Shares in Futuris Corporation and its 43% owned associate, the beef producer Australian Agricultural Company, fell sharply yesterday after Futuris’s announcement that it had terminated the process to sell its AACo stake.
That was a decision which came as a surprise to investors and brokers, but not if you look at the accompanying story on the optimistic outlook for rural Australia, including beef farmers, from the Australian Bureau of Agricultural and Resource Economics.
Beef farmers are expecting a significant rise in returns and many will make a profit as the drought ends in some regions (especially Central and Northern Queensland).
But that information was missed by nervy investors who sold off Futruris shares by around 12% at one stage and AACo by about the same amount as well. Futuris (FCL) shares ended at $1.87, down 11.3% and AACo at $2.84, down 9.3%.
The CEO of Futuris, Les Wozniczka, called a conference call with analysts late yesterday to try and better explain the decision.
Futuris announced at its AGM, after the market had closed on Tuesday that it had terminated the sale process. Despite significant interest in the AACo stake, none of the proposals arising from the sale process had certainty of execution or timing.
Futuris also provided market guidance that underlying earnings before interest and tax for the 2008 full year would be at the upper end of analysts’ forecasts of $154 million to $183 million.
The company said full year underlying profit was expected to be around $100 million, depending upon continued good rainfall and sales of managed investment schemes.
"Achievement of these projections would represent Futuris’ strongest-ever six month operational performance," FCL said on Tuesday.
"These expectations are predicated on continuing good rainfall and MIS sales. We are also expecting a positive mark-to-market in AACo’s result in the six month period 30 June 2008."
That means that unlike the last year or so FCL is expecting the value of the AACo herd to rise because of rising prices.
AACo said in a separate statement that "Market recognition of the strategic and capital value of basic food production operations and agricultural land has increased significantly since the divestment proposal was announced. This climate is expected to be beneficial for AACo."
That’s a reference to the surge in food prices in recent months.
But Goldman Sachs JBWere said yesterday in a research note that it had expected that proceeds from the sale of the AACo stake would have been used to retire debt.
"The termination of this sale process means we now expect a higher debt position going forward and hence a higher interest charge, Goldman Sachs said.
“We were expecting proceeds from the sale of AAC to be used to retire debt. The termination of this sale process means we now expect a higher debt position going forward and hence a higher interest charge. This more than offsets the impact of AAC earnings being brought back above the line (at the 1H08 result FCL indicated AAC earnings would be treated as an NRI below the line given its decision to sell the investment). He said Futuris’s expectation of an underlying profit of around $100 million was below the analysts’ consensus forecast of $105 million."
In its update to shareholders, FCL said:
"Trading results in the 4 months to 30 April have seen vigorous recovery by Elders Rural Services, driven largely by crop-related merchandise sales and further growth in income from grain accumulation and trading operations.
"A good seasonal break has occurred in Western Australia and parts of South Australia with further rainfall expected. Cropping activity is well underway in these regions and is being reflected in accelerated merchandise sales. These trends are expected to become well established in the eastern states in the coming weeks as rainfall spreads.
"Livestock operations are experiencing lower levels of activity and income as postdrought restocking occurs. The consequent increase in herd numbers will benefit trading in subsequent periods. In wool, agency operations are trading in-line with the previous year, but downstream operations are being impacted by the effects of reduced discretionary spending in major economies.
"Real Estate continues to perform well despite recent interest rate rises reducing sales activity."
