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Amused observer

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29/03/17

20:48

Post #: 23720526
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Originally posted by Grant62 ↑

Hard to say but not before end April according to H17. That said however they will have some very real explaining to do if the following is anything to go by. As suggested earlier this week, I reckon that a second strike re: REM at AGM17 is all but certain sans a dramatic turnaround in fortunes, direction, focus, attention and active shareholder engagement.

The following are several announcements /datelines which have already passed by their usual expected response times:

CAMPERDOWN PROPERTY ACQUISITION

Announced 19/12/16. Not yet completed 100 days later.

Reason for this conclusion
Per AHF’s own ASX announcement:

“The purchase price is $260,000, which includes $20,000 to be paid via fully paid securities in AHF Stapled Securities. The contract is conditional on AHF confirming that it is suitable for the type and scale of potential development, statutory planning and is appropriately serviced for the intended uses.”

Typically, most property acquisitions are completed within 60 – 90 days of contract signing which, in this instance, is assumed as 19/12/16. Again, per AHF’s own ASX announcement:

“AHF subsidiary, Dairy Fund Management Limited as trustees for the Camperdown Dairy Park Trust has conditionally contracted to acquire 4.2 hectares (10 acres) of industrial zoned Camperdown land from a local businessperson.”

Further, no shares have yet issued, or if they have, then no New Issues announcement has been made.

Conclusion
Either the proposed acquisition was hype at the time, interest in it has peetered out, obstacles /problems have arisen, they can’t get finality out of Michael, or they cannot make /finalise on even a basic decision such as this.

LIAN HE JOINT VENTURE

Announced 7/11/16. Not yet completed almost 150 days later.

Reason for this conclusion
Per AHF’s own ASX announcement:

“Australian Dairy Farms Group (“AHF” or “Group”) is pleased to advise that Camperdown Dairy Company Pty Ltd (CDC) has entered into a Heads of Agreement with its primary Chinese customer, Australian Lian He Pty Ltd (Australian Lian) to jointly develop, and for CDC to operate, a specialty, purpose built for export, processing facility. …. This will involve a new jointly owned entity focused on the new business.”

According to the ASX announcement, the joint investment proposal is meant to involve the construction of a new specialty milk processing and bottling facility in South West Victoria on various terms, including “on land owned or controlled by AHF”. The Camperdown property acquisition outlined where the JV factory was to be situated however as the land acquisition has not yet completed, it can be argued that the JV arrangements have also not yet concluded. So, the question arises as to what’s now happening regarding the Lian He JV?

Conclusion
Either the proposed acquisition was hype at the time, interest in it has peetered out, obstacles /problems have arisen, they can’t get finality out of Michael, or they cannot make /finalise on even a basic project such as this.

REVIEW OF OPERATIONS

In the H17 report, the Board advised that a strategy update was being worked on and would soon be released. This is what AHF had to say on 28/2/17:

“The Group is currently working on a strategy update document for the information of securityholders that it expects to be able to release to the ASX within the next two months.”

So, the timeframe here seems to be “within 2 months” of which already >1 month has already passed by. Mind you, Hackett’s Review of Operations statement also had this to say:

The Directors ….. have instigated several partnership / joint venture discussions with established industry participants that see like opportunities and have the financial capability and existing product demand to provide long term off-take contracts as well as an investment in the joint venture that owns relevant parts of the production facility.”

By “product facility”, Hackett was referring to the CDC processing operation.

He also had the following to say regarding AHF’s relative competitive advantage:

“(S)smaller operators with efficient equipment specifically designed for short-run production of multiple high value products, are well placed to be flexible and achieve materially higher margins on non-commodity products for higher disposable income target markets in Australia and overseas. There are very few such smaller operators in Australia.”

But, in first having made the claim, he has not yet been able to prosecute the argument. It therefore remains as to whether, when or how the “strategy update document” will be done, dusted and released to the market, as there have been a number of rapid fire market presentations, all with differing, confused and /or inconsistent messages since CDC’s acquisition announcement was first made on 30/12/15. For example, see the ASX Presentations of 8Feb16, 22Apr16, 29Jul16 and 25Nov16. In particular, what has happened to date regarding:

Goats milk (22/4/16);

Selling into Coles regional stores (29/7/16);

“organic free range milk” (as if chickens are not enough!!!) (22/4/16) à repeated 25/11/16 – “Investigation of specialty farming options including organic production”;

Organic grain and organic compost (22/4/16);

“Expanding export markets and range of milk products to the wider Asian markets such as Vietnam, Indonesia, Malaysia and Japan” (22/4/16);

Explaining that the Woolworths sold milk is marketed as “Farmers Own” milk (22/4/16);

