IF ONE is able to filter out the tumult which has caused tension between PrimeAg (PAG) and a number of significant stake-holders, it seems quite obvious that no matter the speculation about a shining new agri-fund via a PrimeAg tie-up with the Future Fund (FF), it will not come to pass. And the basis for this reasoning lies in the FF’s very own Statement of Investment Policies (SOIP).
Firstly, it is important to note that the FF are the funds of all Australians. In the fund’s SOIP, dated 16 September 2010 and available on the FF web site, the body has given itself an open mandate in terms of where it can invest. Whilst not singling out PrimeAg (PAG) alone, given it is as yet unconfirmed that it is establishing a Fund with the FF, I simply reflect that based upon their performance, using the FF's own SOIP to determine suitability, PAG does not fit the bill.
The FF SOIP invariably provides a solid pointer for how it will go about its business. It outlines the need for a properly resourced management team to ensure the FF is managed to best practice and in the instance where appropriate external skills cannot be found ‘roles will be undertaken internally’. The management team would, appropriately, ensure monitoring of the ongoing suitability of appointed investment managers.
In selecting external investment managers the procedures set out in the SOIP require the FF managers to look to ‘the extent to which the manager demonstrates a sustainable competitive advantage over their competitors in their specialist area’, the ‘fit between the managers style and investment process and the investment objectives of the fund’, and the strategies employed by the manager to control operational and financial risk in their organisation’.
The FF indicates that it would do an ‘objective review of potential managers’; in other words no subjectivity. It should be noted that the FF investment return aim is 4.5% above CPI over the long term.
In the case of PAG in the above they clearly cannot fit the bill. They listed at the end of 2007, a little over 3 years ago, and since then have nearly halved investor’s capital and therefore have clearly not demonstrated ‘sustainable competitive advantage over their competitors’.
Looking at the Comsec website (Market Wrap produced by Huntleys Investment Information) their 1 year performance has been 6.6% and given they have not provided any dividends yet this can only be attributed to share price volatility (hardly indicative). Their 3 year return has been -8.1% which seems a little odd given their share price has fallen from $2 to around $1.10.
This certainly does not put them in the top 20% of farmers in the country, a metric that they have set for themselves. It should be noted that the regular farm survey (ABARES) results indicate that the top 25% of farmers are achieving both cash and capital growth returns each year; these would therefore have to be PAG’s competitors to which they do not measure up.
PAG have not demonstrated a capacity to select land given the market in their shares is trading well below their NTA. Furthermore a strategic hub (Warialda) that was seeded into the portfolio post listing (3 years ago) by advisors/capital raiser/directors Saltbush, is currently being sold and likely at a loss? Why was it bought in the first place given crop farming was the long term game and ‘hubs’ established strategically to minimize weather risk etc?
The Future Fund’s SOIP makes references to a number of factors that would continue to exclude PAG on the basis of its performance and given they have only been in existence for 3 years. This includes the need for the FF to manage counterparty and reputation-related risk, that quantitative and qualitative considerations are important, and the need for sceptical enquiry and being sceptical of simplification. In managing ‘manager risk’ the FF have identified the need for careful selection and monitoring of managers and well as monitoring the composition of their portfolios as important criteria.
PAG have not demonstrated profitability, have only been in existence 3 years, have not demonstrated the ability to acquire land, have issues with regards conflicts of interest, issued a recent profit downgrade, their 3 year CEO has stood down, their share price has halved during a period of relatively good seasons and historically high commodity prices with their massive resources, ungeared balance sheet and according to their ‘hub’ strategy. Any credibility/reputation they have left must surely be called into question in now trying to ‘diversify’ their income stream and become a Fund Manager.
The two other listed agricultural companies, Australian Agricultural Company (AAC) (1yr -21.8%, 3 yr -25.3%, 10yr 7.1%) and Tandou Ltd (TAN) (1yr 36.4%, 3 yr 34.0%, 10yr -5.7%) do not fare any better although TAN have done better recently. None have provided dividends recently however so it’s all a capital value trading story if you can time it.
The competitors to the above companies are high quality and lean family operations around Australia that would welcome the chance of alternative sources of funding. Importantly, they generate yields.
John Elgin has over 20 year career in agribusiness involving rural insolvency, business consulting, international business development/management, capital raising and banking.
Email a friend