28 May 2019
Investing in strategic assets in the export food chain, particularly with a North Asia focus
Wingara Ag is building an end-to-end export-oriented agricultural infrastructure platform capable of scaling industrial processing and marketing capacity within the food supply chain.
The platform is service oriented around export focused capabilities and strategic assets which are high barriers to entry. The company is and will continue to invest in strategic logistics and processing assets in the supply chain to provide greater control over the quality and movement of products.
Wingara’s model provides great leverage to the rising demand from Asia for protein and high-quality agricultural produce whilst mitigating weather risk and earnings volatility which are traditional features of agricultural investment. The model is based on a multi-product strategy and geographic supply diversification which will be further developed as the company pursues additional investment opportunities.
The acquisition of Austco Polar Cold Storage in April 2018 and commissioning of a new greenfield fodder processing plant in January 2019 were transformative and provided the scale which has enabled the company to breakthrough to sustainable profitability.
Strong growth is anticipated over the next few years as the company realises efficiency gains, increases storage and processing capacity and further diversifies its infrastructure asset base.
Gavin Xing, Executive Chairman, CEO
Zane Banson, Executive Director, CFO
Mark Hardgrave, Non-Executive Director
ASX Code: WNR
Current Price (27/05/19): $0.275
52-week Share Price Range: $0.21 – $0.37
Market Capitalisation: $28.9 million
Enterprise Value: $55.7 million
Shares on Issue: 105.1 million
NAOS Asset Management 24.3%
Richard Gazal 13.7%
Kellie Anne Barker – Co-founder 10.3%
Gavin Xing – Co-founder 10.3%
Management & connected parties 5.5%
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report 11/04/19||ASX ST1|
|Price $0.0265||Price Target N/A|
|Analyst Recommendation N/A|
|Sector: Consumer Discretionary||52-Week Range: $0.21 - 0.37|
|Industry: Farm Products||Market Cap: $28.9 million|
Wingara Ag has released its annual report for the year end 31 March 2019. The key data are summarised in the following table.
Analysis and comment
FY 2019 was a transformative year for Wingara Ag. The highlights of the year were the acquisition of the Melbourne based export cold storage business, Austco Polar Cold Storage (APCS) and the completion of the first stage development of a new fodder processing facility at Raywood near Bendigo, Vic. The effect of these two investments was to more than double the size of the company from the year before. The acquisition of APCS was effective from May 2018 therefore the FY 2019 results included a contribution for 11 months whilst fodder processing at the new Raywood plant commenced in January 2019 contributing for three months.
Due to these major impacts and the absence of comparable prior year data, it is difficult to interpret the FY 2019 result. In particular, the result includes an accounting gain of $1.0 million attributable to the discount paid for APCS compared with the fair value of the assets acquired, which was partially offset by costs associated with the acquisition transaction. These are generally, non-recurring items. Nonetheless, the overall EBITDA margin has markedly strengthened due to the higher margin generated by APCS and the absorption of group overheads over a much higher sales and gross profit base. The return on average capital employed increased from 12% to 17% and the return on average equity improved from -5% to 7%.
More significantly, perhaps, the company’s balance sheet doubled in size with total assets increasing from $23 million to $47 million as a result of the acquisition of APCS and the Raywood development. However, there was also a significant increase in inventories in part due to a decision to enable a relatively steady monthly supply of fodder to customers in Asia. This balance sheet expansion was funded primarily with an increase in gross debt from $9.3 million to $27.5 million, $6.7 million in new capital and an $8 million reduction in cash.
The increase in net debt, which led to a headline net debt to equity ratio of 177% as at March 2019, was due to funding the acquisition of APCS, development of Raywood and a $4.1 million build-up in inventories. The build-up in inventories, in particular, resulted in the FY 2019 operating cash flow surplus being a modest $184K.
Hay is purchased by the company through the harvest season and inventory holdings are usually at a peak around March and then progressively run-down over the remainder of the year as fodder is sold and delivered to its clients. Accordingly, short term debt levels are typically highest at the end of the financial year. Short term debt as at 31 March 2019 amounted to $8.3 million of which about $5.4 million is attributable to inventory with the balance being debt repayments due over the coming year. As short term debt is seasonal and levels decline through the year, long term debt is more reflective of the core debt burden of the company. Accordingly, the long term debt to equity ratio was 127% as at 31 March 2019.
The apparent interest rate on the company’s funding was high in FY 2019. However, a new $27 million funding package has been established with Westpac which will provide greater cashflow stability and funding certainty at lower cost.
Wingara’s business exposure has now been diversified across multiple, unrelated products with different demand and supply dynamics mitigating the usual risks in agriculture. More specifically, the company’s exposure to growing and weather risk is relatively modest.
