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Wellard downgrades profit forecast

James Nason, 13/06/2016

Australia’s largest livestock exporter has downgraded its forecast profit for the 2016 financial year, due to the impact of ship rescheduling changes and the squeeze on margins created by record cattle purchase costs in Australia.

Wellard Limited shares entered a two-day trading halt before the company released its revised profit forecast to the ASX late last week.

Wellard Ltd said it now expects to record a net profit after tax for the financial year ended June 30, 2016 of approximately $23.5-$30 million, based on current exchange rates.

That is about 50pc lower than its original prospectus forecast of $46.4 million and also well down on the forecast guidance of $42.5 million given in its half-year results in February.

Wellard Ltd shares dropped by 15pc immediately after the latest trade update was announced. The company’s shares were trading this morning at 48c, which compares to an opening listing price of $1.39 on December 20, 2015.

In the trading update released to the ASX, Wellard Ltd said it is on target to ship a record 450,000 cattle in this financial year, ending June 30, 2016.

However, despite shipping unprecedented volumes of cattle, Wellard says its earnings for the financial year will be lowered by several factors, “principally by recent ship scheduling changes and margin compression created by unexpectedly high record cattle prices in Australia”.

The rescheduling was due to high cattle prices and some shipping delays which meant that shipments originally expected to have been completed by June have been pushed into July, and therefore into the next financial year.

“Heavy out of season rain in northern Australia has meant the price we have paid for cattle has consistently been 80-100 cents per kilogram higher than the prior corresponding period. There has been strong customer resistance to those high prices and trading margins have been impacted as a result,” CEO Mauro Balzarini explained in the company’s trading update to the ASX.

Mr Balzarini said the company expects the shipping and trading margin pressure in Australia to continue in the short to medium term, but said the company’s outlook remains positive.

“We have strong and consistent management and liquidity, and a global customer base demonstrated by our volumes of cattle.

“We are continuing to execute our growth strategy, with the successful commissioning of the M/V Ocean Shearer which increases the Company’s shipping capacity by 50%, a growth in cattle shipment numbers, diversification of supply markets, and downstream development in China and Turkey.

“We expect this to bring significant future benefit to Wellard.”

Read the full announcement to the ASX below:

Wellard announcement to the ASX, June 10

Wellard Ltd (Wellard, ASX:WLD) provides the following update on the Company’s operations, forecast profit, outlook and finalisation of its IPO Share Sale Agreement separation settlement quantum and timing.

Operations and forecast profit Wellard is on target to ship approximately 450,000 cattle in FY2016, a record for the Company.

Despite this shipping record it has become evident that the Company’s earnings for the year ending 30 June 2016 will be lowered by several factors, principally by recent ship scheduling changes and margin compression created by unexpectedly high record cattle prices in Australia.

As a result the Company now expects to record a pro forma FY2016 Net Profit After Tax of approximately $23.5-$30 million based on current exchange rates.

June shipping and trading activity is still being finalised, which could affect the final result, with seven shipments still to load.

The largest impact on the Company’s forecast earnings has been the rescheduling of a number of shipments, including two large shipments, one of which is the M/V Ocean Shearer, from June 2016 to July 2016.

These shipments will now be accounted for in FY2017. “The forecast result is lower than anticipated and certainly lower than we would have liked,” said Wellard CEO Mauro Balzarini.

“Heavy out of season rain in northern Australia has meant the price we have paid for cattle has consistently been 80-100 cents per kilogram higher than the prior corresponding period. There has been strong customer resistance to those high prices and trading margins have been impacted as a result.”

Wellard responded to the changed market dynamics by diverting its newly launched M/V Ocean Shearer to South America.

However, the additional sailing time and turn-around time in port has meant the vessel will only complete one voyage for the current financial year, rather than the two that were planned.

The second voyage is now expected to occur in early July, again loading in Brazil.

“The margin pressure we encountered trading and shipping cattle from Australia to South East Asia supports our decision to increase our focus in countries like Brazil, which has a cattle population of more than 220 million head and strong trading margins,” Mr Balzarini said.

Outlook

Wellard expects the shipping and trading margin pressure in Australia will continue in the short to medium term.

Farmers across Australia are benefiting from a good feed bank and have moved from destocking to herd rebuilding, reducing the supply in the short term but increasing it in the longer term as herd numbers rebuilds.

“In time the restocking will lead to improved cattle supply in Australia. In the meantime the mobility of our assets allows us to increase our shipping and trading activity in South America, where cattle supply is greater and margins are better,” Mr Balzarini said.

“Wellard remains profitable despite this margin pressure and our outlook remains positive. We have strong and consistent management and liquidity, and a global customer base demonstrated by our volumes of cattle.

“We are continuing to execute our growth strategy, with the successful commissioning of the M/V Ocean Shearer which increases the Company’s shipping capacity by 50%, a growth in cattle shipment numbers, diversification of supply markets, and downstream development in China and Turkey.

“We expect this to bring significant future benefit to Wellard.”

 IPO Share Sale Agreement quantum

Wellard expects to provide notice next week to WGH Holdings Pty Ltd (WGH) of the amount owing to Wellard pursuant to adjustments arising from the separation of the two companies as detailed in the IPO Prospectus and expects a net amount of approximately $15.6 million (Estimated Adjustment Amount).

The Estimated Adjustment Amount denotes the estimated adjustment to complete financial settlement between the two companies and includes adjustments as evidenced by the Separation Agreement and WGH Share Sale Agreement (Agreements) including adjustments in working capital, drawn debt and planned capital expenditure plus interest on the outstanding amount in order to deliver the Wellard balance sheet in accordance with the IPO Prospectus.

At the time of the release of Wellard’s audited 31 December 2016 Half Year Financial Report on 29 February 2016, the Company estimated the outstanding net amount owing from WGH to be $14.7 million and accounted for a receivable of that amount.

In determining the Estimated Adjustment Amount, Wellard established a Board Sub-Committee which consisted entirely of independent non-executive directors overseeing the process and engaged independent legal, financial and accounting advisors to assist in determining the quantum of the adjustment.

Once the Estimated Adjustment Amount has been finalised and the Company and WGH agree the final amount, under the terms of the Agreements WGH is required to repay the final amount within 5 business days. WGH has informed Wellard that it is currently making arrangements which will enable it to pay the final amount within a 3 month period.

It intends to make such repayment without recourse to selling any of the Wellard shares it owns.

The finalisation of the Estimated Adjustment Amount and the terms on which any credit will be provided to WGH is in the process of being negotiated and documented and will be on a commercial arm’s length basis.

As part of the negotiations, WGH has offered certain payment priorities and security to Wellard subject to the agreement of its lenders. Further details of the Agreements and the calculation mechanism to finalise the purchase price post IPO are disclosed in section 9.4.1 of the Wellard IPO prospectus released on the ASX platform on 4 December 2015.

 Wellard will provide a further update once the final adjustment is determined.

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Comments

  1. Tim Paterson, 08/08/2016

    Like lambs to the slaughter is the comment in Friday’s West Australian. More glory from corporate ag. in Australia.

  2. Peter Vincent, 14/06/2016

    Knock me over with a feather! The downgrade has been foreshadowed for months by those familiar with the facts rather than the hype contained in the “smoke and mirrors” prospectus published by Wellard management.
    What price an investor class action within three years?

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