“Joint venture processing of organic butter with the largest organic milk producer in Australia” (22/4/16);

Maintaining a consistent milk production budget /forecast. For example – 16.5ML (8/2/16), 16ML (29/7/16);

“Strategic plan being developed for significant and strategic entry into the organic dairy market during the 2017 calendar year” (29/7/16 à so therefore underway for >9 months, plus some);

“Investigating markets for soy as well as blended and flavoured milk products” (22/4/16) à even, sheep’s milk (22/4/16);

“expanding with targeted institutional funding from fully owned farms to include managed assets for third party domestic and overseas agricultural land investors” (22/4/16);

“expanding the holdings of water rights via a stand-alone special investment trust managed by AHF” (22/4/16);

“developing other organic inputs such as organic farm fertilizer and manure so as to recycle the significant waste solid material from the CDC factory and farm effluent into organic compost and pellets” (22/4/16);

“AHF intends to continue to expand its farm portfolio by steadily acquiring additional farms which satisfy the size and quality parameters set by the board. Farms are being identified in separate geographical hubs or clusters where eventually each 6 – 10 farms cluster supports an Operations Manager supervising individual farm managers” (8/2/16);

“possible conversion of wetter farms to smaller Jersey breeds” (8/2/16) à now happening;

“AHF is actively investigating opportunities for acquisition of existing organic farming acquisitions or conversions and acquisition and rental of in transferrable water licences” (8/2/16);

“Opportunities to partner and joint venture with successful established parties for growth and diversification” (25/11/16) à very much an infant stage work in progress;

“Vertical integration reduces global commodity pricing, allows the business to bring to the market a range of niche products with full traceability back to the farm” (25/11/16) à arguably happening since 1/2/17 but more likely only partially happening thus far;

“Current export volumes are small with significant potential over time therefore management focus is on securing immediate domestic sale and (sic) produce development” (25/11/16).

The list here could well go on and on, but the message is clear, at present, the strategy is less than coherent, less than directed, and more reactionary rather than either visionary or evolutionary.

The key point is that whilst many things could well be happening, nothing much is actually getting completed except however for:

Admin costs going up quite dramatically.

Through to Oct16, admin costs were put (25/11/16 Presentation) at $220K YTD, and at $50K in Oct16. For Q1, they were $170K. In Q2 however (refer Q2 CFS), they increased to $340K, for a YTD total of $511K. As part of the Q1 CFS, AHF were required to give a Q2 projection which predicted that the Admin Costs for Q2 would be $130K. This estimate subsequently blew away the target estimate by +$210K (ie: +160% variation to budget). Then in the Q2 CFS, the Q3 Admin projection was put at $340K (ie: with the Q2 reported outcome now repeating). Broadly, this puts annualised Admin and Corporate costs at $1.36M in respect of an estimated $25M annualised revenue venture, or at 5.5% revenue cost.

For a business of this size, the Admin revenue cost ratio is far too high but otherwise arguably explains why the business is currently still loss making (ie: between the ramped up Admin costs and the amortisation of options etc which alone cost AHF its H17 profitability). Considered in another context, Admin and Corporate could very well round out the year (if annualised /amortised, etc) at an all up cost of $871K + $285K + $1.36M (annualised Admin) = $2.516M or >10% of likely F17 receipts and quite close to likely F17 revenue (excluding any fair value property or biological asset values).

The corporate structure has become increasing complex, overly duplicated and somewhat cumbersome.

There is now a HOLDING COMPANY (AHF), at least two SUBSIDIARIES (SW Dairy Farms and CDC), a RESPONSIBLE ENTITY (whether as TAU or Dairy Fund Management Limited), likely at least one INCORPORATED JV COMPANY, and at least two TRUSTS (Australian Dairy Farms Trust, and Camperdown Dairy Park Trust). This might well be OK for a $100M+ revenue /business structure, but presently it is at just a quarter of that size.

Expand

Useful insight into stapled investments

This article gives a good explanation of stapled investments like the one AHF is and why they are used. Importantly it shows how the treatment of certain costs can be contained in one entity whilst the other entity does the reporting and it allows certain transactions to flow through a Trust. The ATO is taking a closer look at these types of structures and here is a link to the ATO alert that was imbedded in the article.
https://www.ato.gov.au/law/view/document?DocID=TPA/TA20171/NAT/ATO/00001

Draw your own conclusions as to the shareholder benefits of a stapled security, if there are any. I have a long held view on this matter and how it operates within AHF but shall hold my peace at this point and let you all read and form your own views.
AHF Price at posting: 14.5¢ Sentiment: None Disclosure: Not Held
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