EXPERIENCED investors on the JSE know that it's not worthwhile deviating from traditional main courses when it comes to food producers on the JSE.
Portfolios can find sufficient nutritional value for steady growth in Tiger Brands, AVI or Pioneer Foods - maybe even broadening their diet to take in specialist businesses like Oceana, Illovo, Tongaat or one of the four listed poultry businesses.
Of course, the hungry investor often bemoans the fact that these highly rated ingredients come at a premium price.
But investors looking to guzzle up cheaper food stock among smaller cap shares often end up with a serious case of indigestion. Remember Afribrand, Mighty Meats, Essential Beverages and more recently Country Foods (a mushroom and fruit juice business that folded like a stale burrito).
Thankfully, not too many investors went ploughing into meat group Best Cut Holdings when it reverse listed at the beginning of 2008. Best Cut looks like a textbook case of entrepreneurs biting off far more than they could ever chew.
Fin24.com can only imagine the few unfortunate souls that did buy in at Best Cut - and here we include a bunch of empowerment investors from StratEquity Empowerment Fund - must be tossing their cookies at developments.
Best Cut's belated final results for the year to end-June 2009 reflect a slimmed-down operation, after a number of mainly retail business were handed back to the vendor in July last year. What remains of Best Cut now carries a tangible net asset value of just R10m. This equates to 8 cents per share, a far cry from the 80c/share inferred value for Best Cut shares on listing.
Enforced graciousness?
The retail segments were purportedly returned to the vendor because Best Cut felt these early stage businesses required constant capital investment, which placed a strain on cash resources.
Some might regard the vendor, Alexis Steenkamp, as a gracious chap for taking back these pesky businesses. But it must be pointed out that Steenkamp could not place (ie cash in) the shares he received in settlement for the businesses in question.
So, with no one willing to take up a large parcel of Best Cut scrip, Steenkamp clearly felt he was better off with his businesses back. A significant pronouncement, one might think, on the prospects for Best Cut - which has seen its illiquid shares sliding from around 80c at listing to 28c at present.
Looking at Best Cut's latest results, Steenkamp may well be justified in holding on to early stage businesses - even if they do require constant sources of capital.
Best Cut, to be frank, looks a long way from viable.
Despite getting shot of the demanding retail businesses - which reduced turnover markedly to R73m - Best Cut saw its trading margins fall from 37% to 32%.
Gross profits of around R26m were unceremoniously wiped out by operating expenses of R33m. The operating expenses were up markedly from last year's R28m - despite the reduced business profile and the fact that the comparative period covered only nine months.
Add in R5m in finance costs, and Best Cut found itself a rather unsavoury R9m in the red.
Gone awfully awry
Evidently, it was not only the businesses shunted back to Mr Steenkamp that proved a drain on cash flows.
Best Cut's cash flow statement shows that the pitiful R1.4m operational cash flow could not even service half the company's interest bill.
Fortunately R8m earned off the sale of property, plant and equipment propped up the cash flow statement. Another R4.5m was raised through financing activities.
With virtually no chance of Best Cut raising fresh capital from shareholders - either by a rights issue or a specific shares-for-cash placement - directors have been busy tinkering with available resources.
In this regard, Best Cut entered into a financing agreement with Journey Finance to sell certain assets and then lease them back.
In another bid to shore up cash flow, Best Cut also entered into a factoring agreement with Merchant Factors for a "significant" portion of the debtors' book.
And then to keep just enough oil on the operational wheels, Best Cut took a R3m loan during the second half on the financial year.
It all sounds awfully desperate. Yet recently appointed chairperson Blackie Swart was confident Best Cut would be a going concern in the year ahead.
He pointed to the finance negotiated with third parties and an agreement with an unnamed contract manufacturer, as well as additional financial assistance of up to R6m.
While shareholders may take some comfort from Swart's reassurances, it could be worth revisiting Best Cut's pre-listing documents to grasp just how awry things have gone in two years.
For the year to end-June 2009, turnover of R228m was pencilled in with a gross trading margin of over 40%. Profits were forecast at R24m, equating to earnings of 17.4c/share.
The stomach turns?
- Fin24.com