COMMENT

Wrightson managing director Allan Freeth certainly talks the talk, to the extent that he sometimes sounds like a business textbook.

In the past few years, the company has certainly been enjoying the tail wind of a buoyant rural sector and a depressed currency, although last year both these factors turned more adverse.

Freeth's aim is to reduce the company's exposure to commodity and exchange-rate cycles and to build much more sustainable earnings than it has produced in the past.

There are still plenty of sceptics. Many investors won't even look at agriculture-based businesses, having seen plenty of examples of such companies regularly turning to custard.

Even among those who bother to pay attention, there are still disbelievers.

"Any move they can make in that direction [of reducing their exposure to such cycles] has to be positive," says one analyst.

"But when your customers are ultimately tied to commodity cycles, there's not much you can do. You're always going to be tied to the cycle, you can't escape it."

Andrew Mortimer, an analyst at First NZ Capital, shares those sentiments: "They're ultimately inextricably linked to the wealth of the rural sector."

Although farming fortunes dipped last year, partly accounting for Wrightson's 13 per cent decline in net profit to $18.5 million for the year ended June 30, the rural sector is still buoyant compared with conditions in the mid-1990s, Mortimer says.

Freeth acknowledges this: average net farm profitability in 1993 was about $33,000 a year.

Farm profitability peaked at maybe $100,000 last year, and fell back to between $60,000 and $70,000 in the past year.

"We haven't seen the real hard times [again] yet. That will be the proof of the pudding," Mortimer says.

Nevertheless, last year's result wasn't a bad effort, given the conditions, and there are signs of more sustainable earnings streams.

"There's no doubt that they've improved the business."

The seeds division in particular is currently proving to be "the jewel in the crown" and is clearly more sustainable than the company's traditional stock and station base.

Although conditions such as droughts may affect the seeds division, in most years, farmers will need to plant, no matter what stage of the cycle they are in or what the New Zealand dollar is doing.

The seeds division's contribution to earnings before interest and tax (ebit) has risen from $1.4 million in 2001 to $10.6 million in 2002 and to $12 million in the latest year.

John Cairns, an analyst at Forsyth Barr, has long been a believer in the Wrightson story, acknowledging that the firm has been "out there in the wilderness", and much of his faith rests on his high opinion of Freeth.

"They've certainly moved away from the traditional stock and station agency formula," Cairns says. He talks about a "new mindset" in farming generally, with much more focus on productivity and getting good returns on capital no matter what is happening to pricing.

And that's where the "solutions" part of Wrightson's business comes in.

No longer is seed development focused on increasing the amount of grass grown; the important outcome now is on the productivity of the animal that eats the grass, he says.

Other analysts dismiss the "solutions" strategy as providing minute returns in the overall scheme of things.

Freeth says the company is starting to see the kind of returns it hoped for from the solutions strategy. As he told the annual shareholders meeting last month, the company's average revenue per client from all clients fell about 7 per cent last year, but average revenue from those clients using solutions products and services rose 9 per cent.

He acknowledges it's still early days. The company's total farm packages, which include everything from pasture and animal genetics and breeding to farm consultancy, were used by just under 100 farms last year and this year's target is for about 230 farms. Wrightson's total active client base is about 40,000 farms.

Another part of the solutions initiative involves contracts with dairy farmers to produce maize for silage purposes.

"Above a certain level of productivity, both the farmer and Wrightson share the gains. That's a pretty important signal to the client that we're prepared to be involved."

A key solutions contract is with sheep farmers and the Bernard Matthews processing works.

Wrightson has a contract to supply it with 2 million lambs a year, about 20 per cent of New Zealand's lamb kill. The lambs have to weigh between 17kg and 20kg each. "We're effectively managing the channel from conception of the lamb to slaughter."

Another opportunity to build a more sustainable income stream is in the finance area. Back in February 1998, Wrightson sold its finance business to Rabobank, a move widely viewed as made under duress (although it did allow the company to retire debt and to ensure its survival).

One condition of that sale was that Wrightson was prevented from providing anything other than short-term finance until this month.

In the past couple of years, the company has moved back into providing short-term finance, although its book is still tiny.

It grew only $1 million to $9 million in the year ended June (even so, Freeth notes it contributed $1 million in ebit to the latest result).

Cairns notes that the company is on record as wanting to grow its finance back to a similar size to the business it sold Rabobank, a book of $500 million or $600 million within five or six years.

The previous finance business had been contributing in the order of $10 million or $11 million tax-paid profit a year, he notes.

"They are in a very strong position to write [finance] business. They're the first port of call in terms of seasonal finance," he says.

Freeth acknowledges the medium-term targets for the finance business. While discussions are continuing about a partnership with Rabobank, that isn't looking likely.

"I suspect the particularities of the business, the business returns and credit requirements are such that we may find that hard to do, in which case we're prepared to be quite independent of any bank," he says.

Unlike before, when the finance book was on the company's balance sheet, this time around "we're keen to find optimal ways to fund the business and reduce the capital requirements".

"What is definite is that we will be in financial services, we will be in deposits, the chequing business, term loans and seasonal loans,"' Freeth says. "That is a stake in the ground."

He also sees scope to improve returns from the company's rural-supplies business, an acknowledged problem area in the latest results.

The company has recently replaced its head, Crosby Spooner, with Philip Abraham, previously retail and marketing general manager at the TAB. Before that he held various management roles within New Zealand Post, including heading its retail network.

The rural supplies business through the company's 77 stores nationwide contributed only $3.7 million in ebit to the latest result, down from $8.4 million the previous year and $8.7 million in 2001.