SUNRICE recently gave itself a big pat on the back because profit in the year to 30 April 2013 increased from $33.9 million to $35.8 million. Underlying profit before tax rose 44 per cent and a dividend of 23 cents per B class share was paid.
The Annual Report says the company is in “robust shape”, with all its mills functioning and operations strengthened. It also claims success in establishing or re-establishing export markets it had to abandon due to lack of supply during the drought.
It was not all plain sailing. A significant increase in the amount of rice grown stretched the company’s logistics resources, requiring reopening of the Coleambally mill that contributed to a need to spend $6 million on plant and equipment. And earnings per B class share, at 57.9 cents, were up just 1pc.
The report also noted that while shareholders equity is $314 million, up $21 million on the prior year, net debt is now at $193 million with total borrowings at $328 million, up from $203 million.
Fairly obviously, there is not much scope to fund expansion unless the company can increase its equity capital. Therein lies a problem.
SunRice has two classes of shares - A Class, held by active rice growers and having no nominal value but attracting voting rights, and B Class, held by active rice growers, individuals who have previously been rice growers, and employees. These are non-voting.
More than a year ago the company commenced a review of its capital structure. There is little to show for it so far, but the company has confirmed it will not allow any change in A class shareholder “rights and controls”.
Limiting voting rights to A class shareholders is considered to be a good thing by many rice growers. Like wheat growers in WA who insist that their ownership of CBH is a good thing, it is viewed by growers as giving them “control” of their industry. This is reinforced by the fact that seven of the company’s ten directors are themselves rice growers.
This perception is emotional rather than rational, and derives from a feeling that the outside world is nasty, brutish, and hostile to growers. Only by retaining control, however that is interpreted, can growers maximise their returns.
As a consequence we see the situation now faced by SunRice, in which a shortage of capital threatens to limit growth and the ability to invest in the company’s future. Rice growers, the company’s shareholders, have very limited capacity to buy more shares. And unless more capital is raised, the banks are reluctant to lend more money.
There are ways in which the company could increase its capital without allowing outsiders to own shares, but none of them is consistent with the assumption that SunRice exists for the benefit of rice growers.
One is to stop paying dividends. The amount paid (around $10 million) is not enough to make a major difference, but it would help. To some extent this is already occurring; in 2011/12 some $11 million of after tax profit was retained to “strengthen the balance sheet”.
Another is to pay its chief executive a lower salary than $2 million. No doubt it’s a big job running the company, but I doubt many (or even any) rice growers are pocketing that sort of money. It hardly seems consistent with its statutory obligations for the company’s management to be doing so much better than its shareholders.
Yet another would be to retain a higher proportion of the proceeds from selling rice, so that growers receive a lower price. The company claims to have paid higher prices to growers for their rice this year, although the Annual Report offers no evidence for this. A study last year by the broker Bell Potter, initiated by Australia’s biggest rice grower, Colin Bell, suggests growers are in fact receiving significantly less than international prices.
Some also suggest that SunRice is manipulating grower expectations by announcing a low price early in the selling season, irrespective of the true state of global markets, which is then increased as the season proceeds. When the final price comes in at higher than forecast, the company looks like it has done a great job for growers.
None of these options would do much to confirm the benefits of control. In fact, it is difficult to find anything objective in its favour. Most people seem to simply believe it must be true, or suggest things would be a lot worse without it.
Listing the B class shares on the ASX where anyone can own them is the most likely outcome of the capital structure review. Simply on the basis of net equity they are worth $5.63 each, a lot more than the $3.50 they are currently attracting on the NSX where buyers must first be approved by the company.
Would that lead to a loss of control by growers?
Well no, not automatically. It would relieve pressure on the company to reduce dividends, it would allow capital to be raised to fund investment in future performance, and it would prompt an improvement in governance and transparency. But the A class shareholders would still be the only ones who could vote.
And is that a good thing?
Well, that depends whether you are emotional or rational. But it would prompt a discussion about what ‘control’ really meant and whether having a single desk exporter with conflicted objectives is really all that beneficial.
The answer might be, it’s had its day.
David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at firstname.lastname@example.org