The first stage development at Raywood added 65,000 tonnes export fodder processing capacity to the 45,000 tonnes capacity at Epson, also near Bendigo, at much lower operating costs due to newer equipment and more efficient plant layout. It also significantly boosted the company’s ability to supply the lower margin domestic market. Following the opening of Raywood, the company’s existing plant at Epson, was temporarily closed for upgrading work, which is planned for re-opening in July 2019.
Although Raywood was partially operational for three months, volumes were noticeably higher than the prior year contributing to a 27% increase in revenue. However, gross margins fell slightly due to high prices for hay and costs associated with Raywood’s ramp-up in production. Drought conditions led to lower harvest volumes and some diversion of output into Queensland’s feedlots resulting in higher purchase prices.
APCS is an established profitable business typically generating between $10 million and $11 million revenue per annum. Accordingly, the FY 2019 result, with 11 months revenue of $12.3 million, was exceptional reflecting Wingara’s early efforts to boost marketing to meat exporters in eastern states and expanding its blast freezing/logistics capacity. Margins were also impacted by the change in management and operational procedures. Since the acquisition, the company has undertaken a number of capital works including upgrading blast freezing and storage capacity between November 2018 and January 2019, during which time, effective overall handling capacity was markedly reduced.
Outlook FY 2020
The principal factors driving the results for FY 2020 will be a full year contribution from APCS and Raywood with revenue expected to jump to about $36 million (+24%). Gross margins should also improve as higher volumes at both businesses and operational efficiencies flow through. Further, hay purchase prices are expected to moderate in the second half of the financial year as harvest volumes rebound in response to improved growing conditions and increased planted acreage by Victorian growers. Good rainfalls at sowing in April have provided confidence of a much improved season in 2019 although this will still be subject to follow-on rainfall in the winter and spring. The operating cash flow surplus should be much stronger in FY 2019, maybe as high as $5 million, with the benefit of higher margins and as fodder inventories, after the post-harvest build up, are more closely aligned with monthly exports. Overall, we forecast EBITDA to increase by about 50% to $7.3 million and net profit to increase from $0.9 million to $2.5 million. The effective tax rate (4.8% in FY 2019) will remain very low due to the availability of tax losses.
The main point of uncertainty is the company’s capital spending program for FY 2020. A major investment in solar power at the APCS facility has been proposed and stage 2 and 3 developments at Raywood are sitting in the wings, whilst further operational upgrades at all facilities are likely. However, another business acquisition would have the greatest impact on the balance sheet.
Wingara has stated its objective of building a portfolio of export oriented agricultural services businesses. In particular, the company is attracted to businesses with strong storage and logistics focus and quality-enhancing, non-transformational, value-adding capabilities. With the fodder and cold storage businesses now operating efficiently, we believe that an acquisition in FY 2020 is a distinct possibility. Given past experience, such an acquisition could cost between $20 million and $30 million. With the net debt to equity ratio at 177%, we expect that such an acquisition will have a large equity funding component.
- Building a portfolio of export oriented, agricultural services businesses: Wingara is leveraging its key skill sets and capabilities in project development, acquisition, finance, commodities and international trading, logistics and storage, product traceability management, export accreditation and documentation processes to build an export marketing platform servicing Australia’s food supply chain and focused on establishing direct relationships with farmers and end customers.
- Focussed on strategic assets with high barriers to entry: Investment is focused on strategic industrial assets with export accredited storage and logistics capabilities and quality enhancement, non-transformational, value-adding processes. These export related capabilities and purpose-built assets are typically industry choke points and major barriers to entry.
- Two established, profitable business have been acquired: JC Tanloden (JCT) is a leading Victorian based exporter of fodder products, especially oaten hay and Austco Polar Cold Storage (APCS) is a Melbourne based meat export service and logistics business. It mainly provides blast freezing, storage and export management services for meat exporters in Victoria, South Australia and NSW but also offers logistics services to some domestic clients. Combined revenue in FY 2019 was $29 million.
- Considerable post acquisition capital investment: Fodder processing and handling capacity was doubled in FY 2019 with the stage 1 development of a new a facility at Raywood, near Bendigo, whilst blast freezing and storage capacity at APCS has been upgraded. A wide range of operational improvements have also been introduced at each business. These investments will have a positive impact on FY 2020 results and beyond.
- Positive operational outlook: The outlook for both business units is positive and underpinned by intensified marketing efforts and a strong client focus. Operational improvements are expected to flow through to margin gains, whilst early rains have increased the prospects of a better growing season for hay in 2019 which should lead to lower purchase prices.
- More M&A likely: Wingara is on record with an objective to further diversify its product base with a view to expanding its export opportunities and further mitigating agricultural risks.
- Strong growth forecast for FY 2020: A full year contribution from the newly opened Raywood plant and APCS (11 months previously) together with expected operational gains are expected to drive a 24% increase in revenue to $36 million and a 50% gain in EBITDA to $7.3 million.
