Ann: FY18/19 Milk Supply Contract Prices, page-8

With 242.8M shares on issue and a MC of $42.5M, one should be looking at a realistic net profit p/e of 12 – 16 but no more. To me, pe12 is about right as it sufficiently covers for “real” pricing movement in the economy, with some buffer. For example, if real GDP growth est = 3% and CPI = 2.5%, then broadly, the nominal ROG /GDP is 5.5%, and so it goes.

So, an 8.33% result or better would be considered VG.

Adjust this to a 70% payout and you get to c6.83%. Now, if pe11 on 70%, then you would be getting to c6.4. That’s, in part, my way of thinking. Now, to get to this, NP@c12 = $4.04M, or if @c11 = $4.40M.

To get to these numbers, especially on present trends of REV = c$21M for F18 (bar adjusting for any cattle movements /sales and depending on whether the ODFC result is brought to account as part of F18 – uncertain, here?), would require an effective margin of between – 19.2% à 21%.

Not only is AHF not profitable at the moment (refer H18 + Q3/18 CF) but historically, even when profitable (or thereabouts), the margins generated have been way short of this sort of figure range. That’s not to say that it can’t be achieved, but presently (and for some time, now), it hasn’t been achieved.

A terrible lot therefore is resting on these new rollout initiatives that are being spoken about (but which have been long and extenuating in their execution to date).

Certainly, AHF has the potential to get there but first (*) it must become profitable, then (*) it must generate profits, at least to the extent necessary, to justify the current MC, and then (*) it must generate way and in excess of this in order to drive future growth, both in the business and according to investors.

At 17.5c therefore, my concern is that the SP is not being sufficiently supported by real achievement /reality (as opposed to what is occurring which is largely aspirational in its grounding).

So, which way for the SP?

I would prefer to see the SP justifying its existing position (or any position, for that matter) and then using this to project its way forward. I don’t want to see the SP fall but struggle to see what is justifying it at the present time other than a series of aspirational (not yet fundamental, as in delivering results, etc) statements. That’s me, from a fundamentalist perspective which is generally how I look at things. Technical supporters however may have a different view.

Another way of considering things is this. 12 months ago, the SP closed at 17c (5/7/17). Last night (5/7/18), it closed at 17.5c. In 12 months, the SP rose by 0.5c yet on Monday, an award of 3M shares was given to the CEO on account of achievement of performance outcomes, etc. Whilst this may well have been justified (certainly, the Board considers this so), the reality is that those shares came with a dilutionary impact of 0.22c per share (ie: 3M shares issued against a then share base of 239.8M shares = 1.26% dilutionary impact, or 0.22c/share, at yesterday’s close. Even the SP growth over 12 months was less than this – 1.02%.

Results, achievement, profits is what is necessary. This, after all is an FMCG company (or thereabouts), not a high flying, financial engineering business, a speculative tech upstart or a mining exploration prospect. Yet, presently, it is still being valued as if it is one or more of these.

Presently, AHF is valued at 13.7c on net assets, or at NTA = 10.9c. So, at 17.5c, it is being valued at +3.8c to NA (28% premium @17.5c on H18), or @ +6.6c to NTA (61% premium to NTA @17.5c to H18). And that was at the H18 mark without factoring for the marked deterioration referenced in the MarQ CF (and unlikely improved upon since then).