Thursday, December 7, 2023

New plan on table as Mainland Poultry losses mount

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Egg industry hit by ‘perfect storm’ of price hikes, reg changes and supply chain challenges.
Mainland Poultry produces a third of New Zealand’s egg production under the Farmer Brown and Woodland brands.
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Rising egg production costs ahead of a ban on caged battery hens from January this year and grain price increases have hit New Zealand’s largest egg supplier Zeagold Nutrition hard, with payments to suppliers rising by $35 million between 2019 and 2022.

Zeagold, the trading entity for Mainland Poultry, produces a third of the country’s egg production under the Farmer Brown and Woodland brands.

The latest overdue accounts filed to March 2022 show a $20.5m increase in supplier costs from the previous financial year alone, to $170.9m.

The financial strain on the group was evident in the results filed at the Companies Office this week through reporting entity Indus Valley Ltd. 

The company recorded a $6.17m net loss, up from a $2.9m net loss in the previous corresponding period, on the back of breached banking covenants for the second financial year in a row. 

The 2021 loss had been in part due to a bird virus at two Otago poultry farms hampering exports.

As a result of rising debt ($110m in bank borrowings at March 2022), the group set a sale and leaseback arrangement of some of its egg farms in motion with a foreign buyer in November.

This post-balance date arrangement would explain why the company did not file accounts when they were due in September, bringing it to the attention of the Companies Office.

The foreign buyer doing the sale and leaseback deal is unnamed, because the second stage of the process is awaiting Overseas Investment Office (OIO) approval, but the most likely candidate is the company’s 72.9%-owner, Malaysia-based private equity firm, Navis Capital.

It paid US$242m (then around $350m) in April 2017 for 75% of the company and stumped up $18.77m of $23.22m in fresh shareholder capital to reduce debt during the 2021-22 period. 

The injection diluted its stake in the process, as it did for the NZ shareholders who bought shares in proportion to their stakes. 

Indus Valley was created at the time Navis (via its Hong Kong-based Paul Newman Ltd) bought its majority shareholding. 

Last December, the same Indus Valley/Mainland shareholders introduced Rocky Holdings Ltd into the group structure as the new owner of all Indus Valley shares.

Post-balance date notes in the 2022 financial report show the creation of Rocky Holdings coincided with the repayment of $40.7m of bank loans, a new funding arrangement with the company’s banking syndicate to rectify covenant breaches and lodgement of the sale and leaseback arrangement with the OIO.

When Navis Capital bought into Mainland Poultry, Sydney-based partner Phil Latham highlighted the fact that the laying percentage for the company’s laying hens was among the highest in the world. 

He said there was potential to export both Mainland’s intellectual property and the eggs to Asian markets. He also said Navis’s investment would enable Mainland to go quickly from cage to colony and free-range eggs.

Mainland’s then managing director, Michael Guthrie, who owns 13.8% of the business, suggested the possibility of listing on the NZ stock exchange in future. He expected capital expenditure of between $40m and $80m through a mix of equity and third-party lending lying ahead. 

In January, Zeagold managing director, John McKay, who was issued 600,000 shares in Indus Valley on Feb 7, blamed the late results on covid, personnel changes and getting the accounts audited. 

But, adding further weight to the foreign buyer being Navis Capital, McKay also said then that Indus Valley was making organisational changes for tax and reporting purposes and that no changes in the company’s shareholding were imminent.

Further, Guthrie said in January that the creation of Rocky Holdings involved Navis Capital doing restructuring. The 2023 accounts are still to be filed and will take into account the cost of a fire in two of 12 hen-layer sheds at the company’s Orini chicken farm in Waikato in February, killing 50,000 laying hens.

This week McKay said the outlook for the company this year was “far more positive”. 

“While last year saw the egg industry hit by a perfect storm of grain price hikes, regulatory changes, inflationary pressures on supply chains, building costs and labour, the group still achieved revenue growth of more than four per cent, putting it on a stronger footing for the year ahead,” McKay said.

Operating revenue was up from $176m in 2021 to $183.74m in 2022.

“With additional capital from shareholders last year, we continue to develop our free-range farms.”

Once OIO approval was received he said details would be announced showing more capital for investment in farms and technology “so we can focus on producing a range of high-quality, affordable nutrition for New Zealanders”.

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