- Balance sheet to strengthen: We expected stronger operating cash flows, a better financing arrangement and a larger equity component in funding the next acquisition to lead to a stronger balance sheet over the next 12 to 18 months.
Wingara Ag is developing a farm gate to end customer marketing platform for agricultural products building on its capabilities in project development, asset management and international trading. It has established a strong end customer network in Asia and continues to build long term farmer relationships and networks for product accumulation.
Gaps, opportunities and choke points in Australia’s food export supply chain have been identified, where there is limited competition, lack of pricing transparency and high barriers to entry. Assets have been and will continue to be acquired that fit these criteria and strengthen the company’s capabilities. In particular, the focus is on assets with export accredited storage and logistics facilities and value-added processes that enhance quality with limited transformation of the underlying product, such as blending, blast freezing and fumigation and so on.
These capabilities provide Wingara with sustainable competitive advantages and are major barriers to entry. Export of agricultural and horticultural products is tightly regulated and subject to licencing. Import licences are also often required at the end of the supply chain. These licenses are designed to protect food safety and biosecurity. Accordingly, processing plants, manufacturing and operating processes and the tracing through the supply chain of inputs and outputs is highly regulated and audited by Department of Agriculture and Water Resources and its equivalent counterparts in importing countries. Licenses are typically issued to the processing, manufacturing or storage facility which is ‘site specific’ and for example there are 11 export licences issued for fodder products of which JCT holds two. On the other hand, China only licences the import of oaten hay from Australia of which JCT is a holder.
Wingara acquired its first business, JC Tanloden (JCT), a producer of oaten hay, in 2015 and subsequently listed on the ASX in early 2016. In April 2018, it acquired Austco Polar Cold Storage (APCS), a Melbourne based meat export service and logistics business. Both businesses have export accredited storage and logistics facilities, require tight process control over product traceability and have key value added, quality enhancing processes.
JCT has one of the largest fodder production capacities in eastern Australia and is one of the largest exporters of oaten fodder in south eastern Australia. It operates storage and processing facilities at Epson and Raywood, both near Bendigo, Victoria. Stage 1 at Raywood was developed by Wingara in 2018 and expanded its potential annual throughput capacity to 70KT and storage capacity to 30KT. Wingara also has an option to develop a new site near Horsham, Victoria with similar scale. Victoria has a long history of growing oaten hay and JCT’s supply could be sourced from a network of farmers in a radius of about 300 km and processed to customer specification and baled and packed in containers primarily at Raywood for export to Japan, South Korea, China and Taiwan. Oaten fodder is an important diet supplement for dairy cattle and is in high demand in Asia due to consumers growing appetite for fresh dairy products. Despite appearances, fodder is typically blended to meet end-customer specifications for sugar and moisture content. The fodder is also fumigated and compressed before loading into containers for shipment.
Oaten hay is also grown as a rotational crop to manage weeds. Cereal farmers typically allocate 10% to 25% of their area to oaten hay which is harvested between October and December and delivered to processors through to March. Off farm storage is an industry-wide bottleneck with the peak requirement around February/March each year.
APCS operates a major blast freezing and cold storage facility at Laverton North, in Melbourne’s west, which is accredited for managing red meat for export to Europe, US, China and Japan. The facility has a sizable handling and storage capacity as well as blast freezing capability. Blast freezing extends the shelf life from 3 weeks to over two years and key clients process more than 30% of Victoria’s meat production. APCS is a tolling-service provider to exporters and its responsibilities are primarily storage, freezing, handling, packing and export documentation. Export services are accredited to China, Japan, Korea, EU, USA and the Middle East with Halal certification. Whilst there are a large number of export accredited cod storage facilities in Victoria, APCS is one of only three with a blast freezing capability, a major competitive advantage.
APCS is located close to Melbourne Port and has storage capacity for 10K standard size pallets and blast freezing throughput capacity of 25K packs per week. It services some of the leading meat exporters in southern Australia. The storage facility is also used by domestic food manufacturers and distributors.
Please note that Gordon Capital has been retained by WINGARA AG LIMITED to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report.
MICHAEL GORDON the analyst responsible for this report does not receive any indirect benefits or assistance from WINGARA AG LIMITED. Our remuneration is not linked to the views expressed in this report. At the time of writing the report the author does not hold shares in WINGARA AG LIMITED.
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Please note that Gordon Capital has been retained by Wingara Ag Limited to provide this report for a fixed fee. Gordon Capital does not provide specific investment recommendations and does not receive any additional benefit for the provision of this report. Gordon Capital aims to provide a balanced and objective analysis in this report. Michael Gordon, the analyst responsible for this report, does not receive any indirect benefits or assistance from Wingara Ag. Our remuneration is not linked to the views expressed in this report. At the time of this report, the author nor any associated parties held shares in Wingara Ag Limited.
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