N.A.F. needing time to “digest” F.A.C.

Press, Volume CXI, Issue 32700, 1 September 1971, Page 20

N.A.F. needing time to “digest” F.A.C.

'.Vew Zealand Press Association)

AUCKLAND, August 31

It may take the North Auckland Fanners’ Co-operative, Ltd, about a year to get the earnings of its new subsidiary, the Fanners’ Co-operative Auctioneering Company, Ltd, back to a level where they will sufficiently support the shares issued in the take-over.

The Whangarei company earned a record profit in the year to June 30, but the Hamilton subsidiary suffered a loss in the year to July 31, the chairman of N.A.F. (Mr G. H. Masfen) said in the annual report. The possibility of a loss was apparent at the time of the take-over bid in February. (Last year, F.A.C. earned $102,064.)

The directors were budgeting for a reasonable F.A.C. profit in the current year, but it was too early to predict the short-term results of actions taken to correct the position.

In'the long term, a lift in F.A.C. earnings to something approaching N.A.F. figures should not be impossible, he said.

Explaining why F.A.C. became the subject of take-over bids by Merchant Finance and R. A. Brierley, he said that, as semi-banking organisations servicing the primary producing sector, the stock and station agency companies, must maintain at all times; an underlying strength to be; able to weather periods of| economic difficulty. This meant they must hold, assets, particularly property,; which could not always give the same returns as city properties. They could not sell and lease back major properties that were essential for the business in order to channel funds into more remunerative ventures, or to allow cash distributions to shareholders.

Such a policy would be justified only when cash reserves or profits were adequate to cover increasing

costs in lean periods. At the same time there was no justification for holding idle or very low-yielding assets not essential to the business.

F.A.C. became the subject of attention because it held assets which could be realised without detriment to its principal business, held valuable property which could be sold and leased back, and had for some time been earning at an unacceptable level. The directors of N.A.F. felt they could not allow F.A.C. to be taken over by interests which might adopt policies which were too short-sighted for the good of the industry and the farming community, nor did they wish to see a break in the chain of 11 cooperatives.

Great step forward

“We felt that we had the ability and the knowledge, given reasonable time, to reorganise F.A.C. to the standards we have achieved in the North,” Mr Masfen said. There was no doubt that the merger was a very great step forward for N.A.F., although it would certainly take N.A.F. a year or so to digest the move.

It was unlikely that the number of shares issued in the take-over would exceed 500,000 by the time the last F.A.C. shares had been acquired.

The cash element was financed by $1,230,000 birdging finance, bearing interest of 10 per cent as to $430,000, and of 13 per cent for the remainder.

This loan was repayable in instalments between June

and the end of this year; repayment was being effected from long-term borrowings, placement of shares, and some realisations. Mr Masfen said that while N.A.F. was digesting the F.A.C. operation, inflation had become a major concern. Moreover, an increasing volume of business had increased the requirements of working capital. The company might consider a convertible note issue or a further share issue later in the year if it was likely that the inflationary pressures could not be absorbed by profit retentions. The outcome of the Government investigation into the pattern of farm lending might have an important bearing on the position. Reviewing the last year, Mr Masfen said that all major sections increased their eamings, merchandise turnover increased substantially (to a record $4,546,919) and the livestock business continued to expand. Balance sheet J As announced, the profit rose $21,595, or 9.8 per cent to $243,023 after depreciation of $49,189 (down $7277) and tax of $255,091 (up $31,960); no results from F.A.C. were included.

The earning rate on ordinary shareholders’ funds eased from 15.3 per cent to 14.3 per cent, and that on ordinary capital from 32.9 per cent to 32.7 per cent. The steady 10 per cent dividend, the 2J per cent dividend on the new shares and the preference charge took $88,202. Shareholders’ funds were $635,250 higher at $2,363,407, including capital raised by $310,698 to $146,630 preference and $1,027,068 ordinary.

The investment in F.A.C. was in the books at $1,795,092.