Shares in live animal trader Wellard Ltd (WLD) were unchanged yesterday at 22 cents as investors continue to mull over the unexpected news that the company had pushed back its anticipated return to profitability, and admitted it may even not make money in the next financial year.
The prospectus for the group’s three-prong $52 million equity raising revealed the effective downgrade that Wellard won’t now meet its guidance of a return to profitable trading in the June quarter of 2017.
It has also backed away from its expectation of a full-year profit in 2017-18, revealing that “a return to historical profit levels in FY2018” is dependent on “improved margins and volumes in its traditional markets”.
And judging by the commentary in the prospectus and the reality of the beef cattle marketplace, that is not a given by any stretch of the imagination.
According to the prospectus update, the forecast financial recovery has been delayed by above-average prices for Australian cattle, which has made it more expensive for Wellard and other exporters to fill their carriers and attract overseas buyers for the animals.
In other words, the increased competition for animals from meat exporters and processors is driving cattle prices above the levels where it is economic for the likes of Wellard to compete – this is a normal event in a boom.
The raising could see Chinese group Fulida International Trading increase its holding in Wellard to as much as 27.3% by taking up 15 million shares under a $6 million placement at 24 cents each and co-underwriting a $19.7 million 1-for-4 rights issue at 18.5 cents a share.
Fulida, a Chinese textile maker (now there is synergy, textiles and beef cattle) emerged last September with a 17% stake in Wellard.
The other underwriters are Hong Kong-based hedge fund Black Crane, Bahamas-based Tradeinvest Asset Management, new shareholder Heytesbury Group and Wellard chief executive Mauro Balzarini’s wife, Giovanna Boventi Faroni.
Wellard is also raising $26 million from a two-tranche issue of convertible notes, with most of the money raised coming from Black Crane and Tradeinvest.
Wellard said the new funds would be used to replenish working capital and buy out Fulida for $2.8 million from a Chinese joint venture to build a cattle feedlot and abattoir.
CEO Mauro Balzarini said the company was in a “less strong financial position" as a result of the worse-than-expected trading conditions over the past month.
“The capital raising was mainly done to strengthen the balance sheet,” he said in a statement.
"After the capital raising we will have a working capital amount that will allow us to do better trading conditions, so obtain better payment terms and to do more business.
"It’s also a decision that has been taken because if we expect a turnaround, we want to make sure we take full advantage of that turnaround when it happens."
Mr Balzarini said the company needed to rely on extra funds raised while cattle prices remained at record highs. "That is probably the most important element of our turnaround story."
Heytsbury’s announcement on March 2 that it was buying nearly 10% of Wellard saw a slide in the shares after the company reported an $18 million loss for the six months to December, halted at 17 cents and they began a tentative recovery, peaking at 26.5 cents on March 6 before they eased slowly and then 10% fall on Monday to 22 cents on news of the downgrade in of the profit outlook in the prospectus.
