February 14, 2008

 

Profits, not volumes, for Australia's AWB as wheat market deregulates

 

 

Australian agribusiness AWB Ltd. (AWB.AU) will shift the focus of its grain trading business to margin size from volume throughput in a deregulated wheat export market from July 1, Chief Executive Officer Gordon Davis said.

The deregulated wheat export market, which has been pledged by the government, means a different corporate game for AWB, which formerly operated the single export desk as either monopoly operator or more recently majority exporter, in which the driver of profitability was volume, Davis said.

 

The company recently sought to link dividends to earnings to replace a stable dividend policy.

 

"In a competitive market, the driver of profitability is margin, and clearly in any market not all sectors are equally attractive," he said in a statement.

 

AWB has not issued earnings guidance for this fiscal year ending Sep. 30, with Davis citing uncertainty about wheat export marketing arrangements.

 

However, the company is consensus forecasting underlying net profit of AUS$63 million (US$57.0 million ), up 9 percent on-year.

 

Under the new market structure, AWB will be focused on building a business offering pool products and cash products targeted at where it can create most value for growers and in doing so, value for shareholders, he said, without elaborating.

 

Major risks for the remainder of the year are seasonal conditions, the level of financial stress in the rural sector and commodity price movements, he said.

 

Despite shareholders failing to approve changes to AWB's constitution at a meeting on Tuesday, Davis remains keen to see this amended to position the company most effectively in a competitive market.

 

As the wheat market evolves and AWB offers a range of products to growers, it will need access to low-cost capital, he said.

 

The current constitution with its restrictions and obligations does not allow the company to raise capital at the same cost as competitors and so reform is needed "to ensure we can compete on a level playing field," he said.

 

The Australian Labor Party, which won office in November, has pledged to change existing wheat export arrangements and license multiple bulk exporters, effectively scrapping a system favoring AWB. AWB had until last year held a monopoly over Australia's AUS 15 billion in wheat exports, which account for more than 15 percent of the annual global wheat trade.