Silver Fern Farms profit unsatisfactory but promises more to come

Silver Fern Farms, New Zealand's biggest meat processor and marketer, has returned to profit after two years of losses but admits it still needs to deliver more.

Net profit after tax was $500,000 in the year ended Sept. 30, a significant turnaround from the $28.6 million after tax loss the previous year while pre-tax profit was $1.8 million compared to a loss of $36.5 million in 2013, the Dunedin-based cooperative said in a statement.

Over the same period the company paid down $99 million in debt as part of a plan to reduce the company's debt servicing costs. Total income was $2.32 billion, up from $2 billion the previous year while earnings before interest, tax, depreciation and amortisation was $68.1 million, a nearly $46 million improvement on the 2013 financial year.

Chairman Rob Hewett said it was always a two-year plan to turn the cooperative around but while the 2014 performance was satisfactory, the absolute profit number remains unsatisfactory.

"Our target is materially above that and we know we're going to get there this (2015 financial) year and have a plan to do so," he said. He wouldn't be drawn on the exact target profit but said it was "in the tens of millions rather than single digit millions."

This year's result was lower than initially indicated at shareholder meetings in November because it includes a $3.3 million provision following an Employment Relations Authority decision earlier this month on the technical redundancy of staff at its Silverstream plant in October last year. Hewett said the decision was unexpected and the company thought it prudent to take the provision while it considered its next steps over the coming month.

Chief executive Dean Hamilton said the return to profit and debt reduction has come from a stable market for key commodity products, a strong focus on plant performance and inventory management, a new regional procurement structure and good progress for high value products locally and in new markets. Hewett said being able to sell down its inventory without depressing prices helped with the turnaround along with the sale of some non-core assets.

Debt levels at year end fell to $288.6 million from the $387.6 million it rose to in 2013 after a collapse in sheepmeat prices. That's a 25.5 percent reduction on the previous financial year and the debt equity ratio has improved to 45.2 per cent. Hewett said the cooperative planned to reduce debt by a similar amount this season

The company has hired investment bank Goldman Sachs to advise on its capital raising options and capital structure, a process expected to take around six months. Any money raised would go towards repaying debt, upgrading plant, and accelerating its "value added" product strategy of selling Silver Fern branded venison, beef and lamb.

Mr Hewett said the fund-raising options under consideration include existing shareholders, though an attempt four years ago to raise $80 million from its farmer shareholders saw only around $22 million raised.

"We're open to all options including one or more investors and this process will show who's the best fit. Existing shareholders have also said they're interested in putting capital into the business but $100 million is a big swallow," he said.

The company's value-add strategy is gaining momentum with a launch last month of Silver Fern branded products into China through Alibaba's Tmall electronic shopping mall.

Mr Hewett said the target was to have $200 million or 10 percent of its overall revenue from value-add goods by 2017, compared to the current $80 million or four percent.

"It's growing and I'm quite confident we'll get there ahead of time," he said.

(BusinessDesk)