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AACo says beef move paying off, as it unveils return to profit

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Shares in Australian Agricultural Company hit a five-month high after the beef giant revealed a return to underlying profit, crediting its switch to being an integrated cattle-and-meat processing group.

Shares in the company, better known as AACo, which is Australia's biggest beef producer, touched Aus$1.485 in Sydney, their highest since May, before easing to close at Aus$1.435, a gain of 3.2% on the day.

The headway followed the group's announcement that it would report an operating ebitda (earnings before interest, taxation, depreciation and amortisation) for the April-to-September half of Aus$8m-12m, compared with a loss of Aus$8.2m in the same period of 2014.

In the year to March 2015, AACo reported an operating ebitda loss of Aus$3.6m.

The improvement reflected the group's strategy to expand from cattle fattening and rearing more into beef processing and exporting, with the opening of a Aus$90m abattoir in Darwin in northern Australia.

Beef sales accounted for 80% of the group's sales of more than Aus$230m in the April-to-September half, compared with 47% of takings in the same period of 2013, before the strategic switch took place.

'Well on the path'

AACo said that its "transformation programme from a pastoral company to a vertically integrated beef producer" would see it report "a significant and positive uplift in operating earnings" for the latest half year.

At a reported level, ebitda would come in at Aus$90m-100m, compared with a loss of Aus$4.5m a year before.

"We are not where we want to be yet, but these numbers show we are well on the path," Jason Strong, the AACo managing director, told investors.

"I am proud of what we have achieved in quite a short space of time. We have now got ourselves in a position to maximise the value of all the animals we own and grow."

He added that the group was "now giving confidence that we have transformed the business, are getting the results and are committed to creating a sustainable global beef supply chain company".

Export surge

The change in AACo's strategy, designed in part to reduce the group's exposure to volatile cattle market prices, has come amid – until lately – soaring Australian exports.

These have been spurred by rising demand from China, thanks to dietary changes, and from the US, whose own producers are rebuilding herds from levels depressed after drought encouraged high slaughter rates.

Australia's own herd is expected to decline to a 24-year low thanks to the incentive for producers from high beef, and cattle, prices to sell at a time when persistent dry weather has undermined pasture condition in many areas.

AACo said its own breeding herd was more than 170,000 strong, a little higher than the comparative two years ago.

'Only short term'

However, Australia's beef exports in September fell 14% year on year to 101,616 tonnes, undermined by quota restrictions in the US, to where shipments dropped 38% to 29,318 tonnes.

This decline has been reflected in cattle prices too, which on Wednesday stood at 521 Australian dollar cents per kilogramme, as measured by the eastern young cattle indicator, down 12.5% from a high three weeks ago.

AACo said it was declining to give guidance for its results for the year to March "due to the volatility in international beef prices" and in currency markets.

Separately on Wednesday, Rabobank said that the decline in Australian cattle prices was "only expected to be a short-term impact… reflecting the drop in prices and demand in the US".

Australia will next year gain a new batch of low-tariff quota for beef exports to the US.

By Agrimoney.com

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