Hi Wooky,
my view would be baseline, stabilising to emerging.
Looking through the report, several things do stand out, particularly in relation to prior issued reports (½ yearly and ¼ cash flow statements).
CASH FLOW MATTERS
For example, the Q2 CF statement for Dec15 showed customer receipts of $3.713M, interest received of $61K, payments to suppliers and employees of $2.873M and finance costs of $57K. In the ½ yearly report, however, these figures were slightly changed with customer receipts of $3.658M (down $55K), interest received of $61K (unchanged), payments to suppliers and employees of $2.816M (down $57K) and finance costs of $57K (unchanged). In both statements however the final ending cash position was unchanged at $1.434M. All other figures (ie: Investing Activities and Financing Activities, matched out).
Fast forward now to the yearend position of Jun16 where the CF Statement showed YTD customer receipts of $9.732M, OPEX (staff; working capital, etc) of $10.032M, interest received of $75K and finance costs of $172K. NOCF (net operating cash flow) was shown as -$397K. In the PF16 report however, these figures were shown as: (*) customer receipts - $9.188M (down $544K), OPEX - $9.619M (down $413K), interest received - $75K ($-), and finance costs - $171K ($-). Overall, compared to the Q4 CFS, NOCF was reported in the final quarterly at -$397K, but in the PFR at -$528K. The difference, being a reported deterioration of $131K was matched out through lower finally reported receipts, lower reported OPEX and a higher rate of reduction in finally reported receipts when, for example, cross compared with OPEX. Whilst not directly explained, this may have something to do with the 50:50 JV and of how revenue /costs in reference to that JV have been accounted for. Alternatively, some of the receipts reported for the final quarterly may well relate to F17 as indeed may some of the OPEX, in which case, the deferred figures (if called that) are yet to be reported on.
SOME CLUES
Some clue though in this regard may be found elsewhere in the PFR where for example, prepayments of $138K show up in Note 6 ($14K in F15), GST refunds due of $265K (LY - $nil) and bonds /deposits held of $54K (LY - $94K).
GROUP ELEMENTS
Note 16 of PFR16 put F16 revenue at $10.62M of which $3.192M related to dairy processing and $7.417M, to dairy farming. Allocated costs were put at $10.129M for dairy farming, resulting in a segment loss of $2.712M, and at $3.155M for dairy processing, resulting in a segment profit of $37K.
Overall, the segment loss was $2.664M based on segment costs of $13.284M and unallocated group costs of $1.04M, for an overall group loss of $3.704M.
PROFIT ELEMENTS
The reported net loss for the year was -$3.7M. The significance of this loss was borne out by reference to 2 items, in particular:
- Depreciation & amortisation - $753K (LY - $113K)
- Impairment of property, plant & equipment - $1.809M (LY - $638K)
The property impairments followed an updated valuation of the farms that was carried out for the YE 30/6/16. The adjusted carrying value of the 6 farms is now reflected as $19.5M, with Brucknell 1 and 2 carrying the largest proportional burden ($8.53M).
Adjusted for these, the reported loss reduced to -$1.891M (ex-impairments) and to $1.138M (ex-depreciation & amortisation). Much of the underlying basis of the headline deterioration therefore seems linked back to the drop in farm gate prices arising from Murray Goulburn, etc, earlier this year rather than to other factors. That is, the other factors are addressable, both in the short to medium turn, whilst the farm gate impact will ultimately turn on the Fonterra exit, and the internalising of milk flows through CDC.
THE RAW CDC POSITION
Looking at this, the most direct of points were:
- Dairy processing sales - $3.163M
- Dairy processing costs - $2.477M
- EBITDA - $0.686M
This is from Note 1 of the PFR.
From a segment perspective however, the PFR at Note 16 put the dairy processing revenue at $3.191M (a $28K difference) and NPBT at $37K. Not certain however why the difference.
THE RAW FARMING POSITION
Looking at this, the most direct of points were:
- Dairy farming sales - $7.417M ????
- Milk sales $5.572M
- Livestock sales $802K
- Other Rev $234K
- Other Income $776K
- Interest $75K
Total - $7.459M ????
