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4.5¢ australian dairy nutritionals limited

Grant, I noted your remarks at the AGM last year, but your...

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rivanda

419 Posts.

28/04/17

20:26

Post #: 24345960

Originally posted by Grant62 ↑

++++ second time lucky +++++

Some of this can be considered as seasonal movement but a lot of it can be explained by inept management, a lack of depth, knowledge or understanding of the industry or of the business that they are operating in, and a continuing remoteness in connection from Brisbane to Camperdown (it may as well be London based for all the care or attention to detail, except in loading up the costs).

Theoretically, Q4 customer receipts should be $6.7M on a straight line extrapolation, but on an assessed /ratio determined basis, are more likely to come in at a much lower $6.05M. The effect of this is that instead of Q4/17 generating $350K+ in operating cash flow, it is likely to draw a further operating loss of $300,000. The effect of all this is that year end cash could easily end up falling below $1.1M or indeed to as low as $1.0M absent there being a serious Q4 seasonal kick which, at this stage, seems unlikely (judging by their experience, attention to detail and mastery of the business).

What is intriguing this time round however is yet another little devious twist in the equation involving payments to directors (item 6.1). For example:

Column 1 Column 2 Column 3 Column 4

1 Item
Payments to Directors
Payments to TAU
Notes

2 Q1
27,000

6.1

3 Q2
149,000
169,000
6.1, 7.1

4 Q3
115,000

6.1

5 YTD
291,000
169,000

Given that there are only 2 directors, part from Skene as the CEO /executive director, the Board should not be costing anywhere near this much. More the point, in F16, Hackett was paid $43,800 (including super), and each or Rowley and Jackson $32,850 (ditto). The total therefore should have been $109,500 or ~$27,000 on a quarterly basis. This was then what was paid during Q1. So, what did the payments of Q2 and Q3 relate to, as nothing more than this had been approved by the Company?

There is some explaining that needs to be done here because, all things considered, Jackson would have been paid out by end November, so the Q2 outcome should have been ~$24,700 (all things considered – KJ for 2 months, Adrian and Michael for whole of quarter). Q3 however should have been $19,200. So, what did the other $124,000 paid in Q2 relate to, and the other $96,000 in Q3?

Some strange figures indeed, but I digress.

Instead of further considering the above, the following is a quick 9and arguably damning) assessment of the Q3/17 CF statement which once again was signed by Michael. Pity however the accuracy of the projections being proffered.

There is much to be said about this, but just not with the current Board or Management at the helm.

Consider this (based on the CF reports of F17 YTD):

Column 1 Column 2 Column 3 Column 4 Column 5

1 ACTUAL POSITION (CFS STATED)
Act
Act
Act
Act

2 Item
Q1
Q2
Q3
YTD

3 RECEIPTS
7,782
7,280
5,169
20,231

4 - Customer receipts
- Interest
7,779
3
7,277
3
5,167
2
20,223
8

5 PAYMENTS
7,738
6,857
5,200
19,786

6 - R&D
- Manufacturing & operating
- Advertising & marketing
- Leased assets
- Staff costs
- Admin & corporate
- Other
0
6,477
2
4
1,084
171
0
5,405
3
4
1,105
340
0
0
4,019
9
4
1,065
103
0
0
15,903
14
12
3,254
613
0

7 - Interest paid
121
112
121
354

8 NET PAYMENTS
7,859
6,969
5,321
20,140

9 NET OPERATING CASH
-77
311
-152
81

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

1 PROJECTED POSITION (CFS ADVISED)
Act
Proj
Proj
Proj
Proj

2 Item
Q1
Q2
Q3
Q4
F17

3 RECEIPTS
7,782

4 - Customer receipts
- Interest
7,779
3

5 PAYMENTS
7,738
7,033
7,507
6,231
28,509

6 - R&D
- Manufacturing & operating
- Advertising & marketing
- Leased assets
- Staff costs
- Admin & corporate
- Other
0
6,477
2
4
1,084
171
0
0
5,681
2
4
1,035
130
131
0
5,932
3
4
1,112
340
116
0
4,713
7
4
1,085
301
121
0
22,803
14
16
4,316
942
368

