By Simon Louisson
Brace for another State-Owned Enterprise debacle when Landcorp releases its annual result next week.
Solid Energy was this month placed in Voluntary Administration following its financial collapse.
Landcorp may not be in quite the same pit as the coal miner, but negative cash-flow and rising debt will almost certainly mean it has breached banking covenants.
The Government has opted on a laissez faire attitude to its assets, so Landcorp will be forced by its banks, ANZ, ASB and Westpac, to sell assets at the bottom of market to repay debt.
The predicament of both companies is due to the same underlying factor – management hubris and inept governance.
Solid Energy, under former CEO Don Elder built grandiose plans on coal prices staying close to the multi-year highs they reached in the late 2000s despite all the historical evidence saying otherwise.
Under Dr Elder’s direction, Solid Energy, valued at $2.5 billion, invested heavily in alternative energy. It also built headquarters in Christchurch akin to one of Saddam Hussein’s palaces that housed hundreds of highly paid head office staff.
To the seeming surprise of Dr Elder, but not to experienced observers, coal prices fell so the cost of maintaining the $400 million of debt accumulated to fund Dr Elder’s grand plans became unmanageable. It had to flog off its alternative energy assets, but these were only at the fledgling stage and as the price of oil and coal had collapsed, were far from attractive.
There are many similarities with Landcorp. Spurred by the rise in price of milk powder, Landcorp has bet heavily on dairy, committing multi millions to converting sheep and forestry land to dairy farms.
Already holding a big dairy exposure, it took a long lease on the Wairakei Estate in the Central North Island where forests and nine dairy farms, previously owned by wealthy Auckland investors, will be expanded into 39 farms carrying 42,000 cows by 2021. The 26,000 hectares of conversions will cost “hundreds of millions of dollars,” according to SOE Minister Todd McClay.
Last year’s annual report shows contracted capital for conversions will cost $35 million until 2019 and it then escalates to $229 million.
The problem with Wairakei Estate, Landcorp’s General Manager of Dairy Operations, Mark Julian, told The Waikato Times recently, is the first 10 years will be “pretty tough”. The land is problematic for dairying because it has high production costs and poor levels of dry matter grown, he said.
In 2013/14, costs ran at $4.82/kg of milk solids against Fonterra’s forecast payout this year of $3.85/kg. And that’s before debt servicing costs.
Landcorp was already struggling with negative cashflow in the first half year. While it traditionally generates more positive cash in the second half, in the six months to December 31 it had receipts of $109.3 million, of which $57.5 million was milk, but payments of $121.6 million – a deficit of $12.3 million. Milk receipts are going to fall steeply.
There are other interesting aspects to Landcorp’s accounts. Its operating profit was $1.0 million, down from $13.1 million in the year ago period, but its net profit of $62.7 million, down from $109.3 million a year ago, included $62.6 million of unrealised gains on the value of its livestock.
I know only about enough of farming to distinguish sheep from cows, but my guess is that if milk prices are as dire as Fonterra’s Global Dairy Trade auctions show, then it is likely to affect cow prices.
Landcorp had debt of $359 million at December 31, up from $320 million at June 30, 2014. It has equity of $1.4 billion, but former CEO Chris Kelly pointed out on Radio NZ this week that the problem is that Landcorp, like most farmers is farming for capital gain and is cash poor, but Treasury has insisted it pay high dividends.
The Government extracted a $7 million dividend in October, up from $5 million a year earlier, and it has consistently taken out higher dividends than cashflow warranted.
The end result of this is that Taxpayers will have to endure the lunacy of a Government entity investing heavily at the top of the market and, having got into trouble, watch as the Government sits with its hands in pockets refusing to help, while Landcorp conducts a fire-sale of farms at the bottom of the market.
“My concern is that if you start making short-term decisions based on short-term commodity prices then you are just going to jump all over the place and will have no long-term strategy at all,” Mr Kelly said.
Foreign buyers, such as Chinese company Shanghai Pengxin, which purchased the Crafar farms, will salivate at the prospect of basement bargains.
Questions must be asked about governance. How is it that the managers and boards of SOEs such as Solid Energy and Landcorp get so excited about the normal waves of the commodities cycle that they over-invest and risk the Government’s (taxpayers’) billion dollar businesses?
Where is the oversight from the directors, each of whom is paid over $35,000 for 11 meetings a year while Chairwoman Tracy Houpapa collects over $50,000? What has Treasury’s Crown Ownership Monitoring Unit done to rein in the grandiose plans of SOE bosses and do their most basic job of protecting the taxpayers’ assets?
And what has SOE Minister Todd McClay done to earn his huge salary?
During the 1970s, former Prime Minister Robert Muldoon saw oil prices soar and, egged on by his advisers, spent many billions of dollars on his “Think Big” energy projects that aimed to cash in on the oil boom . But it ended in unmitigated disaster when oil sank to US$ 10/barrel.
Then in the 1980s we had state owned entities including the Bank of New Zealand, Development Finance Corporation and NZ Insurance being driven to the wall trying to ride the property boom.
It seems the more our politicians, managers and advisers swill at the trough, the greater the mess.