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3.4¢ australian dairy nutritionals limited

Ann: Appendix 4C Commentary, page-229

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sabbeth

216 Posts.

09/05/17

21:33

Post #: 24581118

Originally posted by Grant62 ↑

If you look at the DAIRY RELATED COSTS, you will see that these are increasing, rather than moderating despite the existence of a more controlled, codified and /or efficient herd. The costs summary below is in reference to each 6 monthly reporting period since first being listed. The Dec14 results however have also been normalised in order to reflect like for like.

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7

1 DAIRY RELATED COSTS

2 Item

3
Dec-14

4
Dec-14 Norm

5
Jun-15

6
Dec-15

7
Jun-16

8
Dec-16

9 Feed costs

10
227,831

11
631,713

12
1,176,931

13
1,029,728

14
2,409,529

15
1,498,302

16 Repairs, maintenance and vehicle costs

17
11,557

18
32,044

19
98,616

20
95,910

21
174,957

22
140,832

23 Animal health costs

24
15,103

25
41,877

26
59,680

27
71,170

28
143,137

29
80,011

30 Land holding and lease costs

31
18,404

32
51,029

33
48,027

34
32,569

35
45,743

36
45,320

37 Breeding and herd testing expenses

38
40,248

39
111,597

40
22,152

41
83,686

42
72,797

43
107,985

44 Dairy shed expenses

45
17,045

46
47,261

47
30,381

48
49,111

49
42,070

50
62,142

51 Electricity

52
5,878

53
16,298

54
37,723

55
76,772

56
52,311

57
75,113

58 Other dairy related costs

59
67,337

60
186,707

61
138,209

62
333,821

63
221,761

64
732,704

65 Total

66
403,403

67
1,118,527

68
1,611,719

69
1,772,767

70
3,162,305

71
2,742,409

72 12M progressive

73
Normalised

74
2,730,246

75
3,384,486

76
4,935,072

77
5,904,714

Year on Year DAIRY RELATED COSTS appear to be rising by $1M+ on average, without there being any appreciable increase in herd size.

The biggest blowout in costs relates however to the undisclosed “other” category of DAIRY RELATED COSTS.

Through to Jun16, these costs were averaging in the low to mid-$200K range. However, in H17, these costs blew out by >3x average and by > 3½ times PCP Jun16 result, to >$732,000. On a full blown averaging (with everything in), these costs should be <$333,000, but with outliers applied, the cost range should be sub-$230,000.

Something is seriously wrong with management when the “other” category better than triples in 6 months, is your second largest cost component after feed costs, and is effectively half the feed cost, in circumstances where it should be somewhere between 20 – 30% of feed costs (at most).

The farm management responsibility is farmed out here to “elsewhere”, so arguably there is some serious explaining to be done here. This is all the more evident given that most other cost categories have all been relatively stable over the period (ie: within a broad range of each other).

Given then that the Company has a committed executive in charge, with formal CFO /financial accounting arrangements in place, and with a proper audit function in effect, it should zbe quite easy to provide all shareholders with the required explanation for these cost blowouts. They certainly haven’t been on account of:

an increased herd size (it reduced in size during H17),

other substantial work being done (other cost categories were muted to stable in comparison),

a dramatic change in direction (perhaps, but the new transportation and logistics framework commenced 1/2/17, not during H17),

a different herd structure being put in place;

the allocation of CAPEX (given particularly that significant CAPEX had been ongoing since F14 and none of this had led to a similar sort of blowout).

The likely explanation for this though quite simply boggles the mind and so therefore what needs to be explained here should be quite illuminating, if indeed it is ever explained to shareholders,

The DAIRY RELATED COSTS argument however becomes even more streamlined once you start to do some comparisons such as average ng, applying outliers, normalising, etc, as well as applying herd adjustment ratios. Examples of all these can be seen below.

In essence, what is, should not have been, and what should have been has not been occurring, especially so since the acquisition of CDC was first announced. In essence, it seems that the acquisition of the CDC operations has masked what is really going on down at the farm level (ie: nothing to see here; instead you should be over there looking at the really big numbers).

Trouble is, DAIRY RELATED COSTS blew completely out of proportion during F16, jumping effectively by $1.55M+ YoY, and have then continued on further increasing, by another +$1M, despite their having been a subsequent reduction in herd size by 150+ during H17, although as between Dec15 and Dec16, the herd size effectively increased by 500+.

Calibrating for this though, has resulted in looked at what the normalised position should be (ie: outliers applied).

Column 1 Column 2 Column 3

1 DAIRY RELATED COSTS

2 Item

3
Ave

4
Outliers

5 Feed costs

6
1,349,241

7
1,234,987

8 Repairs, maintenance and vehicle costs

9
108,472

10
111,786

11 Animal health costs

12
79,175

13
70,287

14 Land holding and lease costs

15
44,538

16
41,972

17 Breeding and herd testing expenses

18
79,643

19
59,545

20 Dairy shed expenses

21
46,193

22
46,147

23 Electricity

24
51,643

25
55,049

26 Other dairy related costs

27
322,640

28
231,264

29 Total

30
2,081,545

31
1,851,037

32 12M progressive

33
4,163,090

34
3,702,074

What this shows is that, all things being equal, the HY DAIRY RELATED COSTS equation should be ranging around the $1.85M+ mark. Adding 10% to this equation however provides a circa $2M forward, or somewhere between $3.7M à $4.0M, on an annualised basis.