7 - Interest paid
121
112
121
121
475

8 NET PAYMENTS
7,859
7,145
7,628
6,352
28,984

9 NET OPERATING CASH
-77

Column 1 Column 2 Column 3

1 VARIANCE – PROJECTED TO ACTUAL
Var AC/PJ
Var AC/PJ

2 Item
Q2
Q3

3 RECEIPTS

4 - Customer receipts
- Interest

5 PAYMENTS
-126
-2,307

6 - R&D
- Manufacturing & operating
- Advertising & marketing
- Leased assets
- Staff costs
- Admin & corporate
- Other
0
-276
1
0
70
210
-131
0
-1,913
6
0
-47
-237
-116

7 - Interest paid
-9
9

8 NET PAYMENTS
-135
-2,298

RATIOS

Receipts to Manufacturing /Operating Costs

Column 1 Column 2 Column 3 Column 4 Column 5

1
Customer Receipts
Manufacturing Costs
C/M Ratio
Comment

2 Q1*
7,779
6,477
1.20

3 Q2*
7,277
5,405
1.35

4 Q3*
5,167
4,019
1.29

5 YTD*
20,223
15,903
1.27

6 Q4e
5,985
4,713
1.27
YTD C/M Ratio applied

7 F17e
26,208
20,616
1.27
Estimated

Receipts to Manufacturing /Operating Costs + Staff Costs

Column 1 Column 2 Column 3 Column 4 Column 5

1
Customer Receipts
Manufacturing /Staff Costs
C/MS Ratio
Comment

2 Q1*
7,779
7,561
1.029

3 Q2*
7,277
6,510
1.118

4 Q3*
5,167
5,084
1.016

5 YTD*
20,223
19,155
1.056

6 Q4e
6,113
5,798
1.056
YTD C/MS Ratio applied

7 F17e
26,336
24,953
1.056
Estimated

Based on these two ratios, AHF is likely to generated Q4/17 customer receipts of between $5.985M and $6.113M, or at the midpoint à $6.05M.

Against this, Hackett has projected that AHF will have Q4 cash payments of $6.231M + interest of $121K (projected), for a total operating payments commitment of $6.352M (rounded to $6.35M).

This suggests that the Q4/17 OPERATING CASHFLOW will be –ve $300,000 for the quarter, all things being equal, and absent any variation to the above.

Within this context, there is actually not all that much that they can say or suggest.

They haven’t got a clue about how to estimate or project future costings.

They have apparently been spooked out of trying to rip more money out through the ADMIN /CORPORATE expense account (err – line of entry).

The Business has now shown QoQ customer receipt reductions since the beginning of F17, with Q1 at $7.8M, Q2 at $7.3M and Q3 at $5.2M. Very likely, the Q3 receipts reduction has something to do with the likely internalisation of milk flows but even if this is so, it hasn’t shown up elsewhere in the equation, such as in the CMS Ratio which collapsed to its lowest point so far during F17, whilst the CM Ratio retreated from its Q2 highs although was still above the Q1 result.

It is also fairly clear from this that they are back to a break even proposition at best and arguably, right at this moment, going into May, they are in a loss making situation. There is little therefore that any strategic plan or direction which incidentally was not issued today, nor for that matter was any commentary usually associated with the quarterly cash flow releases. AHF has the business but does not have the business mindedness with which to either compete within the elevated food and lifestyle sector, or in the retail grocery segment of the market. Equally, forget about China or anything similar to this. Michael /TAU cannot even get an expert’s report under way, a NOM completed and a resumed XGM convened in order to undertake and complete his transformational overhaul of TAU. So, if TAU can’t do it there, then its doubtless that they can’t do it with AHF. In essence, competency is not one of the KPI measurements that is being complied with.

AHF’s position is also such that it cannot now actually begin its own evolutionary journey without there being significant capital raisings and hence dilution of Michael’s interests in the Company. Neither he nor TAU can stump up the funds necessary to take AHF to the next level. Nor for that matter is effective cost control being either managed or ensured. AHF is therefore at risk of being entirely directionless going forward with captains at the helm who, instead of driving this forward, have actually turned it in towards the rocky shoals ahead.

