Tuesday, September 11, 2012

High-frequency kiwifruit trading

The title of this post is a reference to how quickly I bought then sold this stock.  I bought yesterday and sold today.  


Seeka is a New Zealand company concentrating on whole of production kiwifruit industry in New Zealand.  I first became interested in the stock when the stock price hit $1.00 and the book value was $3.99.  The stock is currently selling at an EV/EBITDA ratio of 1.42.

I purchased some stock at $0.92 but then quickly sold at $0.85 when I realised that my order filled part of a director’s sale order that made me think about this a second time.  Looking on past filings, I see that this director is the second largest insider holder and has been selling stock since a biological pest was discovered in New Zealand that could (and has already begun to) destroy the kiwifruit industry.  The price is now $0.81, and given the book value, I’m investigating at what price I would re purchase this company.

What does Seeka do?

Seeka is basically a vertically-integrated kiwifruit producer.  It leases orchards and grows kiwifruit (and manages orchards for others), harvests the fruit, processes it, and packs it ready for sale.

Seeka’s half-year report is sobering reading.  The conclusion of the Chairman’s address says it all:

This remains a testing time for the industry and Seeka. The pressure of the Psa-V outbreak alongside a challenging harvest and grower uncertainty has again demonstrated how Seeka’s dedicated leadership, dedicated people and its strategy, position the company well to deliver the best outcome to growers and shareholders in the current environment.

Below is a snap of their balance sheet as at 30 June 2012.  I draw your attention to three items.  The first is the bottom line.  Net assets come in at $59 million.  That is as compared with a market cap (today) of $11.7 million.  Net assets are currently 5 times market cap.  The second item is one item in current assets – trade and other receivables.  It’s a massive $28 million.  Its receivables are higher than its market cap.  The other large asset (non-current) on its balance sheet is property, plant and equipment, at $69 million.

Check the arows, they point to matters I find of interest
Note 9 (on Trade and other receivables) states:

Note 9. Related party transactions

Seeka Growers Limited

In the normal course of business the Group undertakes transactions with Seeka Growers Limited, a related party which administers all post harvest operations and revenues from the sale of kiwifruit on behalf of growers with whom it holds a contract. In the current period the Group received $50,318,169 (2011: $51,195,190) for the provision of post harvest and orchard management services to Seeka Growers Limited. At balance date, a significant portion of receivables are due from Seeka Growers Limited. These receivables are funded by future fruit payments from Zespri Group Limited to Seeka Growers Limited.

I find this a pretty odd note.  Basically, Seeka  gets money from Seeka Growers Limited (a related party).  Seeka does all the post harvest work for Seeka Growers Limited, who have not yet paid for the work.  That all makes sense I guess.  It’s the last sentence that’s a bit weird.  “These receivables are funded by future fruit payments from Zespri Group Limited to Seeka Growers Limited”.  

So basically, Seeka Growers Limited can’t pay Seeka until Zespri pays Seeka Growers. 

Zespri is a legislated co-operative of kiwifruit growers. 

Basically, the way I read that note is that Seeka gets paid if Seeka Growers get paid.  Seeka Growers get paid if it can sell fruit to Zespri in the future.  But what if the Kiwifruit industry is finished? Zespri might not be able to pay Seeka Growers, and Seeka Growers might not be able to pay Seeka.


Zespri’s annual report (year ended 31 March 2012 - available on their website) states that 30% of New Zealand kiwifruit orchards have some Psa (Pseudomonas syringae pv. actinidiae) infection.

This news article from September 4 states that nearly 50 per cent of kiwifruit crops in New Zealand are on an infected orchard. 

A 13 August market update from Seeka contained the following ominous line:

Seeka continues to caution the market that the outbreak which is now in its second year has the potential to seriously impact on future earnings for the Company.

The question is, let’s say future earnings for Seeka collapse, what happens to the company?  Clearly if the Kiwifruit industry in New Zealand halves (not out of the question now that Psa is here – many orchardists may switch to another crop that doesn’t get hit by Psa), the assets that Seeka have won’t be worth anywhere near book value. 

Seeka has specialised factories for processing and packing kiwifruit.  Now of course those assets will have some value to another fruit company, or another kiwifruit factory out of New Zealand. 

But I imagine that shipping a factory from New Zealand to somewhere else that grows kiwifruit reduces the book value and sale price of that factory substantially.  Seeka says that its land and building assets were revalued at 31 December 2011 taking into account the Psa discovery.  When $69 million of assets is in “property, plant and equipment”, any further reduction to take into account the wider spread of Psa seriously erodes the $59 million net asset base.

A further aspect I haven't touched on (and won't in any detail) is that assuming that the kiwifruit industry isn't destroyed, merely decimated (in the original sense of the term - ie, cut by 10%), the excess capacity for processing and packing kiwifruit will drive the revenues from these activities down so that Seeka's margins (if they exist) will be suppressed indefinitely as the industry consolidates.

Seeka’s annual report for the year ended 31 December 2001 records revalued land (after initial Psa discovery) at $2.8 million.  It records buildings at $37 million, and plant and equipment at $31 million.  If land was worth $37 million vs a building of $2.8 million, then buying now might be a good move – the land is likely to be far less affected by changes in what can be grown on it, than a building or plant equipment can by what can be processed through it.  The land is fertile and can grow stuff; the buildings/plant are all geared for a particular crop.

But don’t rely on my opinion: director Stuart Burns has reduced his position in the company since 30 November 2011 to 150,000 shares from 300,000.  Finding that makes me happy to have exited the position (but kicking myself for ever initiating it).

I started this exercise asking at what price would I buy this company.  After undertaking this exercise, I can say that I won’t touch this company at any price.  There may be value here, but to see that you’d have to have stepped foot inside a kiwifruit processing factory and have an idea of how much you’d be able to get for the stuff in a liquidation.  Maybe a Psa resistant strain of kiwifruit will be found tomorrow – but I know as much about kiwifruit disease epidemiology as I do about kiwifruit factories so have no advantage there. 

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