Hi
@Muss1
I missed this post.
I guess what I am saying is that I have insufficient faith that what FRM currently earns on its capital is representative of the future. A business is worth the cash it can deliver me tomorrow, I believe. On this basis, I cannot assume a business of this sort will keep delivering an ROE anywhere near current levels. To believe so, seems to me unreasonable.
Perhaps you have seen that the uplift in earnings since FY2014 has essentially all been about a reduction in direct costs (presumably mainly feed). Perhaps also you have seen that if those costs were currently similar to past levels that current ROE's would look quite unappealing. In any case, even if current low feed prices could be sustained, don't you think the power of the supermarkets and the competition with the other majors, would whittle this high ROE away?
Also, I am very doubtful you would get anywhere near NTA in liquidation. For example if we assume that since June 2016, the company has generated enough cash flow after allowing for capex such that cash has swelled to about $7.5m, and you make the following
very optimistic assumptions about recovery rates on assets:
cash (100% recovery): $0.13 per share
receivables+inventories (100% recovery): $0.21 per share
bird flock (50% recovery): $0.07 per share
P&E + in-progress (50% recovery): $0.18 per share
And we further assume that current land & buildings are heavily undervalued on the books:
land & buildings, freehold (130% recovery): $0.27 per share
Giving a total realisable value of: $0.86 per share
On-balance-sheet liabilities: $0.31
Giving net realisable value of: $0.55 per share
Very much less than the book value at June 2016 ($0.69 per share). If we add about $8m for earnings since June, we get book value of about $0.84 per share
So even under these very optimistic recovery rates, we get a liquidation value that is about 34% less than NTA. But it gets much, much worse. In a liquidation there will be a whole bunch of other costs, including employee redundancies etc. But the real elephant in this room, is the off-balance-sheet lease liabilities, which amount to (as at June 2016) a massive $0.35 per share.
In conclusion, in a liquidation, I think you would be
very lucky to see $0.20 per share.