As an evolved business, AHF should be generating a minimum 10-15% margin on its products yet it is not doing this and everything that management and the board either says or suggests is in the nature of pure puffery without any hint of soundness, accuracy or correctness. According to the press announcements, the JVs are plenty and numerous yet they haven’t even been able to finalise on the purchase of the Camperdown lands that they referenced back in November. If they had, then shares would have been issued by now (after all, shares were to form part of the consideration) and the acquisition would have shown up in as part of the INVESTING CASH FLOW. It didn’t, so they haven’t. Even a residential property typically settles from go to whoa within 90 days yet here we have had 130 days pass by since the Camperdown land acquisition announced was first made on 19/12/16. Before long, it will be a year on form this – heaven forbid.

More significantly than this however is that Michael and the Board (which is barely there in terms of it being genuinely independent according to the ASX issued Corporate Governance Guidelines) are at risk of missing their second TSR strike opportunity. The first has already expired given that the required 31/12/16 SP of 23c was not reached. Now, the 30/6/17 TSR strike price requirement. For purposes of considering this, the relevant TSR starting price was the 5 day VWAP immediately prior to the commencement of the relevant measurement period. Given that each of the baseline measurement dates revert to a zero date of 1/7/16, then the 5D/VWAP (or similar) to this was, as a starting point, 18c.

With the Jun30/17 SP requirement being +30%, this would require the SP (given that no dividends have or will be paid), to be >23.4c at the end of the relevant measurement period. In effect, this would require a 67% appreciation from the current SP and then some. With then the resulting XP being 25c, the real effective required “got to” position is arguably +25% (as a buffer), so, from 27.5c to above. To get to there, however, would require a virtual 96% SP improvement over the next two months. Doubtless, the Company (and its board and guiding management( might be able to break bread but they will not make (and are incapable of making) wine out of water.

The Board therefore is in the rather invidious position of facing up to an increasingly hostile shareholder force, an underperforming business and share price, and very likely increased scrutiny of all the costs that seem to have been ripped out of the business over the last 18+ months (all in the name of OPEX, transfer prices, share of costs, etc). It is however quite simple. If the business is not generating a profit, then Michael & Co should not be routinely, regularly and repeatedly charging >$350,000 in share of expenses /overheads to the Company. Nor for that matter should the Company have issued the KPI shares as these have so far failed dismally in driving the business forward or in making it better.

Causing the Company to book (even if done as a non-cash expense) an amount of $871,000 on account of issuing of the performance options to senior management was a travesty, as well as an abuse of shareholder interests. In effect, what has been generated to date has been a loss of MC and MV of >25% relative to Jun16, but in return however for a cost to the Company, to profit and to shareholders of $871,000.

However, far from this being the “one off” that Michael stated in the H17 report, it is likely that the both the exercise and the costs involved will be repeated again, particularly given that there are a further 9.36M unvested options presently sitting out there. Perhaps Michael and the Board can convince us that this has already been taken care of through the “one off” costs that were booked at H17 but given all the financial engineering involved here, it is actually quite hard to fathom whether this is actually so or not. Perhaps the Board would care to explain this further? In this regard, there is at least a further $285,000 in unamortised costs that are yet to be brought to account through the P&L.

Putting this all into context, the Board and its foray into manufacturing has so far proved to be a very expensive option to the Company and its shareholders but a very lucrative one to management, the Board and to the executive shareholder. Doubtless they will want this to continue, but very likely, within the next 6 months, it will all come crashing down.

To not put too fine a point on it:

STRIKE ONE has already occurred and STRIKE TWO beckons. It won’t take too many more reports like today’s (with inert management) in order for shareholders to completely rally against the Board; and

OPPORTUNITY KNOCKS, as the director facing re-election this year is none other than Michael himself.

Talk about letting the hounds out. It’s already rapidly nearing the next full moon and the dogs, they are baying.

Expand

Grant, I noted your remarks at the AGM last year, but your analysis in the last few instances has been quite amazing. Im not a big holder ( 250000 ) but geez what I thought would be such a gem with its vertical integration etc etc has turned out to be enormously complex and frustrating. I thank you and AO (apostrophes aside and forgiven) for your concerns and willingness to share the same. I still think this will work out eventually. Looking forward to AGM even if its in Woop Woop this year. PS I still think P Skene is the right man in his current position and no Im not related to him.

AHF Price at posting: 14.0¢ Sentiment: Hold Disclosure: Held

0 Great analysis

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Last 4.5¢		Change -0.005(10.0%)		Mkt cap ! $12.63M

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0.135	253636	8
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