The actual costs however are a further $1.9M à $2.2M above this. In other words, the DAIRY RELATED COSTS are considered way out of proportion with where they should be, even if there were to be further adjustments made on account of trying to normalise for herd size, etc.

Simply put, whether considered as being $1.9M à $2.2M overstated, or even considered at half these number rates, the financial position of AHF would have been substantially different, both at the F16 and the H17 junctures. It isn’t and it wasn’t and much of this comes down to what AHF has failed to disclose or be transparent about.

There is no point in AHF trying to suggest that they have been misunderstood, or maligned in the process when, for example, the “other” category is its second largest DAIRY RELATED COSTS expense, and upwards of >½ the corresponding costs for feed.

Even on a normalised basis, the H17 blow out in “other” costs is >2¼x what its corresponding 6M average suggests, and >3½x what the outlier estimates are suggesting. This isn’t right à not by any stretch of the imagination. So, what have the farms been up to? And more particularly, what have the Board, executive management, and the “family” all been up to?

At a time when this company is calling for increased transparency, the opaqueness of it all is simply quite thundering in all its resonating impact.

If this Company were being followed by investment analysts, or by financial or business journalists, or if financial results’ conference calls were being held, some serious questioning would be under way.

Indeed, as the following demonstrates, the argument of “the herd ate my costs” also doesn’t quite stack up once the herd figures are included as part of the equation. For instance:

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7

1 DAIRY HERD RATIOS

2 Item

3
Dec-14

4
Dec-12 Norm

5
Jun-15

6
Dec-15

7
Jun-16

8
Dec-16

9 Herd size

10
1,468

11
1,468

12
1,625

13
2,657

14
3,302

15
3,159

16 Dairy Related Costs

17
403,403

18
1,118,527

19
1,611,719

20
1,772,767

21
3,162,305

22
2,742,409

23 Ave cost per period
(the Cow Cost Ratio)

24
275

25
762

26
992

27
667

28
958

29
868

30 2MVA

31
878

32
830

33
813

34
913

35 3MVA

36
439

37
569

38
840

39
852

What this suggests is that the average cow cost is rising rapidly despite all of that home grown pasture being in place. So, whilst they may all be “happy, contented cows … with smiling faces …. and fully bellies”, the reality is that they are costing more, rather than the same or less, whilst producing less. And for this having occurred, despite the fact that Peter Skene is the CEO (but essentially, CEO of CDC and non communicado /banned from going down to or seeing things, insofar as the farms are concerned), he has nonetheless put his name to the “happy contented cows” argument and so therefore stands right there, at the front of the line of responsibility.

Now, if for any reason, this were to be considered differently, then once again, we should not have seen a blow out in costs during H17, by a factor of >25% as the following otherwise suggests:

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7

1 DAIRY HERD RATIOS (12M prog)

2 Item

3
Dec-14

4
01/06/2015 (N)

5
Jun-15 Act

6
Dec-15

7
Jun-16

8
Dec-16

9 Herd size

10
1,468

11
1,625

12
1,625

13
2,657

14
3,302

15
3,159

16 12M progressive dairy related costs

17
2,730,246

18
2,015,122

19
3,384,486

20
4,935,072

21
5,904,714

22 Dairy Related Costs /per cow

23
0

24
1,680

25
1,240

26
1,274

27
1,495

28
1,869

AHF is not a bad company. Indeed, it isn’t even an awful company. It is however a good company, run by bad management, a bad board and an even worse executive.

For all the accountability that exists out there in the world, very little of it shows up in relation to AHF.

This is therefore a very strong reason why the SP is performing as it currently is because shareholders realise that there is something wrong in respect of an otherwise good company, with a sensible or responsible business model in place, but they can’t however quite put their finger on just exactly what it is that they don’t like about the company, or more the point, its management, its board and its executive.

In times like these, real boards and real management knuckle down, get on with the job, explain things and get things sorted out. With this board, this management and this executive however, this rates as a ZERO in the context of their ongoing compliance with corporate governance, their own board guidelines, and the Listing Rules. Simply put, bad companies don’t exist, but bad management and bad boards do, and therein lies the difference à the good, the bad and the ugly.

Expand

Excellent post @Grant62.

Have you or any of the other esteemed posters here approached any media outlets (eg AFR) to share your opinions and facts? I know business journos and media have their flaws but at least these opinions/facts get shared with a wider audience, not just within our relatively small HC forum. If nothing else, this might help add further pressure on our failing management team.

AHF Price at posting: 11.0¢ Sentiment: Hold Disclosure: Held

0 Great analysis

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