- Dairy farming costs - $10.129M
- Operating loss - ($2.712M)
What is clear from the farming perspective however is that the following costs were included (+ share of other costs) as part of the farming expenses equation:
- Deemed cost of livestock sold - $1.35M
- Property impairments - $1.809M
- Farming costs - $4.935M
- Sub-Total - $8.094M
- + share of Depreciation
- + share of employment costs
- + share of finance costs
- + share of some (not all) corporate costs
THE ADVERSE IMPACTS
These can be counted /considered as including the following:
- Reduction in farm /property values - $1.809M
- Large share of Increased depreciation costs - $0.753M
- Deemed costs of livestock sold - $1.35M
Livestock stock realised $802K
Loss on livestock sales was $533K
These 3 costs alone came to $3.912M.
On the direct farming experience only position, the profile seemed to go like this (ignoring, for example livestock sales, depreciation or property impairments):
- Milk sales - $5.572M
- Farm related costs - $4.935M
- Arguably, milk EBITDA $637K
Conversely, for the dairy processing segment, the EBITDA was $686K.
Taking then 2 other segments into account (not defined as such), but broadly:
Sales - $802K
Change in value - $742K
Deemed cost of sold stock ($1.35M)
EBITDA - $194K
Sales - $23K
Change in value - ($1.809M)
EBITDA - ($1.786M)
Then, you have the corporate overheads (always a loss /drag on proceedings) and the EBITDA excluded elements of interest /finance, and depreciation, etc.
THE POSITIVE IMPACTS
Whilst this doesn’t get us all the way there, what is clear is that:
- The climate conditions of F16 clearly adversely impacted the relative asset values of AHF. This likely should reverse position (given the upwardly seasonal plus rainfall that has since occurred, the increased CAPEX works, and the more efficient farming /asset /climate management practices that are now in place. A reversal of values in F17 is therefore now very likely
- The collapse in global dairy prices and the actions of Murray Goulburn, et al, adversely impacted the milk gate prices yet despite this, it is very likely that milk gate sales still generated a +ve EBITDA for the year. Again, a stabilisation to reversal of values is likely in F17.
- The diary pricing impact clearly flowed through and adversely impacted on cattle /herd prices as clearly, in what was sold during the year, a clear and apparent loss was generated. That said, however, what also seems to be the case is that AHF took the opportunity of swapping out (arguably) “impure” elements of its livestock pool, including older aged stock, such that what they now have going forward is a much more pronounced, buoyant active herd. This is also reflected in the fact that biological assets retained both increased in value during the year, as well as in absolute terms. Again, a stabilisation to reversal /further improvement of values is likely in F17.
- At June 30, the herd numbered 3,302 at an inherent value of $4.516M, and an average value of $1,368. This compared to the June 15 position of 1,625 head, at a value of $2.37M and an average value of $1,459.
- It is therefore clear that some cleaning out of the past, and positioning for the future occurred during F16 but that not all of this has yet been explained to us as stapled shareholders. That said, the signs for F17 are encouraging:
- Improved property valuations likely
- Herd size growing ahead of expectations
- Right sizing of the herd
- All being equal, this infers milk production targets for F17 of26M/L (based on the Feb16 Investor Presentation pro forma indication of an average milking yield of 7,850/L per cow (assuming a then F17 herd size of 2100 = annual milk production of 16.5M/L). But even if this is a bit off, F17 milk production (as it is) will likely now fall somewhere between 20M/L (if based on a 6,000/L average yield) through to the 26M/L range, suggested above. This is potentially significant because it suggests that ex-Fonterra, AHF will have internal milk sourcing of between 56% - 72% of CDC’s fully utilised, processing capacity without any further net biological increases in herd size.
- That said, ongoing natural increase alone could well yield a further 700+ net addition to the herd size, even allowing for continuing livestock sales of circa 1,000 per annum. If so, this could well start pushing CDC’s internal sourcing availability at >32M/L (circa, 88%+ capacity) going into F18. So, the transformation including transition to insourcing capability is rapidly emerging.
So, the emerging signs of future improvement are there.
