost basis

Its possible a change in this industry could make it a more sustainable business to invest in. I would suggest that the best change would be a regulatory one that changed the industries ability to rapidly increase volumes at the detriment of margin all the time.

If things go sour for FRM the Darling Downs purchase for $6.5m in 2017 would be an obvious decision they may regret. It was curious move at the time walking into the lions den.

Expand

The problem I have with a "build in book value" approach around a zero payout, is that if you are earning <7% ROE (through the cycle), and you never pay a dividend or make some other capital return, then as far as I'm concerned your intrinsic value is a big fat zero.

Back in 2016 the market was anticipating a dividend "soon" (rightly or wrongly, and very wrongly in my opinion). I'm willing to bet that market optimism will one day rise again, here.

When it does, the illusory dividend will once again raise it's head, and the market will be pricing such.

No.	Vol.	Price($)
1	89033	9.4¢

No.

Vol.

Price($)

89033

9.4¢

Price($)	Vol.	No.
12.5¢	32000	1

Price($)

Vol.

No.

12.5¢

32000

No.	Vol.	Price($)
1	89033	0.094
1	107312	0.093
1	153473	0.092
5	43343	0.090
1	58700	0.089

No.

Vol.

Price($)

89033

0.094

107312

0.093

153473

0.092

43343

0.090

58700

0.089

Price($)	Vol.	No.
0.125	32000	1
0.000	0	0
0.000	0	0
0.000	0	0
0.000	0	0

Price($)

Vol.

No.

0.125

32000

0.000

(20min delay)
Last 9.4¢		Change 0.000(0.00%)		Mkt cap ! $13.52M

Open	High	Low	Value	Volume
0.0¢	0.0¢	0.0¢	$0	0

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