Jenny Ruth: Busy de-risking vegetables

Vegetable processor Cedenco is a company transformed from its early years as a listed company.

In three of its first five years, its losses swamped the two better years.

The accumulated net loss for the five years was almost $8 million, almost a third of the amount raised in Cedenco's 1993 float.

The past five years have shown a pleasing trend of results firmly in the black and continuous improvement.

If it hadn't been for a $660,000 payment to founder and departing director Dean Witters, the latest result would have been a record and up 11.7 per cent on the previous year.

The actual result of $4.1 million was 4 per cent down on the previous year.

Before the Witters payment, it was $4.7 million, below the company's $4.9 million target.

Still, the accumulated profits of the past five years total $14.3 million.

For a time, minority shareholders had reason to be glad they missed out on the May 2001 deal in which Brierley Investments and other interests gave Californian SK Foods a 55 per cent stake (since increased to 58 per cent), just before the new Takeovers Code forbidding such transactions came into force.

Not only did profits keep rising, but early last year the share price briefly rose above the $2.30 float price for the first time since immediately after the float.

But the minorities may have reasons to rue their position now, despite the company's superior performance.

In February, just before the annual meeting, Cedenco said it would not be paying a dividend for last year or for at least three years.

Predictably, the shares plummeted. They had been trading about $1.90; yesterday they were at $1.55.

The company's reason for the dividend suspension was that it needed the capital so it could pursue "growth opportunities".

But it has no immediate targets in sight, as managing director Richard Lawrence admits.

"It's fair to say, at this stage, that anything and everything is on the radar screen," he says.

Money could be spent on either growth or on acquisitions.

Lawrence talks about "increasing opportunities" but is short on specifics.

"The more we can create efficiencies within the Cedenco model, the more attractive we can be as a producer of good quality products," he says when pressed.

He admits disappointed investors who were relying on getting dividends showed their annoyance at the annual meeting, but also claims other shareholders support the company's growth ambitions.

He won't comment on whether it is yet another case of a major shareholder trying to starve out the minorities so it can pick up their shares cheaply.

"The chairman [SK Foods director Scott Salyer] supports the company and believes the current share price is good value," Lawrence says.

He says New Zealand shareholders are particularly addicted to companies paying dividends, but he believes that is changing.

There was another reason the shares fell.

At the same time as it announced the dividend drought, the company warned that although it has been concentrating on "de-risking" the business, it was still at the mercy of the weather.

Adverse weather in Cedenco's first five years as a listed company was a major reason for the poor results.

This year, a cooler than usual growing season in New Zealand delayed the harvest, and in Australia drought raised concerns about whether growers would be able to supply the required volume and quality for its tomato processing facility.

Cedenco also talked about a drop in sales to Japan because of its weak economy and a tightening of customer inventory levels.

And the rising New Zealand dollar does no good to any exporter's bottom line.

The outcome of all this was that the directors think this year's results will be below the $4.1 million earned last year.

Lawrence says that with the processing season in full swing, the company's expectations of a shortfall in volumes have been fulfilled, although there's been some compensation in that the quality of the crop has been better than expected.

"That does somewhat compensate, but not completely," he says.

One of the reasons Cedenco gave for the shortfall in last year's profit was that the contribution from its Australian operations fell 23 per cent from $1.95 million to $1.5 million.

The company had budgeted for a $2.5 million contribution.

It said it couldn't convert record factory throughput into sales and so finished the year with high inventories.

Lawrence agrees that situation simply means deferred sales.

"I don't think any management wants to be carrying a lot of inventory, but this year it's certainly worked for us."

Those inventories will help the company meet any shortfall from the current season and continue meeting its contracts.

Nevertheless, the company's February forecast of a lower result this year still looks on track, Lawrence says.

But the real problems could come next year, if the Australian drought doesn't break.

Without significant rainfall over the next four or five months, Cedenco and all other agribusinesses would be significantly affected.

The climatic problems are doubly disappointing because the company was gearing up to take advantage of a poor growing season in July and August in Europe, particularly in Italy.

"We were hoping for a strong and plentiful crop from Australia. You can never get all the stars to line up," Lawrence says.

On the currency side, Cedenco is affected by the Australian and US dollar exchange rates.

The New Zealand dollar rose from about 40USc early last year to almost 57USc in February when Cedenco made its gloomy prediction.

It has since subsided to 55.5USc.

Against the Australian currency, it has soared from about 80Ac in mid-2001 and has been trading between 91.5Ac and 93.5Ac for the past three months.

Lawrence won't give details on the geographic sales breakdown, but does say the rise against the US dollar hurts it the most.

Most of its exports from Australia and New Zealand go to Asia, and most of its competitors are American.

Much of the company's focus is to increase exports from both countries into Asia, but that does increase the currency risks, he says.

Lawrence won't express an opinion on the perennial debate over whether agribusinesses, with their inevitable commodity price cycles, climate exposure and currency risks, are suitable candidates to be public companies.

"That's the cards I'm dealt," he says. "My job is trying to de-risk the business as much as we can."