Eco Investor June 2017

Pre-Dividend Securities

Two Share Plunges for Murray River Organics

Murray River Organics' shares lost 75 per cent of their value over May, falling in two major down steps from $1.13 to a low of 28 cents. One of two positives to emerge is the high level of confidence that the board has in the company. On the way down, four directors bought a combined 2,633,300 shares worth $1,009,725 at prices from 66 cents to 36.5 cents. Small cap fund Acorn Capital also bought $1,028,795 worth of shares at 67 cents each, bringing its holding to 7.17 per cent.

The four directors were chairman Craig Farrow, managing director and chief executive Erling Sorensen, chief operating officer and executive director Jamie Nemtsas, and non-executive director Donald Brumley. Mr Nemtsas bought 2 million shares worth $730,000.

For investors in the IPO last December the fall is a major disappointment and a reminder of the risks of agriculture. But the set back does not look permanent and there is a good chance that the company can recover in the short to medium term and continue with its growth strategy.

The first fall was on 4 May when the company issued a trading and earnings update saying 2016-17 proforma revenue was expected to be down by $10 million.

About half of the fall is due to a five to six week delay in the harvest season caused by the unusually cool and wet spring and recent wet weather. The other half of the fall is due to slower than anticipated sales following delays in refurbishing the Sunraysia processing facility. This led to dried vine fruit not being processed. There was also a lower contribution from Cluster sales following a write-down of some Cluster inventory.

However, most of the revenue is delayed, not lost. Murray River Organics (MRG) said all going well about $8 million of the revenue and its earnings will add to the expected revenue for 2017-18.

But that was not the end of the story. When the earnings update was released, MRG had harvested 20 per cent of its dried vine crop. But things changed quickly. On 22 May MRG issued a harvest update that precipitated the second share price fall.

With 80 per cent of the harvest now done, MRG said the yield was down, particularly for sultanas which were significantly affected by the wet and cold spring. This led to another revision in net profit after tax - to $0.1 million to $0.8 million excluding any contribution from the new land acquisition.

It doesn't sound like much. The prospectus had forecast $6.6 million.

Also not good is that MRG said it anticipated it would breach its bank covenants at 30 June. Fortunately, the financier has confirmed it will waive the anticipated breach.

MRG estimates that at 30 June it will have net debt of $26.7 million, net assets of 74 cents per share and net tangible assets of 62 cents per share. It said operating cash flow projections for 2017-18 remain positive.

Among the gloom, the second big positive to emerge was the company acquiring 7,764 acres of farmland adjacent to its Colignan vineyard in Sunraysia. The cash consideration is $7.5 million funded from existing banking facilities..

MRG said the soil in the new acreage is suitable for numerous crops such as tree nuts, citrus, vines, grains, ancient grains and high protein beans and legumes. The land has infrastructure, a dam and irrigation in place.

157 acres is planted to easy-peel varieties of citrus that are in high demand in Asia, and 60 per cent of this is still maturing and so has many cropping years ahead. 177 acres is planted for wine. 5,980 acres are bare and suitable for development. 1,450 acres are bare, non-arable land and this includes bio-diversity acreage to satisfy government requirements for irrigated land.

The acquisition will be earnings accretive in 2017-18 and is expected to add $2 million to EBITDA and increase earnings per share by 1.2 cents.

As well as currently earning revenue, the land will be converted to organic production. It has had limited use of non-allowed inputs and can be converted to become Certified Organic in a short period of time.

Mr Sorensen said "Murray River Organics has successfully developed a large scale vertically integrated business model in organic dried vine fruit. Once all of our existing vines reach maturity we expect that Murray River Organics will be supplying more than one quarter of the total global market for this product."

Other good news to emerge was that MRG's 2016-17 bulk dried vine fruit revenue is expected to be up more than 30 per cent on 2015-16 based on the maturing of the existing vineyards.

2016-17 Cluster revenue is expected to more than double. Export sales channels are being developed by the new international sales team and nearly 25 per cent of projected Cluster production for 2017-18 has already been contracted for export.

The revenue from the two recently acquired businesses, Food Source International and Australian Organic Holdings, is expected to exceed internal forecasts by 8 per cent.

MRG says that the strong performance of the acquired businesses, the robust growth in sales across all product categories, and better processes and new equipment at the operating facilities in Sunraysia and Dandenong mean it is well placed to deliver growing performance in 2017-18.

The directors clearly believe it. But for now investors are waiting to see the numbers. (ASX: MRG)







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