Australian Agricultural Company Limited.
 
The company has now transformed itself from a pastoral company to a beef company and is now a fully integrated producer and marketer of  branded beef products and, in the first full year of its transformation strategy has grown its boxed beef revenues by 42%. Managing director Jason Strong said that the results for the year ended 31 March 2015 showed significant progress in the transformation process in the implementation of the new strategy announced in July last year. Sales of boxed beef now amount to $ 267.6 million and account for 77% of revenue compared to 59% in the previous year and the last six months included the first sales of boxed beef from the new Livingstone beef processing facility in Darwin. These sales are for international markets where traceable supply chains, sustainable practices and the company' s unique Australian Heritage enable it to charge premium prices and the next stage of transformation and growth is to build brands. The company has established supply chains focused on customers which drive production and provide better margins. The strategy implementation has resulted in cash flows from operations declining by $ 94.3 million to ($ 75.9 million) because of significant working capital investments but net tangible assets grew from $ 1.40 per share to $ 1.43 per share and the gearing increased from 23.3% to 32.7%.
 
The goals of the company continued to remain organisational alignment, building an authentic Australian brand, secure processing capacity, enhancing cattle procurement capabilities and strategies, optimise production activity and exploit its own know-how and genetics.


Sources & Uses (Source - Company Reports)
 
Operating and financial review
 
The foundation of the business model is that value exists in the beef supply chain but the industry structure creates volatility so that value can and does move rapidly to the different parts of the value chain as a response to changes in market conditions. To reduce this volatility risk, the company has moved to a business model which is more vertically integrated and sought to increase participation in each of the core supply chains. As well as operational optimisation, the company is seeking to maximise value by using a differentiated marketing strategy. The company realises that this could mean giving up the opportunity to sell live cattle when market conditions are favourable such as at present but believes that supporting its own integrated supply chain will yield significantly greater value in the long term.


Beef Indicator (Source - Company Reports)
 
Revenues continue to grow and sales increased by $ 30 million in FY 2015. More importantly, sales have been re-weighted towards boxed beef where sales increased by $ 79.4 million and away from live cattle which declined by $ 49.9 million thus fulfilling a core strategic objective. FY 2014 was marked by destocking of livestock because of drought but better conditions in FY 2015 saw the herds built to more sustainable levels. However, there is an opportunity cost associated as the company made the decision to focus on building its own supply chain rather than pursue short-term gains by selling on spot markets. However, the internal supply of cattle was insufficient resulting in an increase in purchasing but improved dramatic and market conditions meant that these additional purchases were undertaken in an environment of strong pricing.
 

Boxed Beef (Source - Company Reports)

With respect to the refocused strategic objectives, the progress is as follows. The alignment of operations has resulted in an improved organisational structure that follows the key supply chains and allows for better management and reporting. The business is now aligned across three critical vertical supply chains namely the Grassfed division (consisting of the extensive Northern properties and breeding herds), the Grainfed division (containing feedlots and backgrounding properties) and the Northern beef division (which contains the new Livingstone beef processing facility). Brand building is progressing with the help of a leading global branding agency while securing processing capacity and developing procurement capabilities are also progressing satisfactorily.


AAC Daily Chart (Source - Thomson Reuters)
 
With respect to key financial indicators, meet sales for the year ended 31 March 2015 were $ 267.6 million compared to $ 188.2 million in the previous year. Cattle sales declined from $ 120.4 million in the previous year to $ 70.5 million. Statutory EBITDA was $ 44.9 million compared to ($ 19.9 million) and statutory EBIT was $ 32.6 million compared to ($ 34.6 million). NPAT amounted to $ 9.6 million compared to ($ 39.8 million) and net cash flow from operations was ($ 75.8 million) compared to $ 18.4 million. The Grainfed division had total assets of $ 292 million with the key drivers being global beef prices, feed prices, domestic cattle prices and supply and marketing and branding as well as processing costs. The Northern Beef division had total assets of $ 112 million with the key drivers being global beef prices and the prices and supply security of domestic cattle. The Grassfed division has total assets of $ 774 million and the main drivers are climatic conditions, domestic cattle prices and access to the market.
 
For the first quarter of FY 2016, the Grainfed division the sales of Wagyu was 3.1 million kilograms compared to 2.6 million in the previous year and the sale prices $ 12.90 per kilogram and $ 12.46 respectively. Sales of shortfed/other were 5.8 million kilograms compared to 2.9 million in the previous year and prices were $ 8.24 and $ 7.62 respectively. For the Northern Beef division, offtake has been well received by customers and prices remain well above historical averages. Meet sales were 1.6 million kilograms at prices of around $ 6.1 per kilogram. For the Grassfed division, prices for live export sales have been strong but volumes were constrained by delays in export licences in Indonesia. External live sales were 3.8 million kilograms compared to 5.7 million kilograms and prices were $ 2.15 per kilogram and $ 1.7 per kilogram respectively.
 
 
The stock has recently gathered some attention with good reason after moving down by around 17% over the past three months. The recent AGM has announced increases in boxed beef sales and the results validate the company's recent strategic moves into being a fully integrated processor. This has set the stage for future growth and we believe that there is considerable potential for stock prices growth in the future. We put a buy on the stock at the current price of  $1.425.

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