KEY POINTS:
NZ Farming Systems Uruguay - the dairy company part-owned by Craig Norgate and PGG Wrightson - was punished by investors yesterday after it surprised the market with a gloomy profit forecast because of falling milk prices and dry weather.
The NZX-listed dairy farm developer dropped 20 per cent
in value to 60c a share and dragged down the Norgate-led PGG Wrightson - which owns an 11 per cent stake. PGG Wrightson shares dropped 15 per cent to close at a new low of $1.30.
NZ Farming Systems (NZFSU) said it expected to make an earnings before interest and tax (ebit) loss of between US$7 million and US$11 million for the year ending June 30.
The analysts' consensus for ebit had been US$8 million to US$10 million in the black - although the company had warned in October that figure might be lower.
Director Craig Norgate, who is also chairman of PGG Wrightson, said the company expected to be profitable in 2009/10.
"The fundamentals are absolutely on track and we're just frustrated by what's driven the international market prices to where they are today," Norgate said.
But market commentator Arthur Lim said the earnings update was a shock.
The market view was the dairy sector was facing a virtual free-fall in commodity prices. Farming Systems Uruguay was seen as more vulnerable because it was a relatively newer player, Lim said.
"I think that is the bigger concern - are they on top of the situation and are they getting the right information flow [about the farms] coming through?"
Tyndall Investment Management equities manager Rickey Ward also raised concerns about information available to investors.
"One thing that we do know that the market is doing, it is not going to reward uncertainty. Both of these companies have a lot around it at the moment," Ward said.
Norgate said a US$16 million long-term funding package had been finalised with local Uruguayan banks, with more funding to meet ongoing development requirements under negotiation.
"The reality is we would like to have more debt in place. It's just harder to get and it's slower to get but the first tranche is there and we would expect to have further debt capacity certainly well before year end."
NZFSU said the downside warning in October reflected a short-term outlook for milk prices to fall below US30c a litre.
"Prices have since fallen substantially below this level, as demonstrated by the December 2008 Fonterra online auction for whole milk powder being concluded at approximately US20c per litre," the company said.
"The board believes that once customers are confident the market has bottomed and start to rebuild their inventory levels, combined with the impact on production of current lower milk prices, international dairy prices will increase significantly."
Milk production for the year was expected to be 50-60 million litres, compared with the previous forecast of 60-70 million litres.
"This reflects the onset of dry weather conditions in November 2008, a reduction in the anticipated growth of the milking herd and lack of water in the company's dams."
NZ Farming Systems Uruguay was set up by PGG Wrightson to develop dairy-farm operations in Uruguay and floated on the NZX in December last year. The company owns just over 36,300ha of land and planned to have a milking herd of about 20,000 cows and 26-30 sheds by the start of the spring season in September next year.
DOWN ON THE FARM
* NZ Farming Systems Uruguay will lose money as milk prices fall faster than expected.
* A surprised market punished company shares and those of founding shareholder PGG Wrightson.
* Market commentators are concerned about the availability of information.